Bombay Oil Industries Ltd. v. Deputy Commissioner of Income-tax

ORDER

George George K., Judicial Member. - This appeal filed by the assessee is directed against CIT(A)'s order dated 14-2-2005. The assessment year concerned is 2001-02.

2. The ground raised by the assessee is as follows:

"1. The ld. CIT(A) has erred in confirming the addition of Rs. 1,03,11,500 as deemed dividend under section 2( 22)( e) of the Act since the said amount is not covered by the provisions of section 2( 22)( e), the addition ought to be deleted."

3. The assessee-company raised an additional ground through his application dated 27-12-2007 which reads as follows:

"The ld. CIT(A) has erred in treating consideration received on sale of Brands as long-term capital gain without appreciating the contention of the applicant that the said consideration is not chargeable to tax. On the basis of the facts and in the circumstances of the case, the said consideration ought not be charged to tax."

4. The basic facts required for disposal of the ground with regard to deemed dividend are as follows. During the concerned year the assessee had taken unsecured loans from various companies. The details of which are as follows :

5. The Assessing Officer vide his letter dated 17-3-2004 called for assessee's objection for treating the abovesaid unsecured loans as deemed dividend under section 2(22)( e) of the Act. The assessee vide its letter dated 17-3-2004 objected to the proposal of the Assessing Officer. The assessee submitted that it had accepted inter-corporate deposits which were used for the purpose of its business. Instead of taking ICDs from unknown corporate bodies, the assessee-company had taken ICDs from known corporate bodies at prevailing competitive interest rate. It was submitted that the interest paid by the company on these ICDs are offered for taxation by the recipient companies. Thus it was contended that the process of accepting and giving ICDs is a means of alternative finance and cannot be treated as loans and advances under section 2(22)( e) of the Income-tax Act. The assessee further submitted that the sub-clause (ii) provides for an exception to sub-clause (e) of sub-section (22) of section 2 of the Act. This sub-clause excludes from the scope of 'dividend' any advance or loan made to a shareholder by a Company in the ordinary course of business, where the lending of money is a substantial part of the business of the Company. Hence, ICDs taken from abovementioned companies cannot be treated as deemed dividend under section 2(22)( e) of the Act. The objections raised by the assessee was rejected by the Assessing Officer and unsecured loans mentioned above were brought to tax as deemed dividend under section 2(22)( e) of the Income-tax Act. Before the ld. CIT(A) the assessee reiterated the submissions made before the Assessing Officer. For the reasons mentioned in para 6 of the CIT(A)'s, order the appeal of the assessee was dismissed. The relevant portion of the CIT(A)'s order is reproduced below:—

"6. In order to ascertain the factual position, the assessee was required to furnish the following facts for the last three years:—

(i) Party-wise details of amount of loans given and interest received by the said three companies;
(ii) Party-wise details of amount of loans taken and interest paid by the said three companies;
(iii) Break up of net interest on loans and other income.

From the details furnished, it is seen that during the relevant previous year, Madhav Nandini Trading & Investment Pvt. Ltd. had given loan of Rs. 25 lakhs to the assessee on which interest of Rs. 1,39,021 was earned. Likewise during the relevant previous year Anandita Arnav Trading & Investment Pvt. Ltd. had given loan of Rs. 42.75 lakhs to the assessee-company on which interest earned was Rs. 2,10,723. These two companies had not advanced loans only to the assessee and to no other party. The third company, i.e., Rajvi Rishabh Trading & Investment Pvt. Ltd. had during the relevant previous year given loan of Rs. 38.75 lakhs to the assessee. It had also given loan of Rs.16 lakhs to a director of the company. No loans had been given to any outside party. From the P&L Account of these companies for the financial year 2000-01 it is seen that the income earned from interest was a minuscule fraction of the total income earned by the said companies. Thus, out of the gross income of Madhav Nandini at Rs. 1.18 crores, only Rs. 1.39 lakhs came from loan. The entire interest income was on loan advanced to the assessee-company. Likewise, out of gross income of Anandita Arnav at Rs. 2.14 crores, a mere Rs. 2,10,723 came from interest and that too from the assessee-company. Similarly, of the gross income of Rajvi Rishabh at Rs. 2.14 crores, interest income comprised only Rs. 3,05,352 which was entirely from the assessee-company and a director of the company. The facts as brought out above clearly show that lending of money was not a substantial part of the business of the said three companies. On facts, lending of money does not even partake of the character of business activity of these companies as lending is only to the assessee and that too from surplus funds without involving raising of borrowings for advancing loans. For these reasons, I hold that the case of the assessee is not covered by the exception contained in section 2(22)( ii). The treatment of aggregate loan of Rs. 1,03,11,500 received from the three companies as deemed dividend under section 2(22)( e) is therefore confirmed."

