ACIT., CENTRAL CIRCLE-2(4), HYDERABAD V. SATYANARAYANA REDDY MANNE, HYDERABAD

ITA 1129/HYD/2024

AI Insights

The case revolves around the appeal filed by the Revenue against the order of the CIT(A) concerning the assessment year 2021-22. The primary issue was the addition made on account of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961, which the Assessing Officer had treated as loans or advances. The CIT(A) had partly allowed the assessee's appeal, leading to the Revenue's appeal to the Tribunal. The Tribunal examined the nature of the transactions between the assessee and the recipient companies, which were found to be trade advances in the ordinary course of business, and not loans or advances as defined under section 2(22)(e). The Tribunal's decision was influenced by the interpretation of commercial transactions and the application of relevant judicial precedents and CBDT circulars.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 29102 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB-A
• Assessment Year: 2021-2022
• Other Referred Cases: Jayesh T Kotak Vs. DCIT, CIT Vs. Mukundray K. Shah, CIT Vs. India Fruits Ltd, CIT Vs. Creative Dyeing & Printing Pvt Ltd, CIT Vs. Ambassador Travels Pvt Ltd, CIT Vs. Raj Kumar, CIT Vs. Nagindas M Kapadia, Jamuna Vernekar Vs. CIT, CIT Vs. Amrik Singh, CIT Vs. Atul Engineering Udyog, Hero Cycles (P) Ltd Vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B.BALAKRISHNA
• Assessee Lawyers: M.V. PRASAD
• Keywords: Set aside; Deemed dividend; Salary income; Commercial expediency; Search and seizure; Accommodation entries
• Section: 143(3); 142(1); 143(1); 132; 153A; 2(22)(e); 20; 2(22)

Judgement Text

" आयकर अपीलीय अधिकरण, हैदराबाद पीठ में IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A” , HYDERABAD BEFORE SHRI LALIET KUMAR, HON’BLE JUDICIAL MEMBER AND SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER O R D E R PER LALIET KUMAR, J.M : The appeal filed by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals) – 12 dated 19.08.2024 for the assessment year 2021-22. ITA No.1129/Hyd/2024 Assessment Years: 2021-22 The Assistant Commissioner of Income Tax, Central Circle – 2(4), Hyderabad. Vs. Satyanarayana Reddy Manne, Hyderabad. PAN : ADYPM2116L (Appellant) (Respondent) Assessee by: Shri M.V. Prasad, C.A. and Shri K.S. Rajendra Kumar. Revenue by: Shri B. Bala Krishna, CIT-DR. Date of hearing: 24.12.2024 Date of pronouncement: 04.02.2025 ITA No.1129/Hyd/2024 2 2. The grounds raised by the Revenue read as under : “1. The Ld. CIT (Appeals) erred both on facts and in law in granting relief to the assessee. 2) The Ld. CIT(A) ought to have considered the fact that 150% of the purchases were treated as trade advances in view of the CBDT Circular No. 19/2017 and the balance positive balances alone were considered for the purpose of calculation of Deemed Dividend. 3) The Ld CIT(A) erred in not appreciating the fact that the outstanding debit balance of M/s. Maithri Laboratories Ltd in fact represents loan or advance which attracts the provisions of Sec.2(22)(e) of the Act 4) The Ld. CIT(A) erred in not appreciating the fact that the assessee is a substantial shareholder (having shareholding exceeding 20%) in both the companies M/s. Maithri Laboratories Pvt. Ltd. (company which advanced loans) and M/s. MSN Organics Pvt. Ltd., (company which accepted loans) 3. The brief facts of the case are that the assessee is an individual and the Director of M/s. MSN Laboratories Pvt. Ltd., and M/s. MSN Pharma Chem Pvt. Limited having income from salary, other sources and house property, filed his return of income for the A.Y. 2021-22 originally on 29.03.2022 admitting therein net income of Rs.156,71,42,700/- and the same was processed u/s 143(1) of the Act. A search and seizure operations u/s 132 of the I.T. Act were carried out in the case of M/s MSN Laboratories Group cases, on 24.02.2021, in connection with the same the assessee is also covered. In the case of assessee, search & seizure operations were commenced on 24.02.2021 and the proceedings were finally ITA No.1129/Hyd/2024 3 concluded on 27.04.2021. Initially the case has been notified to the Central Circle-3(1), Hyderabad. The case was taken up for scrutiny and notice u/s 143(2), dated 04.04.2022 was issued and served on the assessee through e-mail. Further initial notice u/s 142(1) dated 11.04.2022 was issued calling for certain information. Subsequently, the case has been notified to this Circle vide notification of Pr.CIT(Central), Hyderabad in F.No.Pr.CIT(c)/ Centralization/MSN Pharma/2022-23, dated 22.06.2022. A notice u/s 142(1), dated 31.10.2022 was issued to the assessee calling for certain information. After considering the information submitted by the assessee, the assessment was completed by the Assessing Officer interalia making additions of Rs.4,23,000/- towards agricultural income and Rs.13,20,26,206/- towards deemed dividend. Accordingly, Assessing Officer passed assessment order u/s 143(3) of the Act dt.01.04.2023. 3.1. The assessee has filed an appeal against the assessment order passed by the AO for A.Y. 2021-22 and challenged the additions / disallowances made by the Assessing Officer. The LD.CIT(A), for the reasons stated in the appellate order dated 19.08.2024, partly allowed the appeal filed by the assessee, wherein the LD.CIT(A) has sustained addition made by the AO towards deemed dividend u/s 2(22)(e) of the Act. ITA No.1129/Hyd/2024 4 4. Aggrieved by the order of LD.CIT(A), the Revenue is now in appeal before the Tribunal. 5. The only issue that came up for our consideration from Ground Nos. 2 to 4 of the Revenue’s appeal for the year under consideration is the addition made on account of deemed dividend (dividend distribution tax in the hands of the appellant). During the course of search operation at the premises of MSN Group Companies, books of accounts were found and seized vide Annexure A/MSN/Off/HD3. On verification, the AO found that there was a substantial amount of debit balance outstanding from M/s. MSN Organics Pvt. Ltd (hereinafter referred to as “MSNO”) and M/s. MSN Labs (hereinafter referred to as “MSNL”) in the books of the buyer company. The AO further noted that the appellant is a common director in all the three companies and holds more than 10% of the voting share. During the course of search proceedings, summons u/s 131 of the Act, dated 09.04.2021 was issued to the assessee requesting him to produce the information with regard to the purchases and sales made, receipts, and also excess payments made to MSNL and MSNO. The assessee was asked to provide details of sales and purchases made to/from both the companies. The assessee was also required to produce the nature and purpose of payments made, the necessity or purpose of giving such amounts in excess of purchases made, and to provide a copy of the Board resolution passed, if any, for making payments in excess of purchases made along with details of interest charged on such excess amounts paid, if any. In response, M.S.N. Reddy, has submitted ledger account copies of MSNL and MSNO in the books of ITA No.1129/Hyd/2024 5 payer company and also filed details of opening balance and sales made during the relevant financial year, purchases made from the above two companies, payments made and received from the above two companies and closing balances. M.S.N. Reddy had also explained the nature and necessity of payments made to the above two group companies and submitted that buyer company and the other two group companies i.e., MSNL and MSNO, are engaged in the same line of business of manufacture and sale of Active Pharmaceutical Ingredients (APIs). Buyer company and the recipient company have carried out trading transactions of both purchases and sales made with each other in the course of said business. Buyer company has made payments in respect of purchases made from the above two companies and also received payments in respect of sales made to the above two companies, and submitted that these transactions are in the course of the normal business of the assessee and have business exigency or commercial expediency. 