Apeejay Surrendra Management Services (P.) Ltd. vs. DCIT – ITAT Kolkata on Deemed Dividend and Beneficial Shareholder Liability (2024)

🏢 Apeejay Surrendra Management Services (P.) Ltd. vs. DCIT – ITAT Kolkata on Deemed Dividend and Beneficial Shareholder Liability (2024)

📌 Background

The deeming provisions under Section 2(22)(e) of the Income-tax Act, 1961 are designed to tax loans or advances made by closely held companies to their significant shareholders or to concerns in which such shareholders have substantial interest. However, the provision applies only when the recipient is a shareholder or the benefit ultimately accrues to the shareholder having control or substantial interest.

In Apeejay Surrendra Management Services (P.) Ltd. v. DCIT [(2024) 205 ITD 737 (Kolkata Tribunal)], the ITAT Kolkata Bench examined whether a loan or advance received by a company from a group entity could be taxed as deemed dividend when the beneficial shareholder controlling both entities was a third company (KSWPL). The Tribunal held that the loan was not taxable in the hands of the recipient company, as the beneficial shareholder was KSWPL, and therefore, the deeming provisions could apply only to KSWPL—not the assessee.

📂 Facts of the Case

• Assessee: Apeejay Surrendra Management Services (P.) Ltd. (ASMPL)
• Assessment Years: 2013–14 and 2014–15
• Lender Company: Apeejay Pvt. Ltd. (APL)
• Common Shareholder: KSWPL (Keventer South West Pvt. Ltd.)

Nature of Transaction:
The assessee company (ASMPL) received loans and advances from its group company (APL).

Revenue’s Stand:

• The Assessing Officer (AO) treated the loans received from APL as deemed dividend under Section 2(22)(e).
• The AO observed that KSWPL, a common shareholder, held substantial interest (more than 20%) in both APL and ASMPL.
• The AO concluded that the payment made by APL to ASMPL was effectively a benefit derived by KSWPL, and therefore, taxable as deemed dividend in the hands of ASMPL.
• The CIT(A) upheld the AO’s decision.

❓ Point of Dispute

Whether the loan or advance received by the assessee company (ASMPL) from its group company (APL) could be treated as deemed dividend under Section 2(22)(e) in the hands of the assessee, even though it was not a registered shareholder in APL, but both were under the common control of KSWPL.

📑 Submissions by the Assessee

• The assessee was not a registered or beneficial shareholder of the lending company (APL).
• The beneficial shareholder was KSWPL, which held substantial interest (more than 20%) in both APL and ASMPL.
• The transaction between APL and ASMPL occurred under the controlling influence of KSWPL, which had the power to direct the affairs of both companies.
• Since the assessee was not a shareholder, it did not satisfy the primary condition for the application of Section 2(22)(e).
• Even if the loan resulted in any benefit, it accrued to KSWPL, not to ASMPL, as per Section 5(1)(b) of the Act, which governs income accrual and deeming provisions.
• The assessee relied upon:
  • CIT v. Ankitech Pvt. Ltd. (2011) 199 Taxman 341 (Delhi HC) – affirmed by the Supreme Court.
  • CIT v. Bhaumik Colour Pvt. Ltd. (2009) 313 ITR 146 (ITAT Mumbai Special Bench) – holding that the recipient must be both shareholder and beneficial owner for Section 2(22)(e) to apply.

📑 Submissions by the Revenue

• The Revenue argued that since KSWPL had substantial interest in both APL and ASMPL, the loan given by APL to ASMPL was a device to transfer profits indirectly.
• The AO claimed that the benefit of the transaction flowed to ASMPL, which received the loan amount, and therefore, the addition should be made in its hands.
• The Revenue contended that Section 2(22)(e) should be interpreted broadly to prevent profit diversion in closely held groups.

⚖️ Legal Principles & Tribunal’s Findings

1. Condition of Shareholding

The Tribunal reiterated the settled law that Section 2(22)(e) applies only if the recipient of the loan or advance is both a registered and beneficial shareholder of the lending company.

“Neither the assessee was a shareholder in APL, nor was APL a shareholder in the assessee. Hence, the assessee cannot be taxed under Section 2(22)(e).”

2. Identification of the Beneficial Shareholder

The Tribunal noted that KSWPL was the controlling and beneficial shareholder, with significant influence over both companies.

• The loan from APL to ASMPL was driven by KSWPL’s commercial decisions, and
• The benefit of such a transaction accrued to KSWPL, not ASMPL.

Hence, the deemed dividend—if any—would be taxable in the hands of KSWPL, under the second limb of Section 2(22)(e).

3. Application of Section 5(1)(b) – Accrual of Income

The Tribunal referred to Section 5(1)(b), which taxes income that accrues or is deemed to accrue or arise to an assessee.
It held that since the benefit of the loan accrued to KSWPL, the income could not be deemed to accrue to ASMPL.

4. Business Relationship and Group Structure

The Tribunal found that both APL and ASMPL were under the same group umbrella, and the transactions were commercial in nature, carried out under group management control. There was no evidence of profit distribution or avoidance intent.

5. Proper Person for Taxation

Even if Section 2(22)(e) were to apply, the correct taxable entity would be KSWPL, as the beneficial shareholder deriving control and advantage from the transaction.

🏁 Held

✅ The assessee (ASMPL) was not a shareholder in the lending company (APL).
✅ The beneficial shareholder was KSWPL, which held controlling interest in both entities.
✅ The benefit of the transaction accrued to KSWPL, and therefore, Section 2(22)(e) was attracted only in the hands of KSWPL, not the assessee.
✅ The Tribunal deleted the addition made by the AO and allowed the assessee’s appeal.

“Where the beneficial shareholder is distinct from the loan recipient, the deemed dividend provisions apply only to the shareholder, not the non-shareholding recipient.”

✅ Practical Impact on Taxpayers

• Clarifies taxation hierarchy: Only beneficial or registered shareholders can be taxed under Section 2(22)(e).
• Group company protection: Intra-group loans between non-shareholding entities are not deemed dividends.
• Business control matters: Where one holding company controls both entities, any benefit accrues to the parent, not subsidiaries.
• Prevents double taxation: Ensures that the same income is not taxed in the hands of multiple entities.

🔑 Key Takeaways

1. Recipient must be shareholder: Section 2(22)(e) applies only if the recipient holds shares in the lending company.
2. Beneficial owner rule: Where a controlling shareholder indirectly benefits, the tax applies only to that shareholder.
3. Business control ≠ profit distribution: Group transactions under management influence are not per se taxable.
4. Section 5(1)(b) link: Income must accrue or be deemed to accrue to the correct beneficiary.
5. Consistent jurisprudence: Aligns with Ankitech Pvt. Ltd., Bhaumik Colour Pvt. Ltd., and earlier Kolkata ITAT rulings.

📢 Why This Case Matters

The Apeejay Surrendra Management Services (P.) Ltd. v. DCIT (2024) ruling adds clarity to the interpretation of Section 2(22)(e) in group structures. It emphasizes that deemed dividend provisions cannot be invoked against non-shareholders and must be applied only to beneficial shareholders who actually derive income or advantage from the transaction.

This landmark decision safeguards group companies, subsidiaries, and holding structures engaged in legitimate inter-company financial transactions from arbitrary deemed dividend taxation.

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