The loan my client's company took carried interest and TDS was deducted on it, and the lender's objects clause covers financing. Is that enough to keep it out of s.2(22)(e)?
No, on these facts. The Rajasthan High Court held that payment of interest and deduction of tax at source do not convert a loan into an inter-corporate deposit or into a loan taken in the ordinary course of business, and that the sub-clause (ii) exception needs money lending to be a substantial part of the lender's business — interest of Rs 2,97,552 on a single loan was not. The Court also held that deemed dividend under s.2(22)(e) was outside the s.10(34) exemption read with s.115-O and remained taxable in the recipient's hands.
Decided by the High Court (Sangeet Lodha J and Vinit Kumar Mathur J) on 2016-12-22, reported as D.B. Income Tax Appeal No. 28/2012 and one connected matter (Rajasthan High Court, Jodhpur). It bears on section 2(22)(e), section 10(34), section 115-O, section 2(24), section 260A of the Income Tax Act 1961, in How Tax Law Is Read and Capital Gains Exemptions matters.
This is the Revenue-side answer to the trade-advance line and it is worth carrying alongside Raj Kumar, Creative Dyeing and Circular 19/2017. The Court accepted every one of those authorities in principle but held that on the facts the loan was gratuitous — it was not given in return for any advantage conferred on the lending company — so the commercial-transaction reasoning did not apply. That is the fault line: the exception turns on whether the shareholder gave the company something, not on whether the paperwork looks commercial. On the money-lending exception in sub-clause (ii), the Court set out the Bombay High Court's observation in Parle Plastics that 'substantial part' does not connote the idea of being the major part or the part constituting a majority of the whole, and held on the facts a single loan producing under Rs 3 lakh of interest did not qualify even though the objects clause covered financing. The second holding needs careful dating: for the years before the Court, deemed dividend under (e) never bore dividend distribution tax and so was never within s.10(34). For dividends declared, distributed or paid on or after 1 April 2020 s.115-O has no application at all, s.10(34) is inoperative from AY 2021-22, and dividend of every kind is taxable in the shareholder's hands — so the outcome for a current year is the same, by a different route.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Mewar Polytex Ltd, a public limited company manufacturing PP and HDPE fabric and sacks, returned income of Rs 1,66,89,710 for assessment year 2006-07, declared dividend at 5 per cent on paid-up capital and paid dividend distribution tax. During the year it took loans totalling Rs 1,32,20,000 from five parties. It held 23.67 per cent of Sun Polytex Pvt Ltd and 14.7 per cent of Sisarama Plastic Pvt Ltd, and the Assessing Officer proposed to treat Rs 75,00,000 from the first and Rs 8,00,000 from the second as deemed dividend. The assessee clarified that the corporate loan from Sun Polytex was Rs 55,00,000, that it had paid interest of Rs 1,05,534 at 12 per cent and deducted tax of Rs 23,682, and that Sun Polytex's memorandum covered financing to companies and firms as inter-corporate loans at market rates, from which it had earned Rs 2,97,552 of interest during the year. The Assessing Officer held that the sub-clause (ii) exception applies only where money lending is the primary business, and added Rs 55,00,000 for AY 2006-07 and Rs 18,40,000 for AY 2007-08. The CIT(A) deleted both additions on the footing that the amounts were inter-corporate deposits and not loans. The Tribunal allowed the Revenue's appeal for AY 2006-07 and, for AY 2007-08, remitted the matter to verify whether the advance during the year exceeded the closing balance of the earlier year. The assessee appealed under s.260A on two questions: whether the sub-clause (ii) exception and the settled position on ordinary-course transactions had been ignored, and whether the amount was in any event exempt under s.10(34) read with s.115-O.
Both appeals were dismissed with no order as to costs (para 28). The Tribunal committed no error in treating the loan of Rs 55,00,000 advanced by Sun Polytex Pvt Ltd as deemed dividend taxable in the hands of the assessee (para 26), and deemed dividend under s.2(22)(e) is not covered by s.10(34) read with s.115-O and continues to be taxable in the hands of the recipient (para 27).
