Backdrop
S. 2(22)( e) of the Income- tax Act, 1961 has the effect of bringing to tax as dividend in the hands of the shareholders in respect of payments made by a company; e.g.
(i) Any payment by a company, not being a company in which public are substantially interested of any sum (whether as representing a part of the assets or otherwise) by way of advance or loan to a shareholder who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits), holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has substantial interest in the said concern, or ( ii) any payment on behalf of a shareholder, or (iii) any payment for individual benefit of a shareholder, to the extent to which the company possesses accumulated profits.
However, any advance or loan made to a shareholder or the said concern by a company in the ordinary course of business, where the lending money is a substantial part of the business of the company is not covered
Strict Interpretation
This being deeming provisions, the Calcutta High Court in CIT v. Martin Burns Ltd (1992) [136 ITR 805 (Cal)(HC), has held that under section 2(22) certain amounts are actually not distributed are brought within the net of “dividend” for the purpose of taxability. Therefore, it must receive a strict interpretation.
Dividend under Income- tax Act
Thus, S. 2(22) gives an inclusive definition of the term “dividend” and bring into the tax net certain type of receipts which are treated as dividends, though they may not fall within the meaning of the expression as used in Company Law.
Therefore S. 8 of the Income-tax Act, provides that for the purpose of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within meaning of sub clauses (a) to (e) of S. 2 (22) shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be.
Concept of Deemed Dividend
The Supreme Court in CIT v. Mukundray K. Shah (2007) 290 ITR 433 (SC) has held that the concept of deemed dividend u/s 2(22) (e) postulated two factors viz whether the payment was a loan or advance and whether on the date of payment there existed accumulated profits.
Loan or Advance Vis-a Vis Deposit
The word loan or advance has not been defined u/s. 2 of the Act. So question is whether “Inter Corporate Deposit” (ICDS) is covered under S, 2(22)(e) of the Act. S. 269SS provides for mode of taking or accepting any loan or deposits and specified sum. The Explanation to said section specifies that “loan or deposit” means loan or deposit of money. Similarly S. 269T provides for mode of repayment of certain loans or deposits. Explanation to the said section states that “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and in the case of a person other than a company, includes loan or deposit of any nature.
In Gujarat Gas Financial Services Ltd. v. ACIT (2008) 115 ITD 218 (SB ) (Ahd)(Trib.)</em > the Special Bench has held that two expressions loans and deposits are different and distinct. It can be summed up by stating that in the case of loan the needy person approaches the lender for obtaining the loan therefrom. The loan is clearly loan at the terms stated by the lender. In the case of deposits, depositor goes to the depositee for investing his money primarily with the intention of earning interest. Consequently the Special Bench held that investments made by way of short term deposits cannot be considered as loans and advances. Similar view has been taken by the Special Bench of Delhi Tribunal in case of Housing & Urban Development Corp. Ltd v. Jt. CIT (2006) 5 SOT 918 (SB) (Delhi) (Trib)
Even under the Companies Act, the Bombay High Court in Durga Prasad Mandelia v. Registrar of Companies (1987) 61 Comp. Case 479(Bom)(HC), </em >while deciding the distinction between deposits and loans in the context of erstwhile S. 370 of the Companies Act 1956 held as under:
“There can be no controversy that in a transaction of a deposit of money or a loan, a relationship of debtor and creditor must come into existence. The term “deposit” and “loan” may not be mutually exclusive, but nonetheless in each case, what must be considered is the intention of the parties and the circumstances. In present case; barring the assertion of the respondent that the moneys advanced by the company to the Associated Cement Companies Ltd., constitute a loan and offend S. 370 of the Companies Act. In the context of the statutory provisions, the word “loan” may be used in the sense of a “loan” not amounting to a deposit. The word “loan” in S. 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 S. 370 of the Companies Act. Therefore, moneys given by the company to the other bodies corporate is a loan within the meaning of S. 370 of the Companies Act must be negative”.</em >
Further In Housing & Urban Development Corp Ltd. (Supra) the Special Bench held that
S. 2(22) (e) enacts a deeming fiction. Such deeming fiction would not be given a wider meaning than what it purports to do. 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 S. 2(22) (e) of the Act is that payment must be by way of loan or advances. Thus there is clear distinction between the deposit vis-a-vis loans / advances. Therefore, the ICDS do not come within the purview of deemed dividend u/s. 2(22)(e) of the Act.
