Riddhesh Shah
In a recent decision[1], the Mumbai Tribunal, while determining applicability of the deemed dividend provisions u/s 2(22)(e) of the Income tax Act, 1961 (‘the Act’) on Inter Corporate Deposit (‘ICD’) given by one Indian Wholly Owned Subsidiary (‘WOS’) of a Mauritian Company to its another Indian WOS, held that deposit is not in the nature of loan or advance as per the language of section 2(22)(e) of the Act. The following is a brief analysis of the subject matter and the said judgement:
Provisions of the Act:
As per section 2(22)(e) of the Act dividend includes any payment by a company, (other than a company in which the public are substantially interested) of an amount, by way of advance or loan to a shareholder, 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.
The loan or advance as aforesaid, shall be deemed to be dividend for the purpose of the Act and the said loan or advance. With effect from 1 April 2018, the Company providing the loan / advance shall have to pay Dividend Distribution Tax @ 30% u/s 115-O of the Act and the same shall be exempt in the hands of shareholders.
What is loan or advance and deposit?
The term loan or advance has not been defined under the provisions of the Act. The general meaning of loan is ‘a thing that is borrowed, especially a sum of money that is expected to be paid back with interest’.
Whereas, ICD is essentially a short-term assistance provided by one corporate with surplus funds to another in need of funds.
As can be seen, there is a thin line of difference between loan / advance and a deposit.
Other Sections of the Act:
Section 269SS of the Act which specifies mode of accepting certain loans, deposits and specified sums starts with the words “No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum…….”.
Section 269T of the Act which specifies mode of repayment of certain loans or deposits starts with the words “No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit……”
The question which arises here is that the legislature in the aforesaid section has specifically included the word deposit in the section, making the intention clear to bring deposit within the ambit of the section.
So, by not specifying the word deposit in section 2(22)(e) of the Act, did the legislature intend to not bring deposits within the scope of section 2(22)(e) of the Act? In this regard, following is the brief analysis of the decision of Mumbai Tribunal:
Background of the case:
A Company incorporated in Mauritius, KIIC Investment Company (‘KIIC’) had two WOS in India i.e. Portescap and Videojet. Portescap had made an Inter Corporate Deposit of INR 13 Crores to Videojet. In the course of re-assessment proceedings of KIIC, the tax Officer proposed to add the sum of ICD to the income of the Mauritius Company invoking the Deemed Divided provisions u/s 2(22)(e) of the Income tax Act, 1961 (‘the Act’).
Decision of Mumbai ITAT:
Whether the aforesaid Deposit can be held as dividend within the provisions of Section 2(22)(e) of the Act:
- The Tribunal rejected the deemed dividend taxation on the ground that the amount advanced by Portescap to Videojet was not in the nature of a loan or advance as contemplated in Sec. 2(22)(e) but was an ICD.
- The Tribunal noted that an ICD is different from a loan / advance on the following factors:
- In the case of an ICD, the initiation is at the instance of the depositor, i.e. the giver who has surplus funds, as against in the case of a loan where the transaction is initiated at the instance of the borrower who is in need of the money;
- in the case of an ICD, the amount is repayable on demand whereas a loan is repayable on the conclusion of the agreed tenure;
- In the case of an ICD, the depositor earns interest on surplus funds akin to fixed deposit placed with a bank whereas a loan is a transaction of advancing money on interest.
- The aforesaid facts were demonstrated, by way of Board resolution and the Deposit agreement, by KIIC before the Tribunal and which were accepted by the Tribunal after detailed analysis.
Whether the aforesaid Deposit falls within the meaning of Dividend under the India-Mauritius DTAA:
- KKIC also took an alternative ground that, if the Deemed Dividend provisions are applied in the instant case, the assessee being tax resident of Maurtius be eligible for taxation of dividend at lower rate of 5% as per the India-Mauritus Double Tax Avoidance Agreement (‘DTAA’).
- The Tribunal held that the deemed dividend u/s 2(22)(e) of the Act is also dividend under Article 10(4) of the India-Mauritius DTAA since the said Article extends the meaning of dividend to include any income from corporate rights which is subjected to same taxation treatment as income from shares by the laws of contracting state of which the company making the distribution is a resident.
(In the instant case, at the outset the Tribunal has rejected the deemed dividend taxation under the provisions of the Act. Hence, by application of section 90(2) of the Act, the provisions of Act shall override the provision of DTAA since the same are more beneficial to the assessee.)
