ACIT., CENTRAL CIRCLE-2(4), HYDERABAD V. MSN ORGANICS PRIVATE LIMITED, HYDERABAD

ITA 395/HYD/2025

AI Insights

The case involves MSN Organics Pvt. Ltd., which was subjected to search and seizure under Section 132 of the Income Tax Act on 24.02.2021. Following this, the Assessing Officer (A.O.) proposed that certain payments received from M/s. Maithri Laboratories Pvt. Ltd., a group company, should be treated as deemed dividend under Section 2(22)(e) of the Act. The CIT(A) overturned the A.O.'s decision, leading to the Revenue's appeal to the Tribunal. The Tribunal found that the transactions were trade-related and not loans or advances, thus not qualifying as deemed dividend.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 714523 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Assessment Year: 2021-2022
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Deemed dividend; Search and seizure; Related party transaction
• Section: 143(3); 132; 131; 2(22)(e)

Judgement Text

"आयकर अपीलीय न्यायाधिकरण में, हैदराबाद ‘ए’ बेंच, हैदराबाद IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ A ‘ Bench, Hyderabad श्री रवीश सूद, माननीय न्याययक सदस्य एवं श्री मिुसूदन सावडिया, माननीय लेखा सदस्य SHRI RAVISH SOOD, HON’BLE JUDICIAL MEMBER AND SHRI MADHUSUDAN SAWDIA, HON'BLE ACCOUNTANT MEMBER आयकरअपीलसं./I.T.A.No.395/Hyd/2025 (निर्धारण वर्ा/ Assessment Year: 2021-22) The Assistant Commissioner of Income Tax, Central Circle – 2(4), Hyderabad. Vs. M/s. MSN Organics Pvt. Ltd. Hyderabad. PAN : AAECM9889Q (अपीलार्थी/ Appellant) (प्रत्यर्थी/ Respondent) करदाता का प्रतततितित्व/ Assessee Represented by : Shri M.V. Prasad, C.A. राजस्व का प्रतततितित्व/ Department Represented by : Shri B. Bala Krishna, CIT-DR सुिवाई समाप्त होिे की ततति/ Date of Conclusion of Hearing : 03.07.2025 घोर्णध की तधरीख/Date of Pronouncement : 08.08.2025 O R D E R प्रनत रवीश सूद, जे.एम./PER RAVISH SOOD, J.M. The present appeal filed by the Revenue is directed against the order passed by the Commissioner of Income-Tax (Appeals) – 12, Hyderabad, dated 28.01.2025, which in turn arises from the order Printed from counselvise.com 2 ITA No.395/Hyd/2025 MSN Organics Private Limited passed by the Assessing Officer (for short “A.O.”) under Section 143(3) of the Income Tax Act, 1961 (for short “the Act”) dated 10.04.2023 for A.Y. 2021-22. The Revenue has assailed the impugned order on the following grounds of appeal before us: “1. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in granting relief to the assessee without considering the fact that while arriving at the quantum of deemed dividend u/s 2(22)(e) of the Act, set-off to the extent of 150% of purchases had already been granted towards trade advances in view of CBDT circular 19/2017? 2. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in not appreciating the fact that the outstanding debit balances of M/s. Maithri Laboratories Pvt. Ltd. are in fact loans/ advances which attracts the provisions of section 2(22)(e) of the Act ? 3. The appellant craves leave to amend, modify or alter any ground or grounds of appeal wherever necessary.” 2. Succinctly stated, the assessee company, which is engaged in the business of manufacturing of bulk drugs and pharmaceuticals, was, along with its group entities, subjected to search and seizure proceedings under Section 132 of the Act on 24.02.2021. 3. The assessee company filed its return of income for the subject year i.e. A.Y. 2021–2022 on 15.03.2022, declaring an income of Rs. 42,59,48,350/-. Subsequently, the case of the Printed from counselvise.com 3 ITA No.395/Hyd/2025 MSN Organics Private Limited assessee company was selected for scrutiny assessment and a notice under Section 143(2) of the Act was issued. 