6. The AO, after examination of the ledger accounts of the recipient company, observed that the basic ingredients of ‘deemed dividend’ as defined under section 2(22)(e) of the Act, such as common substantial shareholding of assessee in M/s. MSN Pharma Chem Pvt. Ltd, two recipient companies and the availability of accumulated profits by way of reserves in the hands of the buyer company have been satisfied. The AO analyzed the details of the opening balance, sales, purchases, receipts, payments, and closing balance in the affidavit of the two recipient companies and observed that M.S.N. Reddy has paid an excess amount to MSNL and MSNO in comparison to the amounts payable to the recipient company by aggregating the sales and payments made to the recipient ITA No.1129/Hyd/2024 6 companies and subtracting the purchases made and payments received from the recipient companies. Further, the AO, having regard to the Board’s Circular No.19/2017 dated 12-6-2017 observed that the transactions between buyer company and the other two recipient companies are in the nature of commercial transactions would not fall under the ambit of the word \"advance\" as defined under Section 2(22)(e) of the Act. However, keeping in view the flexibility required in practical business situations, the AO treated the payments made by buyer company to the above two companies to the extent of 150% of the purchases made from the recipient companies as the payments made in the ordinary course of business, and the payments made in excess of 150% of the purchases as payments having no nexus with business transactions. Accordingly, the AO reduced the additional amount of 50% of the purchases from the excess payments computed by him, and such balance excess payments have been treated as payments made by way of ‘advances or loans’ on the reasoning that the said excess payments have no relation to the trading transactions between buyer company and two recipient companies. The AO further observed that although M.S.N.Reddy has made excess payments over and above the normal business transactions, but the buyer company has not engaged in the business of finance and no interest was charged in respect of said loans and advances and therefore, invoked provisions of Section 2(22)(e) of the Act and made addition of Rs.13,20,26,206/- for the assessment year 2021-22. ITA No.1129/Hyd/2024 7 7. The AO further observed that the M/s. MSN Pharma Chem Pvt. Ltd, being the payee, is liable to pay dividend distribution tax under the provisions of Section 115-O of the Income Tax Act, 1961 in respect of the said deemed dividend under Section 2(22)(e) in the hands of the common substantial shareholder, in view of the amendment made to Section 115Q with effect from 01.04.2018, making dividend distribution tax applicable to deemed dividends also. Since no dividend distribution tax has been paid as deemed dividend by M/s. MSN Pharma Chem Pvt. Ltd, the AO made addition towards deemed dividend under Section 2(22)(e) of the Act and computed dividend distribution tax for the assessment year 2021-22. 8. Being aggrieved by the assessment order, the assessee filed an appeal before the LD.CIT(A) and challenged the addition made towards deemed dividend u/s 2(22)(e) and consequent dividend distribution tax under Section 115Q of the Act in the hands of the assessee in respect of the excess payments made to MSNL and MSNO as deemed dividend taxable under Section 2(22)(e) of the Act and contended that commercial transactions between two associated or group companies in the ordinary course of business are not covered under the provisions of Section 2(22)(e) of the Act. The assessee further contended that the AO, having noticed the fact that the buyer company and the other two companies are engaged in similar line of business of manufacture and sale of bulk drugs and also there are commercial transactions between M/s. MSN Pharma Chem Pvt. Ltd and the other two companies in the form of purchases, sales, receipts, and payments, has erred in applying the provisions of Section 2(22)(e) r.w.s. 115Q of the Act towards excess ITA No.1129/Hyd/2024 8 payments made by M.S.N. Reddy to the above two companies, ignoring the fact that the said transactions are purely commercial transactions between the two companies. The appellant has also challenged the findings of the AO with regard to the re- characterization of transactions between buyer company and the other two companies as loans and advances as defined under Section 2(22)(e) without appreciating the fact that current account transactions between the two groups in the normal course of business of the assessee cannot be treated as ‘loans or advances’ for the purpose of Section 2(22)(e) of the Act. The assessee further contended that the provisions of Section 2(22)(e) r.w.s. 115Q of the Act do not attract when payments to the recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder. 9. The LD.CIT(A), after considering the relevant submissions of the assessee and also following certain judicial pronouncements and taking into consideration the reasons given by the AO, observed that excess payments to sister concerns in excess of 150% of purchases from the above two companies cannot be treated as normal commercial transactions between two unrelated parties, going by the nature of the payments and purchases. The LD.CIT(A) further observed that the excess payments should be classified under ‘loans and advances’ that fall within the ambit of Section 2(22)(e) of the Act only, and the treatment by buyer company of such huge payments in its books of accounts is of no relevance. The LD.CIT(A) further observed that the contention of the appellant that the transactions between the two companies are in the nature of current account adjustments due to two-way movement of funds on a need basis is ITA No.1129/Hyd/2024 9 also incorrect because, in a current account (running), it is an opening account, an unsettled running account used in a trade between the buyer and seller, wherein it allows the buyer to make ongoing purchases with amounts paid by reducing the balance, and there is a fixed date by which payments and receipts must be settled. However, in the present case, during the assessment year 2021-22, the appellant has purchased ₹5.69 crores from MSN Organics and made sales of Rs.29.25 crores and consequently, the appellant had to receive a balance amount of Rs.16,05,06,533/-. 10. The LD.CIT(A) further observed that the appellant has also failed to establish any business exigency or need for making huge payments when compared to purchases or sales. Although there are purchase / sale transactions existing between the appellant and the recipient company for the assessment year, when these transactions are compared to payments made by the buyer company to the recipient company, it can be seen that the quantum of these purchases / sales is very less when compared to the payments. Therefore, the case of the appellant does not fulfill the criteria given in the case laws relied upon by it, and accordingly, the account between the buyer company and the recipient company cannot be treated as current account. The LD.CIT(A) has also rejected the contention of the assessee with regard to the argument that the excess amount paid to the two companies has been utilized for the business of the recipient company and that no part of the said payments was utilized / diverted for the benefit of the common shareholder because it is seen that assessee is the substantial shareholder in both the payee and the recipient company, and any ITA No.1129/Hyd/2024 10 excess payment made to the payee in the guise of trade and advances would avoid the payment of dividend distribution tax under Section 115-O and would indirectly benefit the common shareholder; thus, the said payments fall under the deeming provisions of Section 2(22)(e) of the Act. Therefore, considering the nature of transactions between the parties, the quantum of payment, and also by considering the CBDT Circular No.19/2017 