Expenses incurred by the holding company on behalf of the subsidiary cannot be considered a deemed dividend

DCIT v Uniparts India Ltd (ITAT Delhi)

ITAT Delhi has held that expenses incurred by the holding company on behalf of a subsidiary which are not in the nature of a loan cannot be treated as a deemed dividend. 2(22)(e) of the Income Tax Act.

Facts- During the assessment proceedings, the Assessing Officer observed that the assessee had received a loan of Rs.6,43,40,824/- from Gripwel Fasteners Pvt. Ltd. (GFPL) during the year. As per the balance sheet of the assessee in note 12 Non-current investment, GFPL is mentioned as a wholly owned subsidiary of the assessee. AO observed that a substantial shareholding to the extent of 70.79% is held by four persons belonging to one family and also rejected the free transfer of shares claimed by the assessee by referring to the articles of association of the company which revealed that any allocation and the number of shares transferred therefrom is at the discretion of the board of directors. Thus, AO made the addition as deemed dividend in the hands of the assessee.

CIT(A) deletes the addition. Aggrieved, the Ministry of Finance preferred the present appeal.

Conclusion- It was held that GFPL is the wholly owned subsidiary of the assessee and the Assessing Officer observed that the assessee had taken certain loans from it and in view of the fact that it was a wholly owned subsidiary, it treated the transaction as a deemed dividend u/s 2 ( 22)(e) of the Act. However, we have observed from the copy of the ledger submitted to us which shows that the assessee has received certain advances from the company and incurs certain expenses on its behalf which mainly relate to travel, transportation expenses and certain expenses undertaken in his name. Looking at the transactions involved between these two entities, this gives no impression that this is a loan transaction. More or less, the transaction details show that it is only a revenue expenditure and the transactions appear to be routine transactions. Therefore, we are inclined to agree with the findings of ld. The CIT (A) and the reason raised by the Revenue are rejected.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the tax authorities against the order of ld. Commissioner of Income Tax (Appeals)-9, New Delhi (hereinafter referred to as “Ld. CIT (A)”) dated 04.06.2018 for the assessment year 2014-15. Aggrieved by the above order, Revenue is in appeal before us raising the following grounds of appeal:-

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A)-9 is not justified in deleting the addition of Rs. 1,66,97,147/- made by the AO in respect of investments made in various subsidiaries located both in India and abroad. 14Read with rule 8 D of the Act.

2. On the facts and circumstances of the case Ld. CIT(A)-9 is not justified in deleting the addition of Rs. 6,43,40,824/- paid as deemed dividend u/s. 2(22)(e) of the IT Act on account of various amounts received from a wholly owned subsidiary”

2. With regard to Ground No. 1 which relates to Section 14A of the Income Tax Act, 1961 (for short “the Act”), at the time of hearing, ld. DR for Revenue contended that ld. CIT(A) has removed the above disallowance based on the finding that there is no exempt income declared by the assessee during that year. He admitted that the assessee did not declare any exempt income during the year, but relied on the CBDT circular and the findings of the assessing officer.

3. On the other hand, ld. AR for the assessee has submitted that the question raised by the Revenue is a covered question and he has brought to our notice page 88 of the paper book in the assessee’s own case in which the coordination bench has decided the question in favor of the assessee in ITA No. 6056/Del. /2017 for AY 2010-11 by decree of 02.28.2023 noting that there is no exempt income.

4. Reviewed competing bids and documents on file. We have observed that the assessee has not declared any exempt income during the year and the issue is fairly settled and covered in favor of the assessee by various decisions of different courts, particularly the Hon’ High Court. ble in PCIT v. Era Infrastructure. (India) Ltd. (2022) 141 Taxmann.com 289 (Del.). Consequently, ground no. 1 raised by the Revenue is rejected.

5. As regards ground no.2 relating to the question of deemed dividend, the relevant facts brought to our notice by the ld. DR for income is that during the assessment proceedings, the Assessing Officer observed that the assessee had received a loan of Rs.6,43,40,824/- from Gripwel Fasteners Pvt. Ltd. (GFPL) during the year. As per the balance sheet of the assessee in note 12 Non-current investment, GFPL is mentioned as a wholly owned subsidiary of the assessee. A question was put to the assessee as to why the aforesaid loan taken from GFPL should not be treated as deemed dividend. In response, the assessee submitted as follows:-

“The provisions of section 2(22)(e) of the Act are applicable to all legal entities in which the public does not have a substantial interest, i.e. only companies with limited capital . Section 2(18) of the Income Tax Act, 1961 provides the definition of “corporations in which the public is substantially interested” and in accordance with clause (c) of Section 2(18) (b) (B), it is intended that the provisions would apply to any company to which paragraph (b) applies, which would also include any company that might be a subsidiary of a holding company. In other words, the requirements of subparagraph (c) could be met either by any company to which this clause applies or by any subsidiary. of that company, where that subsidiary meets the conditions set out in clause (b) of section 2 (l8) applies.