4. During the course of assessment proceedings, it was observed by the A.O. that certain books of account, viz. Annexure- A/MSN/Off/HD3 were found and seized in the course of the search and seizure operations conducted at the premises of the assessee company. On verification, it was found that the assessee company had, during the subject year, received a substantial amount from M/s. Maithri Laboratories Pvt. Ltd., I.e one of the group companies. The A.O. observed that Dr. M. Satyanarayana Reddy, a common shareholder in both the aforementioned companies, was having substantial interest both in the lender company as well as the recipient company. During the course of the search proceedings, summon under Section 131 of the Act, dated 09.04.2021 was issued to the assessee company, requiring it to produce the information regarding the purchases and sales made, receipts and also the excess payments that it had received over and above the sales made to the aforementioned group entity. Also, the assessee company was required to provide the nature and purpose of the payments made, necessity/purpose of Printed from counselvise.com 4 ITA No.395/Hyd/2025 MSN Organics Private Limited receiving such amounts in excess of the sales made, and was also called upon to provide a copy of the Board resolution passed, if any, for receiving the excess funds along with the details of interest paid on such excess payments so received. However, it transpires from the record before us that there was no compliance by the assessee company to the aforesaid direction of the A.O. 5. The A.O., on a perusal of the record, observed that no interest was charged on the excess amounts that was paid to the assessee company by its group entity, viz., M/s. Maithri Laboratories Pvt. Ltd. Apart from that, the A.O. observed that the Managing Director of the group companies had passed a resolution in respect of the payments made in excess of the purchases within the group companies and that the same were not given as “Inter-Corporate Deposits” (ICDs). Further, the A.O. noticed that the advances received by the assessee company from M/s. Maithri Laboratories Pvt. Ltd (supra) aggregating to Rs. 16,05,06,533/- (as on 31.03.2021) were classified as “Payables” both in the “books of account” and in the “Notes to Accounts” of the assessee company, i.e., were reflected as “trade creditors”. The A.O., based on the details available in the financials of the assessee company and its Printed from counselvise.com 5 ITA No.395/Hyd/2025 MSN Organics Private Limited related party transactions, observed that it had, during the subject year, received advances from its aforementioned group entity, viz., M/s. Maithri Laboratories Pvt. Ltd., over and above the amount that was receivable in connection with the sales, as under: The A.O. further observed that Dr. M. Satyanarayana Reddy (supra), i.e., the common shareholder, was having substantial shareholding in both the assessee company (recipient) and M/s. Maithri Laboratories Pvt. Ltd. (payer), as under: 1 M/s. Maithri Labs Pvt. Ltd. 43.10% 2 M/s. MSN Organics Pvt. Ltd 60.67% Further, the A.O. observed that the assessee company, as on 31.03.2021, had substantial accumulated profits amounting to Rs. 18,124.94 lacs. Printed from counselvise.com 6 ITA No.395/Hyd/2025 MSN Organics Private Limited 6. The A.O., based on the aforesaid facts, holding a firm conviction that the assessee company, during the subject year, was in receipt of an excess payment of Rs. 16.05 crores (approx.) from M/s. Maithri Laboratories Pvt. Ltd. (supra), therein inter alia called upon the assessee company to explain as to why the advances so received be not treated as, and brought to tax in its hands as, deemed dividend under Section 2(22)(e) of the Act. 7. In reply, the assessee company, based on its multi-faceted contentions and drawing support from the objective behind Section 2(22)(e) of the Act, submitted before the A.O. that the “trading credits” of Rs. 16.05 crores standing in the account of M/s. Maithri Laboratories Pvt. Ltd (supra), in its books of account as on 31.03.2021, could not be brought within the meaning of “deemed dividend” under Section 2(22)(e) of the Act. However, the A.O. did not find favour with the contentions of the assessee company. The A.O., after referring to the purchases/sales in the backdrop of the payments/receipts appearing in the ledger account of M/s. Maithri Laboratories Pvt. Ltd (supra) in the “books of account” of the assessee company, observed that as the total purchases made by M/s. Maithri Laboratories Pvt. Ltd i.e. Printed from counselvise.com 7 ITA No.395/Hyd/2025 MSN Organics Private Limited (recipient company) during the year from the assessee company, aggregated to only Rs. 5.69 crores, against which a payment of Rs. 59.00 lacs was made, therefore, the aggregate of the excess payments over and above the trading activity amounted to Rs. 16.05 crores (supra). The A.O. held a conviction that, as