dated 12-6-2017 coupled the details of amount paid by the buyer company to the recipient companies, by allowing 200% of purchases as normal payments in the ordinary course of business, and excess payments over and above 200% have been treated as loans and advances for the purpose of Section 2(22)(e) of the Act, and directed the Assessing Officer to rework the deemed dividend under Section 2(22)(e) and also compute the dividend distribution tax under Section 115Q of the Act. 11. Aggrieved by the order of the LD.CIT(A), the Revenue is in appeal before us. 12. Before us, Shri B. Bala Krishna, learned CIT-DR supporting the order of LD.CIT(A) submitted that there is no dispute regarding the fact that the conditions required for invoking provisions of Section 2(22)(e) are satisfied. Further, the buyer company and the other two companies are part of the MSN Group, and Shri MSN Reddy is the common shareholder holding more than 10% voting power in all three companies. There is no dispute with regard to the fact that the buyer company has accumulated profits in excess of ITA No.1129/Hyd/2024 11 the amounts of loans or advances given to the two companies. Since the conditions for invoking the provisions of Section 2(22)(e) are satisfied, the reasons given by the AO to consider the transactions between the appellant company and the other two companies as loans and advances must be examined in light of the transactions between these companies. If you go by the analysis of the transactions between the buyer company and the other two companies, as done by the Assessing Officer, there is a clear fact to the effect that M.S.N. Reddy has made very minimum purchases from the above two companies, but has made substantial amounts over and above the value of purchases. Therefore, the Assessing Officer came to the conclusion that any amount paid in excess of 150% / 200% of purchases should be treated as loans and advances, and thus, rightly computed the excess amount paid by the buyer company to the two companies and invoked the provisions of Section 2(22)(e) read with Section 115Q of the Act. Therefore, he submitted that the order of LD.CIT(A) should be upheld. 13. Per contra, the learned counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) erred in sustaining additions made by the AO towards deemed dividend under Section 2(22)(e) and the consequent dividend distribution tax under Section 115Q, without appreciating the fact that the transactions between the buyer company and two other associated concerns are trade advances, which are in the nature of commercial transactions effected in the ordinary course of business and does not fall under ‘loans or advances’ for the purpose of Section 2(22)(e) of the Act. The ITA No.1129/Hyd/2024 12 Learned Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate that there is a two-way movement of funds between the buyer company and the recipient companies and the said transactions, which are in the nature of current adjustment account transactions, cannot be termed as loans or advances falling within the ambit of deemed dividend under Section 2(22)(e) of the Act. The Learned Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate the fact that payments made to recipient companies, who is not a shareholder of the buyer company, do not come under the purview of deemed dividend under Section 2(22)(e), since the same have been utilized for the purpose of business of the recipient companies and no part of the said payments were utilized / diverted for the benefit of substantial shareholders. The Learned Counsel for the assessee took us to relevant documents, including ledger accounts of the two companies in the books of accounts of the appellant, and argued that if you go by the nature of transactions involving purchases and sales with the above companies and against purchase and sales, the appellant received payments from these companies and also made payments for purchases. There is a series of day-to-day transactions between the two companies which are arising in the normal course of business of carrying out manufacturing of API and bulk drugs. Since all the three companies are engaged in the business of manufacturing of Active Pharmaceutical Ingredients (API) and bulk drugs, they have transactions with each other for purchases, sales, and also requirement of short-term funds for carrying out the business activities. Therefore, the Assessing Officer having accepted the fact that there are commercial transactions between the buyer company and the two companies, and that these are in the nature ITA No.1129/Hyd/2024 13 of trade advances as per Board Circular No.19/2017 dated 12-06- 2017, but erred in coming to the conclusion that only a portion of advances paid by the buyer company falls under trade advances and rest is loans and advances. 13.1 The Learned Counsel for the assessee, referring to certain judicial precedents, including the decision of the Hon'ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT reported in (2020) 425 ITR 435 (Gujarat), submitted that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the Legislature is to tax funds ultimately received by a shareholder holding not less than 10% of voting power in the company, where such funds have been routed through different modes / concerns and used for the benefit of the shareholder. In the present case, the amounts paid by the buyer company to the two associated companies are for their business requirements, including deployment of working capital, purchase of new assets, and financial support in furtherance of their business activities. Therefore, these transactions cannot be considered as loans and advances for the purpose of Section 2(22)(e) of the Act. The Learned Counsel for the assessee further referred to the decision of the Hon’ble Supreme Court in the case of CIT Vs. Mukundray K. Shah reported in (2007) 290 ITR 433 (SC) and submitted that, in order to invoke provisions of Section 2(22)(e), two factors must be considered: whether the payment was a loan or advance and whether on the date of payment there existed ITA No.1129/Hyd/2024 14 accumulated profits. Unless the transactions are in the nature of loans and advances, the provisions of Section 2(22)(e) cannot be invoked. In this regard, he relied upon the following judicial precedents placed at page 9 of the written submissions: 1) CIT vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra Pradesh) (PB-I: Pg 78-79). 2) CIT vs. Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476 (Delhi) (PB-I: Pg 80-82) 3) CIT vs. Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi) (PB-I: Pg 83) 4) CIT vs. Raj Kumar [2009] 318 ITR 462 (Delhi) (PB-I: Pg 84-88). 5) CIT vs. Nagindas M Kapadia [1989] 177 ITR 393 (Bombay) (PB- I: Pg 89) 6) Jamuna Vernekar vs. CIT [2021] 432 ITR 146 (Karnataka) (PB- I: Pg 90-91) 7) CIT vs. Amrik Singh [2015] 56 taxmann.com 460 (P & H) (PB-I: Pg 92-93). 8) CIT vs. Atul Engineering Udyog [2014] 51 taxmann.com 569 (Allahabad) (PB-I: Pg 94-96). 