Accordingly, in the present case, the assessee company is not a private company within the meaning of the Companies Act, 1956 and also a wholly owned subsidiary, namely M/s Gripwel Fasteners Pvt. Ltd., from whom the loan had been accepted, and which is not a private company within the meaning of the Companies Act, 1956. Further, the assessee company held the entire share capital of its wholly owned subsidiary throughout the previous year. as prescribed in Article 2 (J 8) (B) (c) of the Act.

It is further submitted that more than 20% of the issued share capital of the company is held by persons including foreign investment companies other than the promoters of the company and, therefore, the assessee company does not is not a limited company. Further, all shares of the company are freely tradable and there are no restrictions on the transfer of shares of the assessee company.

In view of the above explanation, it is evident that the assessee company as well as its subsidiary are the companies in which the public has substantial interest and, therefore, the provisions of Section 2(22)(e) of bed. Act, 1961 are not applicable in the case of the assessee company.

Furthermore, notwithstanding what has been mentioned above, we wish to mention that, in accordance with section 2 (22) (e) of the Act, . the amount of the deemed dividend must not exceed the accumulated profit of the company which granted a loan to another company. In the present case, the accrued profits of M/s Gripwel Fasteners Pvt. Ltd., the company which had given loans to the assessee company as on 01.04.2013, was Rs.2,25,17,222/-. A copy of the audited balance sheet as on 31.03.2013 and necessary table of “Reserves and Surpluses” is enclosed herewith for your kind reference. Accordingly, the amount of deemed dividend will not exceed the amount of Rs.2,25,17,222/-.

It is further submitted that the assessee company had mentioned in its audit report the total amount of all transactions and not the maximum amount of advances at any time during the year under assessment and thus, the total amount mentioned in the report cannot be considered as a deemed dividend and the maximum amount unpaid on any day of the year must be considered as a deemed dividend.

6. After considering the above submissions of the assessee, the Assessing Officer rejected the same and observed that a substantial shareholding to the extent of 70.79% is held by four persons belonging to the same family and also rejected the free transfer of shares claimed by the assessor. the assessee with reference to the articles of association of the company which revealed that any allotment of shares transferred therein is at the discretion of the board of directors. Relying on the authorities referred to in the assessment order, he made the addition as deemed dividend in the hands of the assessee.

7. Aggrieved by the above order, the assessee preferred an appeal before the ld. CIT (A) which deleted the addition.

8. Ld. DR for the Revenue has brought to our notice the findings of the ld. CIT (A) at page 15 of the order and submitted that ld. CIT(A) did not dispute the fact that the assessee had taken loan from GFPL and it granted relief on the ground that the transactions were in the nature of current account transfers rather than loan transfers linked to travel expenses, advance payments and food expenses. , taxes paid on behalf of GFPL, transport costs, etc.

9. On the other hand, ld. AR for the assessee has brought to our notice page 16 of the first appellate order and submitted that ld. CIT (A) deleted the addition observing that no loan was given by the assessee company to GFPL and the transactions between two companies are in the nature of current account transactions and there is no had no credit balance of GFPL in the beneficiary’s books. that is, the assessee company, as shown in the current account placed before him. In this regard, he brought to our notice pages 69 to 71 of the paper book in which the details of the transactions are given in the general account. He submitted that all the transactions are in the nature of reimbursement transactions in which travel, food and transportation expenses are incurred on behalf of GFPL and essentially in the nature of a current account in which the assessee receives certain advances and incurs expenses on its behalf. Therefore, this can never be considered a loan transaction. In this regard, he placed reliance on the case law page 48 of the paper book wherein ITAT, Mumbai Bench decided a similar issue in favor of the assessee in the case of Ravindra R Fotedar v. ACIT 167 ITD 100 (Mumbai).

10. Considered the competing submissions and documents on file. We observed that GFPL is the wholly owned subsidiary of the assessee and the Assessing Officer observed that the assessee had taken certain loans from it and in view of the fact that it was a subsidiary in sole ownership, it treated the transaction as a deemed dividend u/s 2. (22)(e) of the Act. However, we have observed from the copy of the ledger submitted to us which shows that the assessee has received certain advances from the company and incurs certain expenses on its behalf which mainly relate to travel, transportation expenses and certain expenses undertaken in his name. Looking at the transactions involved between these two entities, this gives no impression that this is a loan transaction. More or less, the transaction details show that it is only a revenue expenditure and the transactions appear to be routine transactions. Therefore, we are inclined to agree with the findings of ld. The CIT (A) and the reason raised by the Revenue are rejected.

12. Consequently, the appeal filed by the Revenue is dismissed.

Order pronounced in public hearing this 11^th day of October 2024.