6. The assessee being aggrieved has filed this appeal before us. The ld. AR submitted that the 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. He submitted that 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 ld. AR has filed a paper book running into 134 pages the content of the same is certified for having been filed before the lower authorities. The ld. AR took us through the pages 10 and 13 of the paper book, containing the balance sheet of the company Madhav Nandani Trading & Investment (P.) Ltd. and stated that the amount advanced to the assessee-company by Madhav Nandini Trading & Investment (P.) Ltd. is inter-corporate deposits. Similarly he also referred to the balance sheet of the other two companies which has advanced unsecured loans to the assessee-company and contended that the amounts received by the assessee are in the nature of inter-corporate deposits and not loans/advances. He also relied on the following decisions to point out the distinction between loans/advances and vis-a-vis deposits :

(1) Housing & Urban Development Corpn. Ltd. v. Jt. CIT [2006] 5 SOT 918 (Delhi) (SB),
(2) Durga Prasad Mandelia v. Registrar of Companies [1987] 61 Comp. Cas. 479 (Bom.),
(3) Pennwalt India Ltd. v. Registrar of Companies [1987] 62 Comp. Cas. 112 (Bom.),
(4) Gujarat Gas Financial Service Ltd. v. Asstt. CIT [2008] 115 ITD 218 (Ahd.) (SB).

7. Alternatively it was contended that as per clause 2 of section 2(22)( e) of the Act, dividend does not include any advances or lending money to shareholders in the ordinary course of business, where lending is substantial part of the business of the company. It was submitted that the three companies are engaged in the business of advancing funds in addition to investment in shares. The copies of Memorandum and Articles of Association and balance sheet of the three years of the above companies are produced in the paperbook filed. It was contended that lending of money is substantial part of the business of each of the above three companies and though each of the above three companies has made substantial investment in the shares of company, no business relating to investment in shares is carried out as no organized activity for investment in shares is required. It was submitted that the quantum of investment in shares is same as in the earlier year. On the other hand it was contended that all the companies have given substantial amount of loans and advances and as a result, of money lending, these companies have been able to earn income. In this connection the ld. Authorised Representative drew our attention to the decision of ITAT in the case of Harish Chandra Golcha v. ITO [1980] 9 TTJ 1 ( Jp.) where the following observations were made:

"I am in agreement with the decision of the ld. Accountant Member. Though the main business of the assessee is that of soap stone mining, it is clearly carrying on a money lending business also. The huge amounts of interest received and paid, the substantial amount of interest bearing loans and advances shown in the balance sheets and the facts that, except for the advance to SG, none of the other advance have been treated to be not in the course of the business for the purpose of disallowing interest on borrowed capital, all indicate beyond doubt that the assessee was carrying on also a financial banking or money lending business side by side with the principal business."

In the present case it was submitted all the above three companies are carrying on the business of lending money and the quantum of amount advanced is also substantial. It was contended, once it is held that lending of money is substantial part of the business of the company, provisions of section 2(22)(e ) cannot be applied in view of provisions of exception (ii ).

8. The ld. AR further stated, that Assessing Officer erred in treating the entire closing balance of year in credit of above three companies as deemed dividend under section 2(22) of the Act. He contended that the unsecured loan received during the year can only be treated as deemed dividend under section 2(22)( e) of the Act.

9. The ld. DR on the other hand submitted 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. The ld. DR drew support from the order of the CIT(A) which held that lending money was not a substantial part of the business of the three companies which advanced loans to assessee.

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'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."

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.'s case (supra) 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 paras 68 to 74 is reproduced below:

"(68) Before the Assessing Officer 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 CIT(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 Assessing Officer 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. v. Jt. CIT [2006] 5 SOT 918 (Delhi)(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 ld. 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. v. Dy. CIT [2005] 95 ITD 356 (Mum.) .