14. We have heard both parties, perused the material available on record and gone through the orders of the authorities below. We find that, the issue on similar facts has already been decided in favour of the assessee by the decision of the ITAT Hyderabad Benches, in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in ITA No.884/Hyd/2024, wherein the Tribunal has directed the Assessing Officer to delete the addition ITA No.1129/Hyd/2024 15 made u/s 2(22)(e) and consequent levy of Dividend Distribution Tax u/s 115-O r.w.s. 115Q of the Income Tax Act, 1961 for Asst. Years 2019-20 and 2020-21 in the hands of the assessee. The relevant findings of the Tribunal are as under: “15. We have heard both parties, perused the materials available on record and gone through the orders of the authorities below. We have also carefully considered the plethora of case laws relied upon by both sides. The addition towards deemed dividend for the purpose of levy of dividend distribution tax has been made by considering the debit balance outstanding in the accounts of two group concerns i.e., M/s MSN Laboratories Pvt. Ltd and M/s MSN Organics Pvt. Ltd, in the books of the appellant company as on 31.03.2019. The appellant company and two group companies MSN Laboratories Pvt. Ltd and MSN Organics Pvt. Ltd (referred to as recipient companies) are engaged in the same line of business of manufacture and sale of Active Pharmaceutical Ingredients (API). The appellant company and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. The appellant company has made payments in respect of purchases made from the recipient companies and received payments in respect of sales made to recipient companies. During course of assessment proceedings, the AO analyzed the details of opening balance, sales, purchases, receipts, payments and closing balance in the accounts of the two recipient companies and observed that they are in receipt of excess amounts from the appellant company in comparison to the amounts receivable by them against the trading transactions of purchases and sales that took place between the appellant company and the recipient companies during the year. The AO worked out the quantum of excess payments made by the appellant company to the recipient companies by aggregating the sales and payments made to the recipient companies and subtracting the purchases made and payments received from the recipient companies. However, having regard to the Board’s Circular No.19/2017, wherein it was stated that the trade advances, which are in the nature of commercial transactions, would not fall under the ambit of the word “advance” in section 2(22)(e) and keeping in view the flexibility required in practical business situations, the AO treated the payments made by the appellant company to the extent of 150% of the purchases made from the recipient companies as the payments made in the ordinary course of business and the payments made in excess of such 150% of the purchases as payments having no nexus with the business transactions. Accordingly, the AO reduced an additional amount of 50% of the purchases from the excess payments and such balance excess payments were treated as payments made by way of ‘advances or loans’ on the reasoning that they have no relation to the trading transactions between the companies. In this ITA No.1129/Hyd/2024 16 connection, the AO noted that the appellant company is not engaged in the business of finance and that no interest was charged in respect of such ‘advances or loans’. The said amounts of excess payments were accordingly held to be constituting deemed dividend u/s 2(22)(e) in the hands of Sri. M.S.N.Reddy, who is the common substantial shareholder in the appellant company and the recipient companies. The deemed dividend worked out by the AO amounted to Rs.241,53,50,035/- in the case of payments made to MSN Laboratories Pvt Ltd and Rs.1,53,47,177/- in the case of payments made to MSN Organics Pvt Ltd. The aggregate deemed dividend worked out for Asst. Year 2019-20 amounted to Rs.243,66,97,212/-. Similar working has been made for Asst. Year 2020-21 and worked out deemed dividend of Rs.266,76,84,647/-. The details of the recipient companies and the payments made to them by the appellant company in excess of 150% of the purchases, which has been treated as deemed dividend u/s 2(22)(e) by the Assessing Officer for the assessment years 2019-20 and 2020-21 under consideration are summarized in the table given below: Particulars A/c of MSN Laboratories Pvt Ltd in the books of the appellant A/c of MSN Organics Pvt Ltd in the books of the appellant Amount (Rs.) Amount (Rs.) Opening debit Balance 57,44,33,690 0 Add: Sales 100,52,08,397 54,74,844 Add: Payments (net of rent) 298,63,99,230 14,79,63,266 Less: Purchases 1,95,03,644 53,36,102 Less: Receipts 154,70,02,126 13,00,86,779 Closing debit balance 299,95,35,547 1,80,15,229 Excess payments during the year (sales + payments – purchases – receipts) 242,51,01,857 1,80,15,228 Less: Additional 50% of purchases in addition to 100% of purchases considered above 97,51,822 26,68,051 Balance excess payments treated as “advance or loan” constituting deemed dividend 241,53,50,035 1,53,47,177 Aggregate deemed dividend for AY 2019-20 243,06,97,212 Particulars A/c of MSN Laboratories Pvt Ltd in the books of the appellant. Amount in (Rs.) Opening debit balance 299,95,35,547 Add: Sales 100,43,24,928 ITA No.1129/Hyd/2024 17 Add: Payments (net of rent) 506,40,05,020 Less: Purchases 2,13,45,020 Less: Receipts 336,86,26,307 Closing debit balance 567,78,93,192 Excess payments during the year (sales + payments – purchases – receipts) 267,83,57,645 Less: Additional 50% of purchases in addition to 100% of purchases considered above 1,06,72,998 Balance excess payments treated as “advance or loan” constituting deemed dividend. 266,76,84,647 16. The AO observed that the appellant company, being the payer company, is liable to pay dividend distribution tax under the provisions of section 115-O of the Act, in respect of the said deemed dividend u/s 2(22)(e) in the hands of the common substantial shareholder, in view of the amendment made to section 115Q with effect from 01.04.2018 making dividend distribution tax applicable to deemed dividend also. Since no dividend distribution tax has been paid in respect of such deemed dividend by the appellant company, the AO made addition of deemed dividend of Rs.243,06,97,212/- u/s 2(22)(e) of the Act for A.Y. 2019-20 and Rs.266,76,84,647/- for A.Y. 2020-21, in respect of which the appellant failed to pay dividend distribution tax, in the assessment order passed u/s 153A in the case of the appellant company. On first appeal filed by the assessee, the LD.CIT(A) upheld the inference of deemed dividend drawn by the AO in the assessment order. However, the LD.CIT(A) allowed partial relief with regard to the working of the quantum of deemed dividend by holding that payments made to the extent of 200% of purchases can be considered to have been made as per normal commercial practice and excess payments made over and above 200% of purchases should be considered as “loans or advances” falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. Accordingly, the LD.CIT(A) reduced an additional amount of 50% of the purchases from the excess payments computed by the AO and the balance excess amount has been treated as “advance or loan” constituting deemed dividend. 17. The provisions of section 2(22)e) of the Income Tax Act, 1961 deals with ‘Deemed Dividend’. As per the provisions of section 2(22)(e) of the Act, deemed dividend defined to mean, any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding not less than 10% of the voting power, or to any Concern in which such shareholder is member or partner and in which he has a substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to ITA No.1129/Hyd/2024 18 which the company in either case possesses accumulated profits. The term ‘Concern’ has been defined which includes ‘a company’ also. Therefore, in the present case, the conditions prescribed for invoking the provisions of Section 2(22)(e) of the Act is primarily satisfied to the extent the appellant company and other two companies are having common share holder Shri MSN Reddy, who is holding more than 10% voting power in all the three companies and further, the appellant company is having accumulated profits which is in excess of the amount of advance computed by the Assessing Officer. However, whether the transactions between the appellant company and the other two companies are trade advances which are carried out in the normal course of business of all the companies or any loan or advances which fall within the ambit of Section 2(22)(e) of the Act has to be seen in light of nature of transaction between the parties. 