Amount received by Malayala Manorama from its Subsidiary Co.was part of Regular Business Transactions, Not Deemed Dividend: Kerala HC [Read Judgment]

In the case of The Commissioner of Income Tax and M/s Malayala Manorama Co. Ltd, Kerala High Court recently held that amount received from its subsidiary company cannot be treated as deemed dividend for the purpose of section 2(22)(e) of the Income Tax as the same was part of regular business transaction.

In the present case assessee is Malayala Manorama Co.Ltd engaged in printing and publishing of the Malayala Manorama daily, Manorama Weekly, the publication by name “THE WEEK” and also the Manorama Year Book and the assessee company has 100 percent share in its subsidiary company named as Commercial Broadcasts Ltd. who is engaged in distributing the Assessee’s publications in the Gulf region.

During the year, due to the unavailability of flights the Subsidiary Company made arrangements with the Assessee Company to send the publications directly from Kerala to the Gulf on account of the Subsidiary Company and so as to facilitate such exercise and the assessee company has received an amount of Rs.60 lakhs regarding the transaction from the subsidiary company and accounts were being maintained accordingly.

During the course of assessment proceedings the Assessing Officer (AO) observed that the accounting effected was not correct and that there was instance of evasion of tax at the hands of the Assessee, by virtue of the wrong procedure of accounting and accordingly he treated the said amount as deemed dividend under section 2(22)(e) of the Income Tax Act 1961.

After analyzing the above-narrated facts High Court Justice P.R.Ramachandran and Justice Shircy.V observed that it was only a commercial transaction and there was no lending or advancing within the meaning of section 2 (22)(e) and the same cannot be treated as deemed dividend.

The court disallowed the appeal filed by the revenue and noted that the relevant decision of the Delhi High Court in a previous case on the similar issue of the present case. In that decision, the court specified that there was nothing on record to show that the amounts considered by the Assessing Officer were in any manner ‘advances or loans’ in the account of the Assessee. It further observed that the Assessee had regular business dealings with its subsidiary companies and since the transactions were normal business transactions which were carried out during the course of relevant/previous year, they could not be described as ‘advances or loans’  therefore, it will not fall in the meaning of section 2(22)(e) of the Act.

The court held that the same decision is applicable in the present case and accordingly declared that amount received by the assessee company from its subsidiary company should be considered as a part of the regular business transaction and the same cannot be treated as deemed dividend.