Scope and ambit of Sec 2(22)(e)
& Lacuna associated with it
Sec 2(22)(e) of Income Tax Act, 1961 states
that
“any payment by a company, not being a company
in which the public are substantially interested, of any sum (whether as
representing a part of the assets of the company or otherwise) [made after the
31st day of May, 1987, `by way of
advance or loan to a shareholder, being a person 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 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 (hereafter in
this clause referred to as the said concern)] or any payment by any such
company on behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company in either case possesses accumulated profits”.
In
simple words Sec2 (22) (e) covers payment(s) made in nature of Loans
& advances provided following conditions satisfied:
a) Payment has been made by a company in which
public are not substantially interested.
b) Payment has been made to
Ø a person who is beneficial owner of shares
holding not less than 10% of voting power.
Ø any concern in which such shareholder is a
member or partner, having substantial interest.
Ø any person or concern on
behalf of or for the individual benefit of such shareholder.
c) on the date of such
payment company should possess accumulated profits. Deemed dividend would be only to the extent of
accumulated profits.
Lacuna
It
is to be noted that Section 2(22)(e) covers payment in nature of Loans
or advances but transactions in nature of Inter-corporate deposits
are not covered. The requisite condition for invoking section 2(22)(e) is that
payment must be by way of Loan or advances, this distinction is also supported
by following judgments.
IFB Agro
Industries Ltd. Vs. Jt. CIT [ ITAT Kol dtd 12.03.2013]
In this case, IFB Agro
Industries Ltd. (supra) (Appellant) received inter-corporate deposit
(ICD) to the tune of Rs. 11.20 crores from IFB Automotive Pvt. Limited (IFB),
which was treated as deemed dividend under section 2(22)(e) of
the Income -tax Act, 1961 ('IT Act') by the Revenue. The appellant contended
that since section 2(22)(e) of the IT Act applies only to 'loans
and advances', the ICD, not being in the nature of loan, will not come within
its purview.
The Income Tax Appellate
Tribunal, taking into view the explanation of 'deposit' contained under section
269T and 269SS of the IT Act, held that 'deposit' and 'loans' were indeed two
different and distinct terms and that if a section recognises only the term
'loan', then a deposit received by an assessee cannot be treated as a 'loan'
for that section.
Relevant extract of the
said Order:
"Admittedly, the provisions of section 2(22)(e) of the Act refer 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 '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. Further, 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. Here, we may also mention that in section 269T of the Act, the term
'deposit' has been explained vide various circulars issued by CBDT.
Thus, the view taken by the Ld. CIT(A) that the Intercorporate deposit is
similar to the loan would no longer have legs to stand."
Housing & Urban Development
Corporation Ltd. v. Jt. CIT
Another judgment referred to was the
case of Housing & Urban Development Corporation Ltd. v. Jt.
CIT [2006] 5 SOT 918 (Delhi) (SB), in which a
similar view was held. In this case the Special Bench contended as under:
|
"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. "
CONCLUSION
It has been proved, time and again,
that 'deposits' are not 'loans and advances' and the provisions governing
'loans and advances' only cannot be said to apply to 'deposits' as well. This
fact has been well-settled in law.
Once the Companies Act, 2013 is fully
enforced, the governing sections for deposits would be sections 73 – 76 and the
Rules made thereunder. However, as in the Companies (Acceptance of Deposit)
Rules, 1975, the draft Companies (Acceptance of Deposit) Rules, 2013 provides
that amounts received by a company from any other company do not fall within
the meaning of 'deposits'. Accordingly, the provisions pertaining to deposits will not apply to inter corporate deposits.
Section 372A of the Act, 1956 and the
corresponding section 186 of the Act, 2013 also provide for only
inter-corporate loans.
Therefore,
in the absence of any other applicable provisions such inter-corporate deposits
would remain un-governed and inter corporates funding could be done in the form
of “Inter corporate Deposits”.
Disclaimer:
The above study & conclusion is for sharing with professional colleagues & based on current provisions related to Inter-corporate deposits in Companies
Act, 2013 & Income tax Act, 1961. Any retrospective amendments in the
provisions might have the effect of defeating the study & conclusion. Professional consultancy should be seek before entering into any transactions mentioned in this post