On the first question the Court held that the record did not show the advance to be an inter-corporate deposit, and that payment of interest and deduction of tax at source do not take a loan out of the deeming fiction — if they did, the very object of the provision would be frustrated (paras 17 and 18). On the sub-clause (ii) exception it found that in the relevant year there was only one loan advanced by Sun Polytex, that the other advances related to its main business and to refundable excise duty, and that interest of Rs 2,97,552 was meagre, so the concurrent finding that money lending was not a substantial part of its business could not be faulted (para 19). It accepted the ratio of Creative Dyeing, of Pradip Kumar Malhotra and of Parle Plastics but distinguished all three, holding that here the loan was gratuitous because it was not in return for any advantage conferred on the lending company (paras 20 to 25). On the second question the Court reasoned that deemed dividend is income by virtue of s.2(24) and is excluded from total income only if it falls within s.10(34) read with s.115-O; those provisions exclude only amounts declared, distributed or paid by a domestic company by way of dividend which are made chargeable to additional income-tax in the company's hands, and deemed dividend under s.2(22)(e) is not such an amount (para 27).
Merely because, the assessee company has paid the interest to the closely held company and also deducted the tax at source, the loan taken cannot be treated to be inter corporate loan received in ordinary course of business.
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. The Rajasthan High Court held that payment of interest and deduction of tax at source do not convert a loan into an inter-corporate deposit or into a loan taken in the ordinary course of business, and that the sub-clause (ii) exception needs money lending to be a substantial part of the lender's business — interest of Rs 2,97,552 on a single loan was not. The Court also held that deemed dividend under s.2(22)(e) was outside the s.10(34) exemption read with s.115-O and remained taxable in the recipient's hands. This was decided by the High Court (Sangeet Lodha J and Vinit Kumar Mathur J) and bears on section 2(22)(e), section 10(34), section 115-O, section 2(24), section 260A of the Income Tax Act 1961. It is reported as D.B. Income Tax Appeal No. 28/2012 and one connected matter (Rajasthan High Court, Jodhpur). This is the Revenue-side answer to the trade-advance line and it is worth carrying alongside Raj Kumar, Creative Dyeing and Circular 19/2017. The Court accepted every one of those authorities in principle but held that on the facts the loan was gratuitous — it was not given in return for any advantage conferred on the lending company — so the commercial-transaction reasoning did not apply. That is the fault line: the exception turns on whether the shareholder gave the company something, not on whether the paperwork looks commercial. On the money-lending exception in sub-clause (ii), the Court set out the Bombay High Court's observation in Parle Plastics that 'substantial part' does not connote the idea of being the major part or the part constituting a majority of the whole, and held on the facts a single loan producing under Rs 3 lakh of interest did not qualify even though the objects clause covered financing. The second holding needs careful dating: for the years before the Court, deemed dividend under (e) never bore dividend distribution tax and so was never within s.10(34). For dividends declared, distributed or paid on or after 1 April 2020 s.115-O has no application at all, s.10(34) is inoperative from AY 2021-22, and dividend of every kind is taxable in the shareholder's hands — so the outcome for a current year is the same, by a different route. If it applies to you, the first step is this: Do not rest a s.2(22)(e) defence on interest having been charged or TDS deducted; the Court held expressly that neither takes the payment out of the deeming fiction.
