Inter-Corporate Deposit cannot be treated as loan for Section 2(22)(e)

Inter-Corporate Deposit cannot be treated as loan for the purpose of invocation of Section 2(22)(e)

Introduction

The Inter-Corporate Deposit does not fall within the ambit of the expression ‘loan’ specified in Section 2(22)(e) of the Income Tax Act, 1961 for the purpose of treating it as deemed dividend. The judicial pronouncements on the said proposition are as follows:

BOMBAY OIL INDUSTRIES LTD. V. DEPUTY COMMISSIONER OF INCOME TAX

Facts of the Case

The assessee-company had taken unsecured loans from 3 closely held companies. The AO vide a letter called for assessee’s objection for treating the aforesaid unsecured loans as deemed dividend under Section 2(22)(e) of the Income Tax Act,1961.

The contentions of the assessee

The assessee submitted that

• Above amounts received as unsecured loans is inter-corporate deposits placed with company and inter-corporate deposits are not ‘loans’ or ‘advances’ coming within the ambit of section 2(22 )(e) of the Act
• The provisions of section 2(22)( e) brings about a deeming fiction and same is to be strictly interpreted within the frame-work of the particular section.
• The assessee-company submitted the balance sheets of all the three closely held companies and contended that the amounts received by them are in the nature of inter-corporate deposits and not loans/advances.

The contentions of the Department

• The Department contended that inter-corporate deposit is only a loan instrument and same is nothing but a ‘loan’ or ‘advance’ and hence provisions of section 2(22)( e) of the Act is applicable to the facts of the case.

Findings of the ITAT

• It is a settled position that deposits cannot be equated with loans or advances.
• The Jurisdictional High Court in the Durga Prasad Mandelia’s case (supra) has noticed the distinction between deposits and loans in the context of section 370 of the Companies 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 nonetheless 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, moneys 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.”

‘It was held in K.M. Mohammed Abdul Kadir Rowther v. S. Muthia Chettiar that “advance” means literally a payment beforehand; 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 v. Krishnayya Rao Bahadur, 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 beforehand and which is likely to become due at some future time.’

Final Decision of ITAT

The ITAT held that

• There is distinction between deposits vis-a-vis 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 vis-a-vis loans/advances, according to us the authorities below were not right in treating the same as deemed dividend under section 2(22)(e ) of the Act.
• Since we hold that ICDs do not come within the purview of deemed dividend under section 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.

HOUSING & URBAN DEVELOPMENT CORPN. LTD. JOINT COMMISSIONER OF INCOME TAX

The facts of the case

The assessee-corporation was established with the object of promoting urban development. For this purpose, it provided funds to finance various housing projects promoted by various organisations including the State Government. During the course of carrying on the business, the assessee, in order of make optimum utilization of the surplus funds, placed the same as fixed deposit with the public sector undertakings. For the assessment years 1992-93 and 1993-94, the assessee had also invested the surplus funds in the bonds of public sector undertakings. It earned interest on both the investments during the relevant assessment years. While filing the returns of chargeable interest, the assessee did not include the amount of interest earned thereon and, consequently, no interest tax was paid on the same.

The contentions of the assessee

The assessee submitted that

There is a distinction between the term ‘loans’ and ‘Deposits’ as under :

“(a) Loan is a transaction between lender and borrower under a contract. In case of Deposit the same is made of one’s own volition or freewill.

(b) In the case of loan it is the duty of the debtor to seek out the creditor and repay the money according to the agreement. On the other hand in the case of deposit it is the duty of the debtor to go to the banker or to the depositee and make a demand for it. This distinction was made by the Lahore High Court in the case of Gursharan Das v. Ram Rakhamal.

(c )Deposit is to be kept by the depositee for the depositor and the loan is to be kept by the borrower for himself.