18. There is no dispute regarding the satisfaction of the some of the basic ingredients for inferring deemed dividend such as the payer company (appellant) being a company in which public are not substantially interested, substantial shareholding of Sri. M.S.N. Reddy in both the appellant company as well as the recipient companies as per the specified percentages of shareholding and the availability of accumulated profits in the hands of the appellant company. However, it is the contention of the appellant that the other basic ingredient for inferring deemed dividend that there should be payments by the payer company (appellant) by way of ‘advances or loans’ to the recipient company, is not satisfied in the appellant’s case and consequently, no deemed dividend arises in the hands of the common substantial shareholder and no liability to pay dividend distribution tax arises in the hands of the appellant company. Therefore, it is necessary to examine the issue in light of provisions of section 2(22)(e) of the Act, nature of transactions between two companies and the purpose of payments to two recipient companies. 19. The appellant has made three-fold arguments. The first and foremost argument of the appellant is that all the transactions between the appellant company and the recipient group companies have been made in the ordinary course of the business carried on by them and they do not come under the purview of deemed dividend u/s 2(22)(e) of the Act, as they cannot be characterized as ‘loans or advances’. Admittedly, these group companies are engaged in the same line of business of manufacturing and sale of Active Pharmaceutical Ingredients (API). The appellant company and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. These group companies have made payments in respect of purchases made by them from the other group companies and received payments in respect of sales made by them to other group companies. This is evident from the summary of transactions between ITA No.1129/Hyd/2024 19 the appellant company and the recipient companies, i.e., MSN Laboratories Pvt Ltd and MSN Organics Pvt Ltd for both assessment years. From the above, it is undisputedly proved that these are trade advances, which arises in the course of carrying out purchases in the normal course of the business and which result in closing debit balance in the account of the recipient company in the books of payer company and thus, these trade advances in the ordinary course of business cannot be regarded as payment of ‘loans or advances’ to the recipient company, since the same are undeniably in the nature of commercial transactions. It is a settled position of law that trade advances given in the normal course of business on account of trading transactions cannot be treated as ‘loans or advances’ so as to constitute deemed dividend u/s 2(22)(e) of the Act. This legal position is fortified by the decisions in the case of CIT Vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra Pradesh), where it has been held as under : “The finding of facts arrived at by the Tribunal was that the transaction in question was a business transaction and it would have benefited both, the assessee- company and the company P. In fact, the revenue had also conceded that the amount was not a loan but only an advance because the amount paid to the assessee- company would be adjusted against the entitlement to moneys of the assessee-company payable by P in the subsequent years. [Para 10] The revenue contended that since the company P was not in the business of lending money, the payments made by it to the assessee-company would be covered by section 2(22)(e)(ii) and, consequently, payment even for business transactions would be a deemed dividend. There was no merit in the contentions of the revenue. The provision of section 2(22)(e)(i) is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do not fall within section 2(22)(e), there is no need to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(i) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that's all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). This interpretation is in accordance with the legislative intention of introducing section 2(22)(e). [Para 11] Therefore, the Tribunal was correct in holding that the amount advanced for business transaction between the assessee-company and the company P was not such to ITA No.1129/Hyd/2024 20 fall within the definition of the deemed dividend under section 2(22)(e). [Para 12]” 20. Similar view has been expressed by various Courts in CIT Vs. Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476 (Delhi), CIT Vs. Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi), CIT Vs. Raj Kumar [2009] 318 ITR 462 (Delhi), CIT Vs. Nagindas M Kapadia [1989] 177 ITR 393 (Bombay), Jamuna Vernekar Vs CIT [2021] 432 ITR 146 (Karnataka),CIT Vs. Amrik Singh [2015] 56 taxmann.com 460 (P & H),and CIT Vs Atul Engineering Udyog [2014] 51 taxmann.com 569 (Allahabad). This legal position is further fortified from the CBDT Circular No.19/2017 (Pg No.77 of PB-I), where it has been clarified that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) of the Act and that such views have attained finality. The CBDT, therefore, stated that it is a settled position that trade advances, which are in the nature of commercial transactions, would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act. Though, the Assessing Officer and LD.CIT(A) have taken cognizance of the said circular and applied the same to the appellant’s case keeping in view the trading transactions between the appellant company and recipient companies, which resulted in debit balance in the account of the recipient companies at the end of the year, but both authorities have misdirected themselves in holding that payments made to the recipient companies in excess of 150% or 200% of purchases from such company cannot be treated as ‘trade advances’ in the nature of commercial transactions. The AO has wrongly treated the payments in excess of 150% of the purchases as ‘loans or advance’ and wrongly held the same to be deemed dividend u/s 2(22)(e) of the Act. Similarly, the LD.CIT(A) has wrongly treated the payments in excess of 200% of the purchases as ‘loans or advance’ and wrongly upheld the same to be deemed dividend u/s 2(22)(e) of the Act. In our considered view, the said approach of the AO/CIT(A) is arbitrary and the same is not founded on any settled principle laid down by the Courts or on any stipulation conveyed by the Board through a circular regarding the reasonableness of the quantum of trade advances. The AO/CIT(A) has not revealed the basis on which they arrived at the threshold of 150%/200% of purchases for accepting the reasonableness of the quantum of trade advances. In the absence of specification of the relevant basis by the AO/CIT(A), the same is required to be regarded as arbitrary and non-maintainable. Further, having accepted that purchases are being made regularly from the recipient companies and payments in the nature of trade advances are being made to the said companies against the purchases, the AO/CIT(A) has drawn an artificial line for segregating the payments into ‘trade advances’ which are in the nature of commercial transactions and ‘loans or advance’ which do not have such commercial character. Such an approach of the AO/CIT(A) is not permissible since the extent to which trade advances are paid is purely a commercial decision which is contingent on the business ITA No.1129/Hyd/2024 21 expediencies. The AO/CIT(A) cannot place himself in the arm-chair of the businessman and usurp his role for deciding what constitutes reasonable level of trade advances that can be given against the purchases. In this regard, reliance is placed on the decision of the Hon’ble Supreme Court in the case of Hero Cycles (P) Ltd Vs.CIT [2015] 379 ITR 347 (SC) (Pg No.97-99 of PB-I), wherein it was held that the Revenue cannot justifiably claim to put itself in the arm- chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The Hon’ble Apex Court further held that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The Hon’ble Court further held that the authorities must not look at the matter from their own viewpoint but that of a prudent businessman. The said ratio laid down by the Hon’ble Supreme Court in the context of reasonableness of the expenditure laid out for the purpose of business