the assessee company had, during the subject year, received excess funds of Rs. 16.05 crores (supra) from M/s. Maithri Laboratories Pvt. Ltd (supra), which could not be categorized as a trading transaction, thus, the same clearly attracted the provisions of “deemed dividend” under Section 2(22)(e) of the Act. Thereafter, the A.O., observing that the fact of purchases between the group companies and their inter-reliability cannot be ignored, held a conviction that excess payments to the extent of 150% of the purchases made could be considered as reasonable to give room for commercial transactions, and to consider the spirit of the CBDT Circular No. 19/2017, dated 12.06.2017. Accordingly, the A.O based on his observations recorded in the assessment order held the excess payments (after reduction of 150% sales) of Rs. 13,20,26,206/- as “deemed dividend” u/s 2(22)(e) of the Act in the hands of the assessee company. For the sake of clarity, the Printed from counselvise.com 8 ITA No.395/Hyd/2025 MSN Organics Private Limited observations of the A.O. as had been summed up by him in the assessment order are called out as under: -left blank intentionally- Printed from counselvise.com 9 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 10 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 11 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 12 ITA No.395/Hyd/2025 MSN Organics Private Limited 8. Aggrieved, the assessee company assailed the assessment order passed by the A.O. under Section 143(3) of the Act, dated 10.04.2023, before the CIT(A). 9. The CIT(A), based on his exhaustive deliberations, inter alia, on the issue in hand, i.e., sustainability of addition made by the A.O. of Rs.13,20,26,206/- as “deemed dividend” under Section 2(22)(e) of the Act, found favour with the contentions advanced by the assessee company, and observing that the subject amount received by the assessee company from M/s. Maithri Laboratories Pvt. Ltd. was “trade payable” by the assessee company to the said group entity, viz., M/s. Maithri Laboratories Pvt. Ltd., concluded that as the very foundation for making of the impugned addition by the A.O., i.e., treatment of the excess payment by the payer company to the recipient company as “advance”/”loan”, was in itself baseless, vacated the same. For the sake of clarity, the observations of the CIT(A) are culled out as under: Printed from counselvise.com 13 ITA No.395/Hyd/2025 MSN Organics Private Limited -left blank intentionally- Printed from counselvise.com 14 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 15 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 16 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 17 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 18 ITA No.395/Hyd/2025 MSN Organics Private Limited Printed from counselvise.com 19 ITA No.395/Hyd/2025 MSN Organics Private Limited 10. The Revenue, being aggrieved with the order of the CIT(A), has carried the matter in appeal before us. 11. We have heard the learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions. 12. Before proceeding further, we deem it fit to cull out the provisions of Section 2(22)(e) of the Act, as under: “Section (22) - Dividend includes …….. …… (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person Printed from counselvise.com 20 ITA No.395/Hyd/2025 MSN Organics Private Limited who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern), or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.” 13. On a careful perusal of the aforesaid statutory provision, we find that “deemed dividend” as contemplated in Section 2(22)€ of the Act takes within its meaning any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advances or loan to a shareholder, being a person, who is beneficial owner of shares, (not being shares entitled to a fixed rate of dividend, whether with or without right to participate in the profits), holding not less than 10% of the voting power or any payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, (herein in this clause referred to as “said concern”), or any payment by any such company on behalf or for the individual benefit of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Further, “Explanation 3(a)” to Section 2(22)(e) defines a term “concern”, which means a Hindu Undivided Family or a firm or an Printed from counselvise.com 21 ITA No.395/Hyd/2025 MSN Organics Private Limited association of persons or a body of individuals or a company. Also, the “Explanation 3(b)” contemplates that a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such concern. 