Again, the Ahmedabad Bench in Gujarat Gas Financial Service Ltd (Supra) after considering the decisions in the case of Federation of Andhra Pradesh Chamber of Commerce & Industry v. State of AP (2001) 247 ITR 36 (SC), CIT v. Sahara India Savings & Investment Corp. Ltd (2003)264 ITR 646 (All) (HC)(Affirmed in CIT v. Sahara India Savings & Investment Corp. Ltd (2010) 321 ITR 371 (SC) and Oriental Insurance Co. Ltd v. DCIT (2004) 89 ITD 520 (Delhi) (Trib) </em >held that interest on inter corporate deposit are not chargeable to interest tax, as the deposits are not in the nature of loans or advances. The term “loans and advances” should be understood conjointly and not in isolation. If so read the advances which are in the nature of loan should be covered in the term. Ordinarily, an advance is a payment before hand and it does not cover the idea of repayment.
It is trite law that no tax can be imposed on the subject without the words in the Act. No tax can be imposed by inference or analogy. The cardinal principle of interpretation of fiscal law is that it should be construed strictly. In view of the above, the interest on “inter- corporate deposits” unless they clearly fall within the meaning of “interest on loans and advances” would not be taxable. Inter corporate deposits can neither be a loan nor an advance.
The Mumbai Tribunal in Bombay Oil Industries Ltd. v. DCIT (2009) 28 SOT 383 (Mum)(Trib), held that there is clear distinction between deposit- vis- a vis loans / advances. S. 2(22) (e) enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the section. Such a deeming fiction would not be given a wider meaning than what it purports to do. The provisions would necessarily be accorded strict interpretation and ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking S. 2(22) (e) is that payment must be by way of loan or advances. Since there is a clear distinction between the deposits vis-à-vis loans / advances, therefore, the ICDS do not come within the purview of deemed dividend u/s. 2(22)(e) of the Act.
In view of the aforesaid judgements / decisions view expressed by the Mumbai Tribunal in ACIT v. Jasubhai Engineering Pvt. Ltd (2020) 184 ITD 388 (Mum)(Trib), with due respect ,is not correct. In Para 15 the Tribunal has observed as under:
“With regard to inter corporate deposit of Rs. 9/- lakhs assessee has taken inter-corporate deposits but the same was repaid before the end of the current assessment year. However, we notice that since the assessee is having substantial interest in M/s. ABM Steels Pvt. Ltd is having substantial profit in its balance sheet and M/s. ABM Steels Pvt. Ltd is a company in which public are not substantial interested, therefore the provisions of S. 2(22) (e) are very much attracted. Therefore, any credit or advantage taken by the persons having substantial interest will attract the provisions of S, 2(22)(e) of the Act. Even though, assessee has repaid the deposit within the same year it does not mean that the loan or benefit is not taken. We call by any name but ultimately assessee has taken a credit / benefit, the assessee should have known that it is surpassing the deeming provisions particularly when it was holding beneficial interest” It is settled law that deemed dividend provisions get attracted as soon as it takes benefit and it does not matter whether it is repaid within the same year. It is similar to the case of Miss P. Sarda v. CIT [229 ITR 444 (SC)], the Hon’ble Apex Court held that even though the loan is repaid at the end of the year, will attract the provisions of section 2(22)(e) of the Act. Therefore, in our considered view, even though the assessee claims it as inter corporate deposit, the literal meaning will remain same as the short term loan enjoyed by the assessee, hence in our considered view, the provision of section 2(22) </em >(e) is attracted in the present case”
Conclusion
From the above discussion it is clear that “ Inter corporate deposits” do not come under the purview of “loans and advances”. Further ICDS is an unsecured borrowing by the corporate and FIs, from other Corporate entity register under the Companies Act, Thus to consider the receipt of ICDS as loans / advances are not correct.
In P. Sarda (Supra, the Supreme Court has rightly held that even loan repaid well attract S. 2(22)(e) of the Act. But, no question of Inter Corporate Deposit was before the Supreme Court.