(d) Section 269T which is applicable to deposit excludes loans from its purview. This has also been upheld by the Delhi High Court in the case of Baidyanath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO

• Section 370 of the Companies Act, 1956 was applicable to loans given to other companies and it was judicially held that the same did not include deposits made to other companies. The section was subsequently amended to include deposits into its ambit but no such amendment has been made in the Interest Tax Act. Reference was also made to the two decisions of the Bombay High Court in Durga Prasad Mandelia v. ROC and Pennwalt India Ltd. v. ROC for the proposition that the deposits are not considered as loans for purposes of section 370 of the Companies Act, 1956.
• The Limitation Act, 1963 also makes a clear cut distinction between the two expressions. Articles 19 and 21 of the Limitation Act fixes the period within which suits for recovery of loans can be filed while article 22 deals with the period of limitation for suits for money on account of deposit. The starting period of limitation under articles 19 and 21 on the one hand and article 22 on the other are different. Under articles 19 and 21 the cause of action in the case of money lent arises from the date of loan, whereas under article 22 the cause of action in the case of a deposit arises from the date of demand. Therefore, the deposit is clearly distinguishable from the loan. Reliance was also placed on various case laws as under :

1. Ram Janki Devi v. Juggilal Kamlapat

2. Ram Ratan Gupta v. Director of Enforcement, Foreign Exchange Regulation

3. Abdul Hamid Sahib v. Rahmat Bi

4. Sharda Talkies (Firm) v. Smt. Madhulata Vyas

The contentions of the Department

• The Assessing Officer held that interest tax was payable on the total amount of interest earned by the credit institution and no distinction could be made on interest earned on loans and advances or interest earned on investment of surplus funds either in bonds of fixed deposits and, accordingly, subjected said interest to interest tax.
• The interest earned on short-term deposit with Public Sector Undertaking and also from securities and bonds is covered under definition of loans and advances chargeable to tax under section 2(7) of the Act read with section 5 of the Interest Tax Act.

Findings of ITAT

♦ The dividing line between a loan and deposit is undoubtedly very thin. It is, therefore, essential to understand the distinction between the two on the basis of judicial precedence available on record :

(i) The Hon’ble Supreme Court in the case of Ram Janki Devi v. Juggilal Kamlapat held as under :

“The case of a deposit is something more than a mere loan of money. It will depend on the facts of each case whether the transactions is clothed with the character of a deposit of money. The surrounding circumstances, the relationship and character of the transaction and the manner in which parties treated the transaction will throw light on the true form of the transaction.”

(ii) The Hon’ble Supreme Court in the case of Ram Ratan Gupta v. Director of Enforcement, Foreign Exchange Regulation held as under :

“The expression ‘to lend’ in the ordinary use means to deliver to another a thing or on condition that the thing lent shall be returned with or without compensation for use made of it by the person to whom it lent. The subject-matter of lending also be money. Though a loan contract created a debt, there may be a debt and without contracting a loan, in other words, the concept of debt is more comprehensive than that of loan.

It is settled law that the relationship between the banker and a customer qua debtor and creditor. Though, ordinarily a deposit of an amount in the current account of a bank creates a debt it does not necessarily involve a contract of loan. The question whether a deposit amounts to a loan depends upon the terms of the contract under which the deposit is made. Ref. to.

When a person deposit foreign currency in the current account of a bank in order to draw it whenever necessary for the purpose for which it was given, it cannot be said that he enters into a contract of loan with the bank within the meaning of section 4(1) of the Act. He only deposits the money for the said purpose, such deposit is not a loan, the person cannot be held to have contravened section 4(1) of the Act.”

(iii)The Hon’ble Madras High Court in the case of held as under :

“The terms ‘loans’ and ‘deposits’ are not mutually exclusive terms. There are a number of common features between the two. In a sense a deposit is also a loan with this difference that it is a loan with something more. Both are debts repayable. But, the question as to when the repayment is to be made furnishes the real point of distinction between the two concepts. A loan is repayable the minute it is incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefore or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit.”

(iv)The Hon’ble Madhya Pradesh High Court again considered this aspect of the matter in the case of Sharda Talkies (Firm) v. Smt. Madhulata Vyas. Their Lordships observed as under :

“There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions. In the case of a deposit, the depositee receives money at the instance of the depositor. In the case of a deposit, the requirement of the depositee is neither relevant nor material. The depositor has to go to the depositee for depositing the amount or the depositee may go and collect the amount. But in case a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount.