is applicable with equal force in respect of reasonableness of the quantum of trade advances given against purchases. We, therefore, are of the considered view that the action of the AO/CIT(A) in holding that amounts paid upto 150% / 200% of the purchases alone can be considered as reasonable quantum of trade advances in contravention of the binding decision of the Hon’ble Supreme Court cited above and the same is untenable on facts and in law. Having accepted the factum of purchases and payment of trade advances against the purchases, the AO/CIT(A) could not have imposed an imaginary and artificial limit on the quantum of payments that can be regarded as trade advances by sitting in the arm-chair of the businessman. Therefore, we are of the considered view that the entire amount of payments made against purchases has to be regarded as ‘trade advances’ without any artificial limitation on the quantum of such trade advances. As a result, the amounts paid to recipient company in excess of 200% of the purchases also have to be regarded as ‘trade advances’ which are in the nature of commercial transactions only and they cannot be characterized as ‘loans or advance’ constituting deemed dividend within the meaning of section 2(22)(e). The addition made by the AO and upheld by the CIT(A) towards deemed dividend is therefore wholly untenable and needs to be deleted. 21. We further noted that the transactions of payments made by the appellant to the recipient companies have arisen due to business exigencies and the said transactions therefore bear commercial character. The appellant company and the recipient companies are associate concerns of the same group with a common Managing Director and substantial shareholder Sri.M.S.N Reddy. The group companies, including the said companies, are engaged in similar line of business of manufacture of Active Pharmaceutical Ingredients (API). As mentioned by the AO himself in the assessment order (Pg No. 50 and 51 of the order), the business activities of the group companies ITA No.1129/Hyd/2024 22 are inter-related and inter-dependent since each company is making sale of raw materials, engineering materials and intermediates to the other associate companies, in view of the fact that the manufacturing process is fragmented into different stages and different group companies are handling the manufacture at different stages. In view of existence of such inter-dependency among the associate concerns, the said companies provide funds to each other on a need basis as a measure of business expediency as and when there is requirement of funds for the purpose of business in order to provide the required support to the business of the other associate concerns. Further, this fact is also apparent from the audited financials of the appellant company that export sales constitute a significant portion of its total sales (Pg No 17 of PB-I). The appellant is making the export sales by taking marketing services from the foreign subsidiary companies promoted by MSN Laboratories Pvt Ltd namely, MSN Pharmaceuticals Inc, USA, MSN Laboratories Europe Ltd and Mega MSN Pte Ltd, Singapore (Pg No.37 of PB-I). The sales commission paid to such foreign subsidiary companies is debited to P&L A/c (Pg No.18 back side of PB-I). These facts clearly bring out the large-scale dependency of the appellant on MSN Laboratories Ltd for effecting its export sales. We further noted from the funds flow statement regarding the utilization of the funds given by the appellant company to MSN Laboratories Pvt. Ltd (page No.75 of PB-I), where there is utilization of such funds by way of investment in foreign subsidiaries of MSN Laboratories Pvt. Ltd to the extent of Rs.60 crores during the year, apart from utilization towards working capital and acquisition of fixed assets of the business (for setting up new units/expansion of existing units). The business expediency for making huge payments to MSN Laboratories Pvt. Ltd is revealed by this crucial fact also in addition to the explanation furnished in the preceding paragraph. Therefore, the payments made by the appellant to MSN Laboratories Pvt. Ltd which are evidently imbued with business expediency cannot be considered to be falling under the ambit of “advance or loans” under section 2(22)(e) so as to constitute deemed dividend. Further, the provisions of deemed dividend are not attracted in the facts of the case for the instant assessment years as the basic ingredient to invoke the said provisions that payments by way of ‘advance or loans’ have been made by the appellant company to the recipient companies in which Sri. M.S.N.Reddy is the common substantial shareholder, is non- existent. Therefore, in our considered view, the addition made by the AO, to the extent upheld by the CIT(A), towards deemed dividend u/s 2(22)(e) in the hands of the appellant for the purpose of levy of dividend distribution tax without the satisfaction of the said basic condition laid down in the section is unwarranted and untenable. 22. The second limb of argument of the appellant is that current adjustment account transactions do not represent ‘loans or advance’ for the purpose of deemed dividend. We, find that there is a two-way movement of funds between the appellant company and the recipient companies as per the business requirements of the said companies and the same is evident from the perusal of the respective ledger ITA No.1129/Hyd/2024 23 account copy of the recipient companies in the books of the appellant company, the copies of which were furnished to the AO during the assessment proceedings (Pg No.62-67 and Pg No.68 of PB-I). We further observed that there is a series of debits and credits in the concerned ledger accounts, which clearly indicate that the transactions were effected in the normal course of business and the concerned group companies have given funds to and received funds from each other as and when required for the purpose of the business of the said group companies. It needs to be borne in mind that such transactions between the group companies cannot be considered to be in the nature of ‘loans or advance’ to the group companies. An account containing such series of debit and credit entries reflecting movement of funds both ways between the associate/group companies as per their business requirements has to be construed to be in the nature of a Current Adjustment Account unlike the transactions in the nature of ‘loans or advances’ to a shareholder or to a concern in which the shareholder has substantial interest, the movement of funds in a current adjustment/ accommodation account is in either direction on a need basis. Therefore, transactions which are in the nature of current adjustment account transactions cannot be termed as ‘loans or advances’ falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. 23. The appellant, in support of the aforesaid contention places reliance on several judicial decisions. In the case of CIT Vs. Schutz Dishman Bio-tech Pvt Ltd in Tax Appeal Nos. 958 & 959 of 2015 (Pg No.100-101 of PB-I), the Hon’ble Gujarat High Court held that where there is movement of funds on a need basis, unlike transactions in the nature of loans or advances which are usually few in number, such transactions are in the form of current adjustment accommodation entries. The Hon’ble Court held that when the CIT(A) and Tribunal have concurrently held that the amounts are not in the nature of loan or deposit but merely adjustments based on large number of adjustment entries occurring in the accounts between the entities, application of section 2(22)(e) would not arise. Similarly, Hon’ble Calcutta High Court in the case of CIT Vs. Gayatri Chakraborti [2018] 407 ITR 730 (Calcutta) (Pg No.102-104 of PB-I) held that the transactions between the shareholder and the company were in the nature of current account and the provisions of section 2(22)(e) would not be applicable, where there were transactions of giving money by the company to the shareholder and vice versa in the account. Further, the ITAT, Mumbai held in the case