14. Considering the definition of the term “deemed dividend”, as envisaged in Section 2(22)(e) of the Act, along with the definition of the term “concern” contemplated in “Explanation 3” (supra), we shall herein advert to the facts involved in the case before us. 15. Ostensibly, Dr. M. Satyanarayan Reddy, during the subject year, had substantial interest in both the companies, viz. (i). M/s. MSN Organics Pvt. Ltd. (payer company); and (ii). M/s. Maithri Laboratories Pvt. Ltd. (recipient company), as under: 1 M/s. Maithri Labs Pvt. Ltd. 43.10% 2 M/s. MSN Organics Pvt. Ltd 60.67% Accordingly, as per Section 2(22)(e) r.w. “Explanation 3”, any payment, by way of advance or loan made by M/s. Maithri Laboratories Pvt. Ltd. (supra) as an advance or loan to M/s. MSN Printed from counselvise.com 22 ITA No.395/Hyd/2025 MSN Organics Private Limited Organics Pvt. Ltd., i.e., the assessee company, would, in the normal course, fall within the meaning of “deemed dividend”, to the extent the payer company, viz., M/s. Maithri Laboratories Pvt. Ltd. possessed accumulated profits. 16. This takes us to the core issue involved in the present appeal, i.e, as to whether or not M/s. Maithri Laboratories Pvt. Ltd. (supra) had made any payment by way of an advance or loan to the assessee company, viz., M/s. MSN Organics Pvt. Ltd. In our view, the adjudication of the factual position would require a reference to the transactions carried out inter se M/s. Maithri Laboratories Pvt. Ltd. (supra) and M/s. MSN Organics Pvt. Ltd., (assessee company), which have been culled out from the assessment order, as under: Printed from counselvise.com 23 ITA No.395/Hyd/2025 MSN Organics Private Limited 17. On a careful perusal of the aforesaid transactions/payments, we concur with the CIT(A) that the A.O. had, based on his perverse observations, made the impugned addition in the hands of the assessee company under Section 2(22)(e) of the Act. We, say so, because the purchases and sales transactions between M/s. MSN Organics (assessee company) and M/s. Maithri Laboratories Pvt. Ltd. (supra) reveals as under: (A.) Purchase Transactions: On a perusal of the record, we find that M/s. Maithri Laboratories Pvt. Ltd. (supra) had, during the subject year, made purchases of Rs. 5,69,60,654/- from the assessee company, against which it had made a payment of Rs. 59 lacs to the assessee company. Ostensibly, the whole of the payment of Rs. 59 lacs made by the payer company, viz. M/s. Maithri Laboratories Pvt. Ltd. to M/s. MSN Organics (assessee company) during the year under consideration, was for meeting out the “trade liability” of the payer company towards the assessee company. Accordingly, no Printed from counselvise.com 24 ITA No.395/Hyd/2025 MSN Organics Private Limited part of the payment of Rs. 59 lacs (supra) made by M/s. Maithri Laboratories Pvt. Ltd. for part payment of its “trade liability” could have been considered as an advance/loan to the assessee company. Consequently, since the payment of Rs. 59 lacs (supra) made by M/s. Maithri Laboratories Pvt. Ltd. (supra), was much less than the purchases made from the assessee company, therefore, in the absence of there being any excess payment made by the said payer company which can be regarded as an “advance” or “loan”, there could be no justification for treating any part of the said amount as “deemed dividend” under Section 2(22)(e) of the Act. (B). Sale Transactions: On a perusal of the record, we further find that M/s. Maithri Laboratories Pvt. Ltd. (supra) had, during the subject year, made sales of Rs. 29,25,22,766/- to M/s. MSN Organics Pvt. Ltd. (assessee company), against which it had received an amount of Rs. 6,82,00,000/- from the Printed from counselvise.com 25 ITA No.395/Hyd/2025 MSN Organics Private Limited latter. Accordingly, as on 31.03.2021, an amount of Rs.22,43,22,766/- [Rs.29,25,22,766/- (minus) Rs.6,82,00,000/-] was receivable by M/s. Maithri Laboratories Pvt. Ltd (supra), on account of the subject sales made to the assessee company during the year itself. As observed by the CIT(A), and rightly so, the aforesaid “trade receivables” (net) of Rs. 22,43,22,766/- (supra) “could not have been treated as “payment made by way of advances/loans” and brought within the meaning of “deemed dividend” under Section 2(22)(e) of the Act. 18. On a conjoint perusal of the purchase/sale transactions of M/s. Maithri Laboratories Pvt. Ltd. (supra) with M/s. MSN Organics Pvt. Ltd. (assessee company) during the subject year, an amount of Rs. 16,05,06,533/- (net balance) was payable by the assessee company to M/s. Maithri Laboratories Pvt. Ltd. (supra) on 31.03.2021. 