(v) The Bombay High Court had the occasion to consider the distinction between the words ‘loan’ and ‘deposit’ in reference to the provisions of section 370 of the Companies Act, 1956, in Durga Prasad Mandelia v. ROC and held as under :

“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.”

It held that the word ‘loan’ would not include deposit.

(vi) Again the Bombay High Court considered the distinction between the words ‘loan’ and ‘deposit’ in reference to the provisions of section 370 of the Companies Act, 1956, in Pennwalt India Ltd. v. ROC and held as under :

“It is true that both in the case of a loan and in the case of a deposit there is a relationship of a debtor and a creditor between the party : giving the money and the party receiving the money. But in the case of a deposit, deposit is usually at the instance of the giver and it is for the benefit of the person who deposit the money-the benefit normally being earning of interest from a party who customarily accepts the deposits. Deposit could also be for safe-keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the amount so received. In the case of a deposit which is payment on demand, the deposit would become payable when a demand is made. In case of a loan, however, the obligation to repay the amount arises immediately on receipt of the loan. It is possible that in case of deposits which are for a fixed period or loan which are for a fixed period, the point of payment may arise in different manner. But by and large, the transaction of a loan or transaction of making a deposit are not always considered identical.

‘Loan’ and ‘Deposit’ are not identical in meaning and cannot always be interchanged. Some loans may be deposits and some deposits may be loans. But all loans are not deposits and vice versa.

The facts that both transactions create the relationship of a debtor and a creditor is not enough to equate a loan with a deposit. Nor would it be correct to make distinction between the two only for the purpose of calculating the period of limitation. The nature of two are somewhat different and that is the reason why a distinction is made between the two for the purpose of calculating the period of limitation. If two transactions are identical, there would be no need to prescribe different periods of limitation.”

(vii) The Delhi High Court in the case of Baidya Nath Plastic Industries (P.) Ltd. v. K.L. Anand, ITO also had the occasion to deal with the term ‘loan’ and ‘deposit’ in the context of section 269T of the Income-tax Act. It is held as under :

“In order to determine this question it will be necessary to consider whether the meaning of the term ‘deposit’ ascribed by the Explanation to section 269T includes the term ‘loan’ in its ambit. The distinction between a loan and a deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it. This distinction was adopted by the Lahore High Court in the case of Gurcharan Das v. Ram Rakha Mal. A similar view was expressed by a Division Bench of the Oudh High Court in the case of Chaturgun v. Shahzady. While drawing the distinction between the words ‘deposit’ and ‘loan’ the court relied upon two earlier decisions of the Madras High Court in V. Balakrishnudu v. Narayanaswamy Chetty and Kishtappa Chetty v. Lakshmi Ammal. In this regard, it held as follows:

‘The word ‘deposit’ as pointed out by the Madras High Court in V. Balakrishnudu v. Narayanswamy Chetty is derived from the Latin depositum, a technical word used in the Roman law of bailment for a bailment of a specific thing to be kept for the bailor and returned when wanted, as opposed to commodatum where a specific thing is lent to the bailee to be used by him and returned. In popular language commodatum is translated by the word ‘loan’ and the distinction between deposit and loan is this : that a deposit is to be kept by the depositee for the depositor and the loan is to be kept by the borrower for himself. Thus I deposit my hat in the cloak room. My hat is not to be used by the depositee, but is to be kept for me and returned to me on my demand; but I lend my money to a friend and he can do what he likes with it as long as he returns it to me either on demand or at some specified time. It may be, as observed by Sir Walter Schwabe when Chief Justice of the Madras High Court in Kishtappa Chetty v. Lakshmi Ammal, that article 145 covers more than the depositum of Roman law, and this Lordship observed that the framers of the Indian Limitation Act ‘meant to use simple and plain language’, but I take this to mean that the word ‘deposit’ is used in the ordinary sense of the word in the English language, and as far as I am aware the word ‘deposit’ does not cover a transaction of the nature of a loan. The transaction that we have to consider is a loan. The plaintiff lent the defendant these ornaments to be used by the latter in a religious procession. There was no question of trust or quasi-trust. It was a mere loan for the benefit of the borrower and in my opinion article 145 has no application’.”