of Ravindra R Fotedar Vs. ACIT [2017] 85 taxmann.com 314 (Mumbai) (Pg No.105- 111 of PB-I) that where the movement of funds is in both ways on need basis between the two companies in which the assessee held substantial interest, the transactions are in the form of current accommodation entries and the amount in question could not be regarded as deemed dividend. In another case of Neha Home Builders Pvt Ltd Vs. DCIT [2018] 98 taxmann.com 465 (Mumbai-Trib) also (Pg No.112-116 of PB-I), the ITAT, Mumbai held that when the transactions between group companies were current and inter ITA No.1129/Hyd/2024 24 banking accounts containing both receipt and payment entries, same could not be regarded as loans and advance, as contemplated under section 2(22)(e) and no addition could be made as deemed dividend. Similar view was expressed by the ITAT, Delhi in the case of Saamag Developers Pvt Ltd Vs. ACIT [2018] 90 taxmann.com 20 (Delhi-Trib) (Pg No.117-131 of PB-I), wherein the Tribunal held that the amounts received from various group companies could not be considered as loans and advance, as contemplated u/s 2(22)(e) since the said transactions between the group concerns are current and inter banking accounts containing both types of entries of giving and taking of amounts. In the case of Iswar Chand Jindal Vs. ACIT [2015] 61 taxmann.com 428 (Delhi-Trib), the ITAT, Delhi held that the transactions between the two group companies are in the nature of current account transactions and the same cannot be regarded as deemed dividend under section 2(22)(e) of the Act. The sum and substance of ratio laid down by various courts and Tribunals is that current account transactions between two group companies cannot be regarded as loans or advances as defined u/s 2(22)(e) of the Income Tax Act, 1961. Therefore, we are of the considered view that the provisions of deemed dividend u/s 2(22)(e) are not applicable to the transactions between the appellant company and recipient companies, as the said transactions bear the character of current adjustment account transactions due to two-way movement of funds on a need basis. Thus, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax to the extent upheld by the LD.CIT(A) is not warranted and therefore, deleted for this reason also. 24. The third and final proposition canvassed by the appellant is that deemed dividend not attracted when payments to recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder. In this regard, we find that the payments made by the appellant company to the two recipient companies during the year do not come under the ambit of deemed dividend u/s 2(22)(e), as the said funds have been used by the recipient companies for the purpose of their business and they have not been diverted to or utilised in any manner for the benefit of the common substantial shareholder. The business expediency/exigencies in making the said payments to the recipient companies had already been explained in earlier part of this order. The funds received from appellant company have been wholly used by the recipient companies for meeting the working capital requirements of the business, financing the acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). The funds have not been diverted to the common substantial shareholder or were not utilised for the benefit of said shareholder. The details of the utilisation of the funds by the two recipient companies are submitted at Pg No.75-76 of PB-I, which were submitted to the LD.CIT(A) during the appellate proceedings. The said statements are prepared on the basis of the cash flow statement ITA No.1129/Hyd/2024 25 forming part of the audited financial statements of the recipient companies, the copies of which were furnished to the AO during the assessment proceedings. It may be seen from the perusal of the said statements that the funds received from appellant company have been fully subsumed in the funds utilised by the recipient companies during the year for the purpose of working capital, acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). Thus, the payments made to the recipient companies during the year were wholly used by them for the purpose of their business and such payments did not yield any benefit to the substantial common shareholder. We further noted that at para 7.19.2 of the assessment order, the AO has also accepted the factual position that the funds received from the appellant company have been utilized for financing the current assets of the recipient companies. Thus, it may be seen that there is no finding by the AO on facts that such funds have been diverted by the recipient companies for the benefit of the common substantial shareholder. On the other hand, the AO expressed his opinion that such financing of current assets of the recipient companies by the interest free funds received from the appellant company can be construed as a benefit accruing directly or indirectly to the recipient company. Since the utilization of the relevant funds for financing the working capital (current assets) of the recipient companies is an undisputed fact, it cannot be said that any part of the said funds has been diverted to the common substantial shareholder. Consequently, there is no scope for obtaining any direct or indirect benefit by the common substantial shareholder from the said funds. Therefore, in our considered view, it is not legally tenable to consider the payments made by the appellant company to the recipient companies as ‘deemed dividend’ in the hands of the common substantial shareholder for the purpose of levy of dividend distribution tax in the hands of the appellant company, in the absence of any benefit derived by such shareholder from the said payments. 25. In support of this contention, the appellant placed reliance on the decision of the Hon’ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT [2020] 425 ITR 435 (Gujarat) (Pg No.140-146 of PB-I), wherein it was held in the light of the decision of the Hon’ble Supreme Court in the case of CIT Vs. Mukundray K. Shah [2007] 290 ITR 433 (SC) that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The Hon’ble High Court held that the intention of the legislature is to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed through different modes/concerns. The Hon’ble High Court held that what needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. The relevant portion of the said decision is extracted below: ITA No.1129/Hyd/2024 26 “7.11 Examining the facts of the case in the light of the above legal and statutory position, this case relates to the second mode of payment envisaged under clause (e) of section 2(22) viz. to any concern in which such shareholder is a member or a partner and in which he has substantial interest. From the reasons recorded it emerges that according to the Assessing Officer unsecured loans have been extended by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. and that the petitioner held 27.49% shares in M/s J.P. Infrastructure Limited; 50% shares in Gujarat Mall Management Co. Pvt. Ltd.; and 29% shares in Aryan Arcade Pvt. Ltd., which according to him had to be treated as deemed dividend in the hands of the shareholder and taxed accordingly. As is apparent on a plain reading of the reasons recorded, while the Assessing Officer has information that M/s J.P. Infrastructure Limited has advanced unsecured loans as referred to therein to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd., there is no information to the effect that such payment was made for the benefit of the petitioner. Except for the fact that the loan giver company in which the petitioner had shareholding in excess of 10 per cent of the voting power, had given loans and advances as referred to therein to two concerns in which the petitioner had substantial interest, the reasons are totally silent as regards any benefit having been obtained by the petitioner from the said loan transactions. It is not the case of the respondent that even if no amount has travelled to the petitioner, he would still be liable