Mewar Polytex Ltd, a public limited company manufacturing PP and HDPE fabric and sacks, returned income of Rs 1,66,89,710 for assessment year 2006-07, declared dividend at 5 per cent on paid-up capital and paid dividend distribution tax. During the year it took loans totalling Rs 1,32,20,000 from five parties. It held 23.67 per cent of Sun Polytex Pvt Ltd and 14.7 per cent of Sisarama Plastic Pvt Ltd, and the Assessing Officer proposed to treat Rs 75,00,000 from the first and Rs 8,00,000 from the second as deemed dividend. The assessee clarified that the corporate loan from Sun Polytex was Rs 55,00,000, that it had paid interest of Rs 1,05,534 at 12 per cent and deducted tax of Rs 23,682, and that Sun Polytex's memorandum covered financing to companies and firms as inter-corporate loans at market rates, from which it had earned Rs 2,97,552 of interest during the year. The Assessing Officer held that the sub-clause (ii) exception applies only where money lending is the primary business, and added Rs 55,00,000 for AY 2006-07 and Rs 18,40,000 for AY 2007-08. The CIT(A) deleted both additions on the footing that the amounts were inter-corporate deposits and not loans. The Tribunal allowed the Revenue's appeal for AY 2006-07 and, for AY 2007-08, remitted the matter to verify whether the advance during the year exceeded the closing balance of the earlier year. The assessee appealed under s.260A on two questions: whether the sub-clause (ii) exception and the settled position on ordinary-course transactions had been ignored, and whether the amount was in any event exempt under s.10(34) read with s.115-O. The matter was decided on 2016-12-22 by the High Court (Sangeet Lodha J and Vinit Kumar Mathur J). On those facts the High Court held as follows. Both appeals were dismissed with no order as to costs (para 28). The Tribunal committed no error in treating the loan of Rs 55,00,000 advanced by Sun Polytex Pvt Ltd as deemed dividend taxable in the hands of the assessee (para 26), and deemed dividend under s.2(22)(e) is not covered by s.10(34) read with s.115-O and continues to be taxable in the hands of the recipient (para 27).
On the first question the Court held that the record did not show the advance to be an inter-corporate deposit, and that payment of interest and deduction of tax at source do not take a loan out of the deeming fiction — if they did, the very object of the provision would be frustrated (paras 17 and 18). On the sub-clause (ii) exception it found that in the relevant year there was only one loan advanced by Sun Polytex, that the other advances related to its main business and to refundable excise duty, and that interest of Rs 2,97,552 was meagre, so the concurrent finding that money lending was not a substantial part of its business could not be faulted (para 19). It accepted the ratio of Creative Dyeing, of Pradip Kumar Malhotra and of Parle Plastics but distinguished all three, holding that here the loan was gratuitous because it was not in return for any advantage conferred on the lending company (paras 20 to 25). On the second question the Court reasoned that deemed dividend is income by virtue of s.2(24) and is excluded from total income only if it falls within s.10(34) read with s.115-O; those provisions exclude only amounts declared, distributed or paid by a domestic company by way of dividend which are made chargeable to additional income-tax in the company's hands, and deemed dividend under s.2(22)(e) is not such an amount (para 27). In the words reproduced by the source cited on this page: "Merely because, the assessee company has paid the interest to the closely held company and also deducted the tax at source, the loan taken cannot be treated to be inter corporate loan received in ordinary course of business." The decision followed or applied Navnit Lal C. Javeri v. K.K. Sen, AAC (1965) 66 ITR 198 (SC) — relied on for the object of the provision; CIT v. Creative Dyeing & Printing (P) Ltd. (2009) 318 ITR 476 — distinguished on facts; Pradip Kumar Malhotra v. CIT (2011) 338 ITR 538 — distinguished on facts; CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 — set out and held not to assist the appellant on the facts.
