Case Law Details
Court :Bombay High Court
Citation : M/s Parle Plastics Ltd. (Taxpayer) [ITA No. 37 of 2002]
Brief : The issue before the HC relates to certain provisions in the Indian Tax Laws (ITL) that provide for taxability, as dividend, of certain advances or loans made by a company to another concern when the lender/borrower have a common shareholder with substantial interest (deemed dividend provisions). However, advance or loan is not treated as deemed dividend if it is made by the lending company in the ordinary course of its business and the lending of money is a substantial part of the company’s business.
The HC held that in order to constitute substantial part of the business, the lending of money need not be the major part i.e., more than 50% of the lending company’s business. In the facts of this case, loans and advances were more than 40% of the total assets and interest income was more than total profits of the lending company. The HC held that deemed dividend provisions were not applicable to the loan received by the Taxpayer from such a company.
Background-The ITL contains an expanded definition of dividend which, in addition to conventional dividend or distributions, includes payment of an advance or a loan made by a closely-held company to its shareholder or to a concern in which the shareholder has a substantial interest. However, if such an advance or loan is made by a company in the ordinary course of business where the lending of money is a substantial part of the company’s business, it is not treated as dividend (exception).
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