Case Law Details
RELEVANT PARAGRAPHS :
10. We have heard the rival submissions and perused the material on record. The authorities below have not controverted the claim of the assessee company that the amount received from above three companies is inter-corporate deposits. The Assessing Officer held against the assessee only on account that it had failed to explain, the investment is neither loan or advance. It is a settled position that deposits cannot be equated with loans or advances. The Jurisdictional High Court in the Durga Prasad Mandelia and Others vs. Registrar of Companies, Maharashtra 1987 – (061) COMP CAS 0479 (Bom.) has noticed the distinction between deposits and loans in the context of Section 370 of the company’s Act. The Court held as under :
“There can be no controversy that in a transaction of a deposit of money or a loan, a relationship of a debtor and creditor must come into existence. The terms “deposit” and loan may not be mutually exclusive, but none the less in each case what must be considered is the intention of the parties and the circumstances. In the 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 Section 370 of the companies Act, there is nothing else to show that these moneys have been advanced as a “loan”. 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 Section 370 must now be construed as dealing with loans not amounting to deposits, because, otherwise, if deposit of moneys with corporate bodies were to be treated as loans, then deposits with scheduled banks would also fall within the ambit of Section 370 of the Companies Act. Therefore, money’s given by the company to the other bodies corporate is a loan within the meaning of Section 370 of the Companies Act must be negatived. Therefore, the petitioners would well be entitled to the relief.”
Section 370 of the companies Act 1956 was subsequently amended to include ‘deposits’ into its ambit thereby indicating the distinction between ‘deposits’ and loans/advances. The recent decision of the Tribunal in the case of Gujarat Gas Financial Service Ltd. vs. ACIT 115 ITD 218 (Ahd.)(SB) has elaborately considered the issue whether the interest on inter-corporate deposits is interest on loans or advances and whether the same is exigible to chargeable interest under interest tax Act. The Tribunal after considering the entire precedent on the issue though in the context of the interest tax Act had categorically held that interest on inter-corporate deposits is not akin to interest on loans or advances. The relevant portion of the order of the Tribunal cited supra which runs from para 68 to 74 is reproduced below:
“68. Before the AO the assessee as regards income from Inter-Corporate Deposit the assessee company accepted this interest of Rs. 1,21,54,153 along with interest on Bill Discounting Rs. 1,48,74,208 and other interest of Rs.3,66,184 can be bought under the purview of the Interest-tax Act, 1974. However before CTV(A) it was submitted that these are interest on deposits and the nature is that of the investment and so interest-tax being leviable on loans and advances and not on fixed deposits, the amount was not to be included. The CIT(A) held:
“I have carefully considered the matter and find that the definition of interest does not speak of excluding this amount in its definition. Accordingly therefore, the inclusion by the AO of these items is found justified and is upheld.”
69. The submission of the assessee is that these ICD’s being neither loans or advances, interest earned on these is not exigible to interest tax in view of the decision of Ahmedabad Tribunal in the case of Utkarsh Fincap (P) Ltd. (supra). Reliance is also placed on the decision of Housing & Urban Development Corpn. Ltd. vs. Jt. CIT (2006) 5 SOT 918(Del)(SB) , Stanrose Holding Ltd.(IT Appeal No.25 (Mum. of 1966) and Persepolis Investment Co.(P) Ltd. (IT Appeal No.51(Mum)of 1997). The Id. DR on the other hand supported the decision of the CIT(A) and submitted that when assessee itself had offered it to tax where the question of allowing it as not taxable. He also submitted that it is taxable as held in Bajaj Auto Holdings Ltd. vs. DCIT(2005) 95 FTD 356(Mum).