It was decided by the High Court on 2016-12-22 and is reported as D.B. Income Tax Appeal No. 28/2012 and one connected matter (Rajasthan High Court, Jodhpur). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 2(22)(e), section 10(34), section 115-O, section 2(24), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. Both appeals were dismissed with no order as to costs (para 28). The Tribunal committed no error in treating the loan of Rs 55,00,000 advanced by Sun Polytex Pvt Ltd as deemed dividend taxable in the hands of the assessee (para 26), and deemed dividend under s.2(22)(e) is not covered by s.10(34) read with s.115-O and continues to be taxable in the hands of the recipient (para 27). It arises in How Tax Law Is Read and Capital Gains Exemptions matters, on section 2(22)(e), section 10(34), section 115-O, section 2(24), section 260A of the Income Tax Act 1961, and was decided by Sangeet Lodha J and Vinit Kumar Mathur J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you are running the commercial-transaction defence, plead and prove the advantage the company received in return — a mortgage of the shareholder's property, a job-work adjustment, an expansion the lender itself benefits from — because the Court distinguished Creative Dyeing and Pradip Kumar Malhotra precisely on the absence of any such advantage. If you are running the sub-clause (ii) money-lending exception, put in the lender's turnover, profit and manpower split on the Parle Plastics lines and not merely the objects clause; a single loan and a small interest figure will not do. Date the s.10(34) point before you take it. Deemed dividend under s.2(22)(e) was outside the s.115-O charge, and so outside s.10(34), for payments up to 31 March 2018. For payments between 1 April 2018 and 31 March 2020 it was inside that charge — the proviso to s.115-O(1) inserted by the Finance Act 2018 with effect from 1 April 2018 taxed s.2(22)(e) dividend in the company's hands at thirty per cent — so the shareholder's receipt was exempt under s.10(34) for those two years. From 1 April 2020 s.115-O has no application and s.10(34) is inoperative from AY 2021-22, so all dividend, deemed or actual, is taxable in the shareholder's hands. Check whether the payer really is a company in which the public are not substantially interested within s.2(18) before conceding the first condition — s.2(22)(e) reaches only such a company.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns one document, DCIT v M/s Coffeeday Global Limited (Bangalore Tribunal, 24 February 2020), and a read of that judgment shows it does not mention this case at all - the indexing appears to have confused it with Vardhaman Polytex Ltd v CIT (2012) 349 ITR 690 (SC), which is cited there at para 8.6 on interest capitalisation. A second search on the party name returns 18 documents, all of them other Mewar Polytex litigation in excise, sales tax and unrelated writ jurisdictions, none citing this judgment. So no decision applying, affirming, overruling or doubting it was found, and no Supreme Court challenge is traceable. The judgment's treatment of an inter-corporate deposit and of the money-lending exception to section 2(22)(e) therefore stands untested. A practitioner should note that the section 2(22)(e) landscape shifted after the Finance Act 2020 abolished dividend distribution tax and restored taxation of dividends in the shareholder's hands, which changes the consequences of a deemed-dividend finding even though it does not alter the construction of section 2(22)(e) itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Paragraph 14 of the judgment as reported paraphrases s.2(22)(e) as applying to 'any sum paid by way of advance or loan by a company in which the public are substantially interested' — dropping the words 'not being' that the Court itself set out correctly when it quoted the section in paragraph 13. Read paragraph 13, not paragraph 14, for the statutory text. Paragraphs 3 and 4 record the assessee's shareholding in Sun Polytex as 23.67 per cent and in Sisarama Plastic as 14.7 per cent, and the AO's notice covered loans from both; the appeal as argued and decided concerns the Rs 55,00,000 from Sun Polytex. The judgment also records that for AY 2007-08 the Tribunal had remitted the question whether the advance during the year exceeded the closing balance of the earlier year, so that a sum already taxed as deemed dividend is not taxed again. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were dismissed with no order as to costs (para 28). The Tribunal committed no error in treating the loan of Rs 55,00,000 advanced by Sun Polytex Pvt Ltd as deemed dividend taxable in the hands of the assessee (para 26), and deemed dividend under s.2(22)(e) is not covered by s.10(34) read with s.115-O and continues to be taxable in the hands of the recipient (para 27).
TaxSphere, “Mewar Polytex Ltd v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/mewar-polytex-v-acit-inter-corporate-deposit-and-money-lending-exception/ (validity last checked 2026-09-08)
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