♦ We have also perused the relevant provisions of Limitation Act, 1963. Articles 19 and 21 of this Act prescribes the period within which suits for recovery can be filed where article 22 deals with the period of limitation for suits for money on account of deposit. The starting period of limitation under articles 19 and 21 on the one hand, and article 22 on the other, are different. Under articles 19 and 21 the cause of action in the case of money lent arises from the date of loan, whereas under article 22 the cause of action in the case of a deposit arises from the date of demand.

♦ For our purpose, the advances, however, only mean advances which are in the nature of loan. Furthermore ‘loan’ and ‘deposits’ cannot be taken to be identical in meaning when a recourse is taken to the provisions contained under the Companies Act, 1956. Section 58A and section 227 of the Companies Act, 1956 in itself clearly place distinction between the two expressions. The Explanation added to section 370 of the Companies Act, 1956 by the Companies (Amendment) Act, 1988 for including deposits for the purpose of loan was for a limited purpose of inter corporate transaction and a similar amendment has not been made in the Act under which the issue is being considered. The revenue’s plea that the decision rendered by Bombay Bench of the Tribunal in LIC’s case (supra) was in respect of statutory Corporation also does not render any assistance to the issue under consideration, since the statute under consideration does not provide for any dichotomy on the applicability of its provision on the basis of status of an assessee.

♦ From the following speech of Finance Minister given at the time of introducing the Act, it can be inferred that interest on deposit is not to be included in the definition of interest under this Act : “These institutions would reimburse themselves by making necessary adjustments in the interest rates charged from borrowers. The proposed tax is expected to raise the cost of borrowing and yield revenue to the Government.”

The interest tax was not to be borne by the lender but by the borrower. In cases of lending made before 1-10-1991 credit institutions were specifically empowered to vary the rate of lending so as to reimburse of the extra charge going to fall on them by the introduction of the Act. Section 26C was specifically introduced in the Act for this purposes. Now in case of deposit there is no such power with the depositor to recover the said amount from the depositee. This again indicates that the two expressions are different.

Final decision of ITAT

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 there from. 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 be held that interest on deposits representing investment of surplus funds 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.

IFB AGRO INDUSTRIES LTD. V. JOINT COMMISSIONER OF INCOME TAX

Facts of the case

• The assessee-company held 18 per cent shares of a company ‘F’. During the year it received inter-corporate deposit [ICD] of Rs. 11.20 crores from the said company.
• The Assessing Officer treated the ICD received by the assessee from the company ‘F’ as a loan and consequently treated the same as deemed dividend under section 2(22)(e). He, therefore, added the above amount in the income of the assessee.
• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.

The contentions of the assessee

The assessee submitted that

• The Inter corporate deposits were not in the nature of loan and the assessee had never asked the company ‘F’ for any loan.
• The issue in the assessee’s case was squarely covered by the decision of the Coordinate Bench of this Tribunal, Mumbai Bench in the case of Bombay Oil Industries Ltd. v. Dy. CIT [2009] 28 SOT 383, wherein it had been held that Intercorporate deposits were different from loans and advances and the same would not come within the purview of deemed dividend.
• Assessee had not taken any loans from the company ‘F’, but the company ‘F’ had placed the Intercorporate deposits with the assessee.

The contentions of the Department

The Department submitted that

• The term Intercorporate Deposit had been rightly treated to be a loan or advance to which the provisions of section 2(22)(e) of the Act applied.
• The assessee having taken the loan from the company ‘F’ under whatever name called, the same was liable to be treated as a deemed dividend u/s. 2(22)(e) of the Act.
• The term intercorporate deposit was synonymous of loan.