to be taxed for the said transactions merely by dint of the fact that two concerns in which he had substantial interest had received loans from a company in which he had shareholding exceeding 10 per cent of the voting power. According to the respondent, the question as to whether or not the amount had travelled to the petitioner is a matter to be decided at the stage of evaluation at during the course of the re-assessment proceedings. Evidently, therefore, the Assessing Officer has not recorded any satisfaction that the amount paid by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. had been paid for the benefit of the petitioner. In the opinion of this court, in the light of the decision of the Supreme Court in Mukundray K. Shah (supra), any payment made by a company in which a shareholder has shareholding exceeding 10 per cent of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a ITA No.1129/Hyd/2024 27 shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions.” 26. Further, the SLP filed by the Revenue against the said decision of the Hon’ble Gujarat High Court has been dismissed by the Hon’ble Supreme Court by stating that it does not find any ground to interfere with the impugned order passed by the High Court, as reported in DCIT Vs. Jayesh T Kotak [2021] 130 taxmann.com 170 (SC) (Pg No.147 of PB-I). Therefore, in our considered view, it is now a settled law that the payment made by the payer company to the recipient company, in which there is a common shareholder holding not less than 10% and 20% of the voting power respectively, would be deemed to be ‘dividend’ in the hands of such shareholder only if any benefit from such transaction has been received by such shareholder or the amount is ultimately used for the benefit of the shareholder. This settled legal principle has been judicially laid down having regard to the intention of the legislature to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed to him through different concerns in which he holds substantial interest. 27. Let us now come back to the observations of the Assessing Officer. In the assessment order, the AO expressed the view that the requirement that the payment made by the payer company should result in a benefit to the shareholder so as to construe the same to be in the nature of deemed dividend is not applicable to the limb of section 2(22)(e) dealing with “payments by way of loans or advances made by a company in which the shareholder has not less than 10% voting power to a company/concern in which such shareholder has substantial interest”. The AO stated that the said condition is applicable only to another limb of section 2(22)(e) which deals with the “payments made by the payer company on behalf of or for the individual benefit of the shareholder”. However, the said view of the AO is patently contrary to the decision rendered by the Hon’ble Gujarat High Court in the case of Jayesh T Kotak (supra) which has since been affirmed by the Hon’ble Supreme Court. The decision rendered by the Hon’ble Gujarat High Court in the said case that receipt of benefit by the shareholder on account of payment made by the company in which he holds voting power of not less than 10% is a sine qua non for regarding such payment to be deemed dividend is ITA No.1129/Hyd/2024 28 with specific reference to the limb of section 2(22)(e) dealing with “payments by way of loans or advances made by a company in which the shareholder has not less than 10% voting power to a company/concern in which such shareholder has substantial interest”. Therefore, in our considered view, the said decision is squarely applicable to the facts of the appellant’s case where the transactions forming the subject matter of examination of the applicability of provisions of deemed dividend in the assessment order are the payments made by the appellant company to the recipient company in which the appellant holds not less than 10% and 20% of the voting power respectively. In the case of the appellant, it is undisputed that the payments made by the appellant company have been used for the business purposes of the recipient companies as already discussed above. The relevant funds have not been utilized by the recipient companies for the benefit of the common substantial shareholder. In view of the said incontrovertible fact and having regard to the decisions of the Hon’ble Gujarat High Court and Hon’ble Supreme Court in the case of Jayant T Kotak (supra), we are of the considered view that the payments made by the appellant company to the recipient companies during the year do not fall under the scope of deemed dividend u/s 2(22)(e) of the Act. Therefore, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax, to the extent upheld by the LD.CIT(A) is not warranted for this reason also and thus, deleted. 28. In this view of the matter and considering facts and circumstances of this case and also, by following ratios of various Courts/Tribunals discussed hereinabove, we are of the considered view that the transactions between appellant Company and two other recipient Companies do not come under the provisions of section 2(22)(e) of the Income tax Act, 1961 and consequently, the AO/CIT(A) is erred in levying dividend distribution tax in the hands of the assessee for both assessment years. Thus, we set aside the order of the LD.CIT(A) on this issue, and direct the Assessing Officer to delete addition made u/s 2(22)(e) and consequent levy of Dividend Distribution Tax u/s 115-O r.w.s. 115Q of the Income Tax Act, 1961 for Asst. Years 2019-20 and 2020-21 in the hands of the assessee. 15. In this case, the Ld.CIT(A) has recorded categorical finding that M/s. Maithri Laboratories Private Limited (hereinafter referred to as “Maithri Labs”) has not made any excess payment to M/s. MSN Organics Pvt. Ltd during the F.Y. 2020-21 relevant to A.Y. 2021-22 and the closing debit balance of M/s. MSN Organics Pvt. Ltd in the books of M/s. Maithri Labs is attributable to the receivables against ITA No.1129/Hyd/2024 29 sales outstanding from M/s. MSN Organics Pvt. Ltd. Since there was no excess payments by M/s. Maithri Labs to M/s. MSN Organics Pvt. Ltd, the very foundation of the Assessing Officer to treat the excess payments made by the buyer company to the recipient company as advances / loans is itself baseless. The Revenue failed to bring on record as evidence to controvert the findings recorded by the Ld.CIT(A). Therefore, we are of the considered view that the Assessing Officer has completely erred in working out the excess payments made to MSN Organics Pvt. Ltd, against purchases ignoring the fact that the entire amount of the excess payment is against the outstanding receivables by the said company towards sales made for the year under consideration and treated the excess payment of Rs.13.20 crores as loans / advances within the meaning of Section 2(22)(e) of the Act. The Ld.CIT(A) after considering the relevant facts has rightly deleted the addition made by the Assessing Officer. 16. In this view of the matter and by respectfully, following the decision of the ITAT Hyderabad Benches in the case of MSN Pharma Chem Private Limited for the A.Y 2019-20 in ITA No.884/Hyd/2024 (supra), we are inclined to uphold the order of the LD.CIT(A) on this issue and direct the Assessing Officer to delete the addition made u/s 2(22)(e) of the Act in the hands of the assessee. Accordingly, ground nos.2 to 4 of Revenue appeal are dismissed. Accordingly, the appeal of the Revenue is dismissed. ITA No.1129/Hyd/2024 30 17. In the result, the appeal of the Revenue is dismissed. Order pronounced in the Open Court on 4th February, 2025. Sd/- Sd/- Sd/- /- Sd/- Sd/- Sd/- (G. MANJUNATHA) ACCOUNTANT MEMBER (LALIET KUMAR) JUDICIAL MEMBER Hyderabad, dated 04.02.2025. TYNM/Sr.P.S. Copy to: S.No Addresses 1 Satyanarayana Reddy Manne, C/o. 8-3-167/D/16, Kalyan Nagar, Vengal Rao Nagar, Hyderabad – 500018. 2 The Assistant Commissioner of Income Tax, Central Circle – 2(4), Hyderabad 3 The Pr.CIT – (Central), Hyderabad. 4 DR, ITAT Hyderabad Benches 5 Guard File By Order "