70. We have heard the parties and considered the rival submissions. It might be true that assesses had offered it to tax initially but he claimed it as not taxable and therefore the matter has to be examined on merits and to determine as to whether it is taxable under the Act. We find it is not taxable in the light of the decision in the case of Utkarsh Finance (P) Ltd. (supra) wherein Ahmedabad Bench of the Tribunal after considering the decision in the case of Federeation of Andhra Pradesh Chambers of Commerce & Industry vs. State of AP (2001) 247 FTR 361(SC), CIT vs. Sahara India Savings & Investment Corpn. Ltd., (2003) 264 ITR 646(All) and following the decisions in the case of Gujarat Industrial Investment Corpn. Ltd.(sic), Oriental Insurance Co. Ltd. Vs. DCTT(2004) 89 1TD 520(Del.) held that interest on inter-corporate deposits are not chargeable to interest tax, as the deposits are not in the nature of loan or advances. It held as under:
“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 alone should be covered in the term. Ordinarily an advance is a payment before hand and it does not connote the idea of repayment. It is adjusted when the action for which the money is advanced is completed and if not repaid on expiry of the loan like a deposit. The company is not bound to accept the deposit made, if proceedings on the basis of the prospectus a person interest to make a deposit. By issuing prospectus of a company invites offer for making deposit and that is not offer to receive deposit whereas in case of loan the assessee prays for a loan. It offers to borrow money and once that offer is accepted, the lender is bound to give money to the borrower on terms settled. It is also to be noticed that a taxing statute has to be strictly construed and the subject cannot be taxed unless comes within the letter of law. The argument that a particular income falls within the spirit of the law cannot be availed of by the revenue. 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 tat it should be considered strictly. In view of the above, the interest in inter-corporate deposits unless they clearly fall within the meaning of ‘interest on loans and advances* would not be taxable. Inter-corporate deposit can neither be a loan not an advance. Therefore, the AO is directed to exclude the interest on inter-corporate deposit from the assessment of the assessee, Consequently, the levy of penalty made would also not stand. They are, accordingly deleted.”
71. It has considered the decision of Bajaj Auto Holdings Limited’s case(supra) referred to by the CTT(A) and distinguished by stating that Mumbai Bench has proceeded on a footing that deposit would be an advance and would be includible in the term with interest on deposit and advance”. The Bombay Bench is more persuaded by the reason that the interest on deposit was not excluded from the definition of interest and the term “interest on loans and advances” was wide enough to include the same. It had not considered that whether it was not a loan nor an advance and as to whether the amended definition of “interest” under the Act was exhaustive or inclusive. In holding that the ICD is not an advance the Ahmedabad Tribunal also noticed that the meaning of the term “advance” as understood in the commercial words and as stated under the title “What is advance” in the following words :
“It was held in KM.Mohammed Abdul Kadir Rowther vs. S.Muthia Chettiar (I960) 2 Mad. LJ 13 at 15 that “advance means literally a payment before hand; in certain cases it may be a loan but it cannot be said that a sum paid by way of advance is necessarily a loan. In Raja of Venkatagiri vs. Krishnayya Rao Bahadur AIR 1948 PC 150 at p. 155, it was observed that ordinarily and advance does not connote any idea of repayment. It is, therefore, clear that the word “advanced” used in section 296 means an advance in the nature of a loan and not merely an advance as is understood in the common parlance in the sense of payment of money before hand and which is likely to become due at some future time.”
72. It has also referred to section 296 of Companies Act regulating loans to directors for book debt which was in the nature of loans or advances from its inception.
73. In the case of Housing & Urban Development Corpn. Ltd. (supra), the Special Bench after considering various decisions and circulars of CBDT held that deposits in the form of securities and bonds cannot be considered as loans and advances and as such interest thereon shall be outside the scope of interest defined under section 2(7) of the Interest -tax Act. Paragraph 22 of the order reads as under :-
“22.From the foregoing discussion we are of the considered view that despite similarities, the two expressions ‘loans’ and ‘deposits’ are To be taken different and the distinction 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 lent at the terms stated by the lender. In the case of deposit, however, the depositor goes to the depositee for investing his money primarily with the intention of earning interest. In view of this legal position, it has to beheld that interest on deposits representing investment of surplus Junds would also not fall under the definition of interest as given in section 2(7) of the Act and as such would not be liable to interest tax. The answer to the question under reference in our humble opinion is that investments made by way of short-term deposits and also in the form of securities and bonds cannot be considered as loans and advances and as such interest thereon shall be outside the scope of “interest defined under section 2(7) of the Act.”
74. In these circumstances we hold that interest on inter-corporate deposits is not an interest on loan or advance and therefore would not be includible in the chargeable interest under the Interest-tax Act.”
From the above it is clear there is distinction between deposits viz- a-viz loans/advances. Section 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 the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking Section 2(22)(e) of the Act is that payment must be by way of loan or advances. Since there is a clear distinction between the inter-corporate deposits viz a viz loans/advances, according to us the authorities below were not right in treating the same as deemed dividend u/s.2(22)(e) of the Act. Since we hold that ICDs do not come within the purview of deemed dividend u/s.2(22)(e) of the Act, the alternative contention of the assessee namely by virtue of Section 2(22}(e)(ii) of the Act, the unsecured loans received by the assessee is not ‘dividend’ is not adjudicated.
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