19. We, thus, based on our aforesaid deliberations, are of a firm conviction that it is a matter of fact evident beyond doubt that M/s. Maithri Laboratories Pvt. Ltd. (supra) had not made any excess Printed from counselvise.com 26 ITA No.395/Hyd/2025 MSN Organics Private Limited payment to the assessee company, viz., M/s. MSN Organics Pvt. Ltd., during the subject year, i.e., A.Y. 2021–2022 and the closing “debit balance” of the assessee company in the “books of account” M/s. Maithri Laboratories Pvt. Ltd. was attributable to the “receivables against sales” outstanding from M/s. MSN Organics Pvt. Ltd. i.e the assessee company at the end of the subject year. Accordingly, as there were no excess payments made by M/s. Maithri Laboratories Pvt. Ltd. to the assessee company, viz., M/s. MSN Organics Pvt. Ltd., during the subject year, i.e., A.Y. 2021– 2022, therefore, we concur with the CIT(A) that the very foundation of the A.O., i.e., treatment of the excess payments made by the payer company to the recipient company as advances/loans, is itself baseless. 20. We thus, in terms of our efforts and deliberations, find no infirmity in the well-reasoned order passed by the CIT(A), based on which he had concluded that there was no justification for the A.O. to have made the protective addition of Rs. 13,20,26,206/- in the hands of the recipient/assessee company. Printed from counselvise.com 27 ITA No.395/Hyd/2025 MSN Organics Private Limited 21. Before parting, we may herein observe that the substantive addition of the “deemed dividend” under Section 2(22)(e) of the Act, was made by the A.O. in the hands of Shri M. Satyanarayana Reddy (supra), vide his order of assessment passed under Section 143(3) of the Act, dated 01.04.2023, for A.Y. 2021–2022. However, on appeal, the impugned addition of Rs.13,20,26,206/- (supra), made by the A.O., was vacated by the CIT(A)-12, Hyderabad, vide his order passed in Appeal No.100721/2020-21, dated 09.08.2024. Also, as is discernible from the CIT(A)’s order t in the case of the present assessee company, the impugned addition of “deemed dividend” under Section 2(22)(e) of Rs. 13.20 crores (approx.) made in the case of Shri M. Satyanarayana Reddy (supra) on substantive basis, had been vacated based on the observations on which the protective addition in the case of the present assessee company had been struck down by him. 22. Be that as it may, we herein concur with the well-reasoned view taken by the CIT(A), which had, based on his exhaustive deliberations on the issue in hand, vacated the impugned addition of deemed dividend of Rs. 13.20 crore (supra), made by the A.O. on a protective basis in the hands of the assessee company under Printed from counselvise.com 28 ITA No.395/Hyd/2025 MSN Organics Private Limited Section 2(22)(e) of the Act. The Grounds of Appeal Nos. 1 and 2 filed by the Revenue are dismissed. 23. The Ground of Appeal No. 3, being general in nature, is dismissed as not pressed. 24. Resultantly, the appeal filed by the Revenue is dismissed. Order pronounced in the Open Court on 8th August, 2025. Sd/- (श्री मिुसूदन सावडिया) (MADHUSUDAN SAWDIA) लेखा सदस्य/ACCOUNTANT MEMBER Sd/- (श्री रवीश सूद) (RAVISH SOOD) न्यायिक सदस्य/JUDICIAL MEMBER Hyderabad, dated 08.08.2025. **TYNM/sps आदेशकी प्रनतनलनप अग्रेनर्त/ Copy of the order forwarded to:- 1. निर्धाररती/The Assessee : M/s. MSN Organics Pvt. Ltd. Plot No.C-24, MSN House, Sanath Nagar, Hyderabad – 500 018. 2. रधजस्व/ The Revenue : The Assistant Commissioner of Income Tax, Central Circle – 2(4), Hyderabad. 3. The Principal Commissioner of Income Tax (Central), Hyderabad. 4. नवभधगीयप्रनतनिनर्, आयकर अपीलीय अनर्करण, हैदरधबधद / DR, ITAT, Hyderabad 5. गधर्ाफ़धईल / Guard file आदेशधिुसधर / BY ORDER Sr. Private Secretary ITAT, Hyderabad Printed from counselvise.com "