No Deemed Dividend on Business Advances between Holding and Subsidiary Companies u/s 2(22)(e): ITAT [Read Order]

Section 2(22)(e) applies only to gratuitous loans or advances to shareholders, not to reciprocal and business-related transactions

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, delivered a ruling upholding relief granted by the CIT(A) on multiple contentious issues including deemed dividend, depreciation on time-share assets, and commission expenditure.

The bench dismissed the Revenue’s appeals for Assessment Years 2015-16 and 2016-17 in ITA Nos. 242 & 243/Mum/2023, holding that the findings of the lower appellate authority were sound, factual, and legally consistent.

The assessee company, Prestige Holiday Resorts Pvt. Ltd., is engaged in developing, marketing and operating time-share resorts under the “Prestige” group. It holds and operates resorts, sells “time-share weeks” to members, and also earns commission income and management fees from its subsidiaries and associate entities.

During the scrutiny assessment, the Assessing Officer (AO) observed that the loans and advances to subsidiary entities were allegedly in the nature of deemed dividend under Section 2(22)(e); depreciation claimed on time-share weeks was disallowed, stating that these do not constitute tangible building assets; commission expenses were treated as unverifiable because certain agents did not respond to departmental verification notices under Section 133(6).

Based on these observations, the AO made substantial additions to the returned income.

The CIT(A)-54, Mumbai, however, deleted all additions after detailed examination of contracts, accounting records, and supporting evidence. The Department appealed before ITAT Mumbai.

On appeal, the Tribunal, comprising Prashant Maharishi (Accountant Member) and Kavitha Rajagopal (Judicial Member) emphasised that the “commercial substance” test must prevail over mere form of payment and “The amounts advanced to and received from subsidiaries were trade-related, backed by contractual obligations, and adjusted through running accounts. Such reciprocal dealings, carried out in the normal course of business, cannot be characterised as loans attracting Section 2(22)(e).”

On the issue of whether inter-company transactions constitute deemed dividend (Section 2(22)(e)), the Bench noted that the AO had not established any personal benefit or shareholder advantage, which is a sine qua non for invoking deemed dividend provisions. Thus, the addition was deleted.

On the issue of depreciation on time-share weeks (Section 32), the Tribunal observed “The assessee has demonstrated that the cost of construction of the resort units corresponding to time-share weeks is capitalised as part of the building block, used for the business of resort operations and time-share sales. Depreciation allowable under Section 32 is thus rightly claimed.”

The Bench noted that “ownership” under Section 32 includes not just legal title but effective control and use of an asset for business, citing the principle laid down by the Supreme Court in Mysore Minerals Ltd. v. CIT (1999). Hence, the depreciation disallowance was dismissed as untenable.

On the issue of disallowance of commission expenses (Section 37(1)), the Tribunal stated “Once commission payments are through verifiable banking transactions, supported by agreements, confirmations, and subjected to TDS, mere non-response to summons does not justify disallowance. The onus shifts back to the Department to establish falsity, which it has failed to do.” Accordingly, the deletion of disallowance under Section 37(1) was upheld.

The Tribunal found that the CIT(A) has correctly appreciated the facts and law in deleting the additions. Accordingly, the Revenue’s appeals were dismissed, affirming full relief to the assessee for both AYs 2015-16 and 2016-17. 

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