The findings of ITAT

• The provisions of section 2(22)(e) of the Act refers to only ‘loans’ and ‘advances’ it does not talk of a ‘deposit’.
• The fact that the term ‘deposit’ cannot mean a ‘loan’ and that the two terms ‘loan’ and the term ‘deposit’ are two different distinct terms is evident from the explanation to section 269T as also section 269SS of the Act where both the terms are used.
• The second proviso to section 269SS of the Act recognises the term ‘loan’ taken or ‘deposit’ accepted. Once it is an accepted fact that the terms ‘loan’ and ‘deposit’ are two distinct terms which has distinct meaning then if only the term ‘loan’ is used in a particular section, the deposit received by an assessee cannot be treated as a ‘loan’ for that section.
• The intercorporate deposits cannot be treated as a loan falling within the purview of section 2(22)(e) of the Act.

Final decision of ITAT

• An intercorporate deposit is not a loan but a deposit which has a meaning different from the term loan.
• The addition representing intercorporate deposits treated as loan by the AO and as confirmed by the Ld. CIT(A) stands deleted.

KIIC INVESTMENT COMPANY DEPUTY COMMISSIONER OF INCOME TAX, (IT)-3(1)(2), MUMBAI

The facts of the case

• Assessee is a common shareholder in two concerns, namely, Portescap India Pvt. Ltd. (hereinafter referred to as ‘Portescap’) and Videojet Technologies (I) Pvt. Ltd. (hereinafter referred to as ‘Videojet’) inasmuch as it directly holds almost 99.99% of the shares of the former and 99.88% of the shares in the latter company.
• Portescap had advanced monies totalling to Rs. 13 crores to Videojet during the previous year relevant to the assessment year under consideration.
• The Assessing Officer after noticing the common shareholding of the assessee in the aforesaid two concerns, examined the applicability of Sec. 2(22)(e) of the Act qua the amount of Rs.13 crores advanced by Portescap to Videojet. As per the Assessing Officer, the amount of Rs.13 crores advanced by Portescap to Videojet falls within the purview of Sec. 2(22)(e) of the Act and accordingly, the assessee-company being the common shareholder, the said amount was treated as ‘deemed dividend’ u/s 2(22)(e) of the Act in the hands of the assessee-company.

The contentions of the assessee

• The amount advanced by Portescap to Videojet was not in the nature of a loan or advance as understood for the purposes of Sec. 2(22)(e) of the Act inasmuch it was an Inter-Corporate Deposit (ICD) placed by Portescap with Videojet.
• A loan or advance is quite distinct from an ICD and, therefore, the said amount would not fall within the purview of Sec. 2(22)(e) of the Act.
• It has been pointed out that in the case of a deposit, the initiation is at the instance of the depositor, i.e. the giver who has surplus funds, as distinct from the case of a loan where the transaction is initiated at the instance of the borrower who is in need of the money.
• Secondly, in the case of a deposit, the amount is repayable on demand whereas a loan is repayable on the conclusion of the agreed tenure.
• In the case of a deposit, 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.
• Reference has also been made to a copy of the ICD agreement, which is placed at pages 14 to 18 of the Paper Book, wherein clause (1) itself brings out that the transaction was initiated by Portescap, i.e. the depositor and not by Videojet. Secondly, clause (2) of the Deposit agreement has also been referred to, which defines the tenure of the deposit being two years from initial drawdown, which was extendable for one year, if agreed by both the parties.
• Thirdly, even clause (4) dealing with the ‘Return’ brings out that interest is payable by Videojet @ 3 months MIBOR + 0.5% prevailing on first working day of the applicable quarter.
• In this case, the depositor has sought interest at a specified rate from the acceptor of deposit, which therefore showed that the depositor has given the deposit for its benefit in the form of earning of interest.
• Clause (6) of the agreement has also been brought-out to show that the purpose of Videojet, the acceptor, to use the funds deposited has been identified, namely, to finance the activities of Videojet, in particular, for purchase of fixed assets, to improve its commercial distribution network and to meet other working capital requirements.
• The clause has been emphasised by the learned representative to say that the depositor, i.e. Portescap imposed this condition in order to safeguard its money.
• Even clause (5) relating to repayment and termination has been referred to say that there is no pre-determined repayment schedule set-out which usually exists in case of a Loan agreement.
• In the present case, the Principal amount is repayable by Videojet in unequated instalments over the tenure of the deposit depending on the cash generation from its operations.
• Clause (7) of the Deposit agreement has been referred to point out that it entitles the depositor, i.e. Portescap to ask for immediate repayment of the deposit in the event that the acceptor, i.e. Videojet becomes insolvent or will be unable to pay its deposits or if an order is made or a Petition is filed for liquidation or bankruptcy of the acceptor.
• It is pointed out that a Loan agreement is devoid of any such terms and conditions. Furthermore, reference has been invited to pages 78 to 80 of the Paper Book, wherein is placed a copy of the deposit receipt issued by the acceptor, i.e. Videojet, which also shows acceptance of an ICD from Portescap.

