Introduction
The case, Apeejay Surrendra Management v. DCIT[i] pertains to an appeal filed by Apeejay Surrendra Management against the orders of the Commissioner of Income Tax (Appeals) [‘CIT(A)’], challenging the addition made by the assessing officer (‘AO’) and confirmed by the CIT(A) towards deemed dividend under s. 2(22)(e) of the Income-tax Act, 1961 (‘Act’). The key contention is the treatment of loans/advances received by the Assessee from a group company, where a common shareholder holds a substantial interest in both the lender and the Assessee. The Income Tax Appellate Tribunal (‘ITAT’) examined the legislative intent behind s. 2(22)(e) of the Act and the relevant definitions under the Companies Act, 2013 to determine the taxability of such transactions and concluded that the addition made by the assessing officer in the hands of the assessee was not sustainable.
Brief Facts
Apeejay Surrendra Management (‘Assessee’) received a loan from Apeejay Private Ltd. (‘APL’), a group entity. The Assessee was not a shareholder of APL.
Kathua Steel Works Pvt. Ltd. (‘KSWPL’), a common shareholder, held substantial interests in both the Assessee company and APL, with a shareholding of 57.86% and 99.96%, respectively.
The AO classified the loan received by the Assessee from APL as deemed dividend under s. 2(22)(e) of the Act for the assessment years 2013-14 and 2014-15, attributing this to the common shareholding of KSWPL.
The Assessee contested this treatment before the CIT(A), citing various judicial precedents. The CIT(A) upheld the AO’s addition.
Aggrieved by the decision of the CIT(A), the Assessee filed an appeal to ITAT.
Arguments by the Assessee
The Assessee contended that the loan received from APL does not fall within the purview of the deemed dividend under s. 2(22)(e) of the Act, emphasizing the lack of direct shareholding in APL despite KSWPL's substantial common shareholding in both entities.
The Assessee argued that the transactions involving loans from APL were genuine business transactions carried out for legitimate commercial reasons.
The Assessee highlighted the distinction between legal ownership and beneficial ownership, emphasizing that mere common shareholding by KSWPL did not establish beneficial ownership by the Assessee in APL.
It was also argued that the transactions were not structured with the intent to avoid tax liability or to circumvent the provisions of the Act.
Reference was made to relevant judicial precedents and case law supporting the Assessee’s position that loans received under similar circumstances should not be treated as deemed dividends under s. 2(22)(e) of the Act.
Arguments of the Revenue
The Revenue argued that there are three limbs collectively which form the basis for assessing whether a particular transaction is treated as deemed dividend under s. 2(22)(e).
The first limb considers the nature of the transaction. It focuses on whether there was a payment, loan, or advance made by a closely held company to its shareholder.
The second limb evaluates the shareholder's interest in the closely held company. It assesses whether the recipient of the payment, loan, or advance holds a substantial interest in the company.
The third limb looks into the source of funds used for the transaction. It investigates whether the payment, loan, or advance was made out of accumulated profits or reserves of the company.
According to the Revenue, the Assessee falls under the second limb and hence the loan received under similar circumstances should be treated as deemed dividends under s. 2(22)(e) of the Act.
Held
The ITAT referred to the Hon’ble Supreme Court’s rulings in the case of CIT v. National Travel Services[ii] and held that neither the Assessee nor APL can influence or exert control on KSWPL to vote in a specific manner. Rather, due to KSWPL’s significant shareholding, it is in a position to influence both the Assessee and APL to act in a particular way.
It was held that KSWPL, as the major shareholder, is the beneficial owner in this scenario. APL extended a loan to the Assessee under KSWPL’s control and influence, thereby attracting the deeming provisions of s. 2(22)(e) in the hands of KSWPL.
The ITAT held that the income is deemed to accrue or arise in the hands of KSWPL and not the Assessee.
Therefore, the ITAT held that applying the second limb of s. 2(22)(e), the income and its tax liability should not be attributed to the Assessee. Accordingly, the ITAT set aside the decision of the CIT(A) and deleted the addition against the Assessee.
Our Analysis
The ITAT’s ruling is detailed and considers the leading decisions on the issue and has correctly held that the provisions of s.2(22)(e) of the Act will not be applicable to the assessee in the present case. However, the decision raises an interesting question of law i.e., whether the observations of the ITAT that the income is taxable in the hands of KSWPL can enable the tax authorities to reopen the assessment of KSWPL and tax KSWPL in respect of the transaction.
End Notes
[i] [2024] 159 taxmann.com 609 dated 19.02.2024.
[ii] (2018) 89 taxmann.com 332 (SC).
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.