Other Judicial Precedents:
Following is the gist of other favourable judicial precedents on the subject matter:
| Case and Forum | Citation | Brief of the decision |
| Bombay Oil Industries (Mumbai Tribunal) | [2009] 28 SOT 383 | The provisions would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking section 2(22)(e) is that payment must be made by way of loan or advance. Since there is a clear distinction between the inter-corporate deposits vis-a-vis loans/advances, the lower authorities were not right in treating the same as deemed dividend under section 2(22)(e). |
| Durga Prasad Mandelia (Bombay High Court) | [1987] 61 COMP. CAS. 479 | The word “loan” in section 370 must be construed as dealing with loans not amounting to deposits, because, otherwise, if deposit of money with corporate bodies were to be treated as loans, then deposits with scheduled banks would also fall within the ambit of section 370. However, deposits with scheduled banks do not fall within the ambit of section 370. Then to treat certain deposits of money and not others as being within the ambit of section 370 of the Act would be to give an inconsistent construction to the section. |
| Pennwalt India Ltd (Bombay High Court) | [1987] 62 COMP CASE 112 | There is no provision under section 370 of the Companies Act which prescribes that a loan includes a deposit for the purposes of that section. Section 371 lays down penal consequences for not complying with the provisions of section 370. It was, therefore, absolutely necessary that if deposits were also to be included in loans for the purposes of section 370, it should have been clearly so specified |
| IFB Agro Industries Limited (Kolkata Tribunal) | [2014] 42 taxmann.com 428 | Where assessee company held 18 per cent shares of a company and during year it received inter-corporate deposit from said company, inter-corporate deposit could not be treated as a loan falling within purview of section 2(22)(e) |
| Visisth Chay Vypapar Ltd. (Delhi High Court) | [2012] 20 taxmann.com 377 | The expression ‘advance’ occurring in section 2(7) of Interest-tax Act, 1974 along with the expression ‘loan’ should take its colour from ‘loan’ and cannot be given wider interpretation to include deposit as well. Otherwise, money deposits given for investments, etc., would also qualify as ‘advances’ and interest thereon would become exigible to the Interest-tax Act. Such a situation was never contemplated by the legislature. Hence, inter-corporate deposit is not in the nature of loan or advance. |
| Seamist Properties (P.) Ltd (Mumbai Tribunal) | [2005] 1 SOT 142 | It was held that the deposits are not loans or advances by relying on various other judicial pronouncements, which are as follows: A. M. Shamsunder (Madras High Court) [2000] 244 ITR 266Eetachi Agencies (Bombay High Court) [2001] 248 ITR 525Baidya Nath Plastic Industries Pvt. Ltd. (Delhi High Court) [1998] 230 ITR 522Industrial Enterprises (Hyderabad Tribunal) [2000] 73 ITD 252Balaji Traders (Pune Tribunal) [2001] 78 ITD 368K. Srinivasan (Madras High Court) [1963] 50 ITR 788M.A. Jindal (Calcutta High Court) [1987] 164 ITR 28 |
Conclusion:
It is pertinent to note that, the said decision of Mumbai Tribunal may lead to mischief among corporates to change the nomenclature of loan into an ICD. The retaliatory action by the Revenue authorities in the form of amendment to the Act (which may be retrospective or prospective) cannot be ruled out.
The High Court decisions referred to by the ITAT have distinguished between a loan and a deposit but not between an advance and a deposit. Since, section 2(22)(e) of the Act covers an advance as well as a loan, it may not be appropriate to rely on these HC decisions to state that a deposit is not covered u/s 2(22)(e) of the Act. The ITAT has also relied on the Ahmedabad ITAT Special Bench (‘SB’) decision in the case of Gujarat Gas Financial Service Ltd.[2] and the Mumbai ITAT decision in the case of Bombay Oil Industries (supra) to conclude that section 2(22)(e) of the Act is not applicable in case of an ICD.
At this juncture, it is important to analyse the said judgements. The Ahmedabad ITAT SB ruling is in the context of Interest Tax Act which uses the term “loan and advance” whereas section 2(22)(e) of the Act uses the term “advance or loan”. This difference has not been taken into account by the Mumbai ITAT while deciding on the issue. Thus, for the purpose of the Interest Tax Act, advances in the nature of loan may only be covered. However, the term advance could be interpreted widely in the context of section 2(22)(e) of the Act to cover a deposit as well. In the case of Bajaj Auto Holdings Limited[3], Mumbai ITAT has taken a view that the term “advance” has wide connotation and it means any money advanced to any person and that a deposit would come under the purview of advance.
In view of the above, the taxpayers who have already placed ICDs could rely on this decision to defend a potential application of section 2(22)(e) of the Act by the tax authorities. However, litigation cannot be ruled out and the position is far from settled.
Further, with regard to
provisions of tax treaty, despite the ITAT’s ruling on the interpretation of
the tax treaty, taxpayers could still claim relief under the relevant tax
treaty depending on the language of the tax treaty.
[1] ITA No. 1381/Mum/2017 and 564/Mum/2018
[2] [2008] 115 ITD 218
[3] [2005] 95 ITD 356