The contentions of the Department

• The amount advanced by Portescap to Videojet was of the nature covered by Sec. 2(22)(e) of the Act and, therefore, the impugned sum has been rightly sought to be assessed in the hands of the assessee-company.
• Videojet was in need of funds for its working capital requirements as specified in clause (6) of the Deposit agreement and since Portescap had surplus funds, the amount was loaned to Videojet and thus it could be said that this lending to Videojet was at the instance of the assessee, who was a common shareholder.
• It can also be understood as a case of advancing money by Portescap to meet the requirement of Videojet, which would thus justify the conclusion of the Assessing Officer that it is a case of a loan received by Videojet from Portescap.
• Both Portescap and Videojet are controlled by the same entity, i.e. the instant assessee, and that in the absence of any conclusive evidence to show that the money was advanced at the instance of Portescap or it was given at the request of Videojet, the only conclusion that is liable to be drawn is that it is a case of a ‘loan’ and, therefore, the Assessing Officer was justified in invoking Sec.2(22)(e) of the Act.

The findings of the ITAT

• 2(22)(e) of the Act creates a deeming fiction. The Hon’ble Supreme Court in the case of Gopal and Sons (HUF) v. CIT noticed the aforesaid feature of Sec. 2(22)(e) of the Act and laid down that it is to be given a strict interpretation.
• As per the Hon’ble Supreme Court, since the provision extends the definition of ‘dividend’ on an artificial basis, strict interpretation is to be given in order to bring any amount into its fold.
• What can be safely deduced at the present is that unless a particular sum fulfils all the stated conditions of Sec. 2(22)(e) of the Act, the same cannot be brought to tax as a ‘deemed dividend’.
• The payments sought to be covered in Sec. 2(22)(e) of the Act are only those which fall within the meaning of the expression “advance or loan”.
• We may refer to the decision of the Special Bench of the Tribunal in the case of Gujarat Gas Financial Services Ltd. v. Asstt. CIT wherein even in the context of Interest Act, 1974, the distinction between an ICD and a loan has been accepted. The aforesaid reasoning prevailed with our co-ordinate Bench in the case of Bombay Oil Industries Ltd. (supra) to say that an ICD is quite different from a ‘loan or advance’ contemplated u/s 2(22)(e) of the Act. Therefore, it was held that an ICD could not be treated as a ‘deemed dividend’ within the meaning of Sec. 2(22)(e) of the Act.
• The ITAT has also responded to the contention of the Department that it was the recipient who was in need of the funds and therefore it has to be understood as a loan transaction. The response was made by way of analysis of the ICD agreement by the Tribunal. The findings of the Tribunal on this aspect is envisaged in Para No. 19, 20 and 21 of the Order.

The final judgment of ITAT

In our view, the cumulative effect of the evidence which bears on the character of the transaction demonstrates that it is in the form of a ‘deposit’ and not as a ‘loan’. Therefore, in our considered opinion, the Revenue is wrong in asserting that it was a case of ‘loan’ so as to fall within the purview of Sec. 2(22)(e) of the Act. Thus, we conclude by holding that the sum of Rs.13,00,00,000/- given by Portescap to Videojet would not fall within the scope and ambit of Sec. 2(22)(e) of the Act and, therefore, the addition made is directed to be deleted.