(70) We have heard the parties and considered the rival submissions. It might be true that assessee 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 Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of AP [2001] 247 ITR 361 (SC), CIT v. 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. v. Dy. CIT [2004] 89 ITD 520 (Delhi) 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 beforehand 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 that 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 Assessing Officer 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 CIT(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 K.M. Mohammed Abdul Kadir Rowther v. S. Muthia Chettiar [1960] 2 Mad. LJ 13 at 15 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 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 beforehand 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 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.'

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 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.

11. Facts pertaining to the additional ground raised by the assessee in brief are as follows. During the year the assessee had transferred trademark and copyright 'Parachute' and 'Saffola' brand. In the return of income it did not offer net consideration on the transfer of trademark and copyright to tax since according to the assessee the said trademark and copyright did not have any cost of acquisition. However, a revised return was filed, wherein the assessee-company offered the said consideration to long-term capital gain. For this purpose it obtained a report of the valuation valuing the said brand as on 1-4-1981 and determined the long-term capital gain by reducing from the indexation cost of acquisition from the full value of the said brand. The above revised return was filed without prejudice to the assessee's contention that the said net consideration is not liable to any tax. While passing the order under section 143(3) the Assessing Officer taxed the long-term capital gain on the sale of the brands. Though the assessee had filed the appeal before the CIT(A) on other issues it did not raise the issue of taxability of consideration received on the sale of brands before the CIT(A). The CIT(A) decided the other issues vide order dated 14-2-2005, from which the present appeal has been preferred before us.

12. It is submitted by the ld. A.R. that the assessment completed was set aside by the CIT under section 263 and as a result of which the assessee- company is now desirous of taking the additional ground, which was reproduced above. It was submitted that all facts relating to above adjudication of the additional ground is already on record and no fresh investigation of facts is necessary. It was further submitted that the Tribunal has power to admit the additional ground in view of the Full Bench decision of Hon'ble Bombay High Court in the case of Godavari Sugar Mills Ltd. v. CIT [1993] 199 ITR 351 and Ahmedabad Electricity Co. Ltd. v. Commissioner Of Income-Tax. [1993] 199 ITR 351 and in the interest of justice and for complete and proper disposal of the appeal, it is necessary that additional ground should be admitted and he prayed for adjudication of the same on merit. On merit the ld. A.R. relying on the decision of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 contended that the net consideration received on assignment of name "Parachute" and "Saffola" is not chargeable to tax under the Act, being self- generated assets. It was contended that capital asset transferred by the company being trademark/brand name and not being goodwill, the receipts on such transfer is not chargeable to capital gains tax. He stated that the words "Trademark or brand name associated with business" were introduced in section 55(2) with effect from 1-4-2002 and thus capital gains could not be taxed in case of transfer of 'Trademark or brand name' for the concerned assessment year. He also relied on the decision of Hon'ble Delhi High Court in the case of Commissioner Of Income Tax… v. Milk Food Ltd…. [2006] 280 ITR 331 (Delhi) , Voltas Ltd. v. Dy. CIT [1998] 64 ITD 232 (Bom.) , ICI India Ltd. v. Dy. CIT [2002] 81 ITD 348 (Cal.) , for the proposition that since no cost is incurred for acquisition of Trademark/brand name, the company is not liable for capital gain tax in respect of sale proceeds mentioned above for the relevant assessment year.

13. The ld. D.R. on the other hand, opposed the admission of the ground by stating that the assessee himself has offered for long-term capital gain by filing revised return. As regards the merits the ld. D.R. supported the order of the Assessing Officer .

14. We have heard the rival submissions and perused the material on record. We find that from the revised return the assessee has put up a note, which reads as follows :

"The Company relies upon the decision of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294 and contends that net consideration received on assignment of brand name 'Parachute' and 'Saffola' is not chargeable to tax under the Act being self-generated assets.

The capital assets transferred by the Company being trademark/brand name Parachute and Saffola and not being goodwill of Business, hence provision of section 55(2) are not applicable for assessment year 2001-02. Reliance is placed on the decision of Mumbai Income-tax Appellate Tribunal in the case of Voltas Ltd. v. Commissioner Of Income-Tax. [1998] 64 ITD 232 .

However, as a measure of abundant caution and without prejudice to its contention that the consideration received on transfer of the trademark/brand name is not liable to tax, the return is revised to include long term capital gains on transfer of the trademark/brand name by considering the fair market value of the brand name Parachute and Saffola as on 1-4-1981 as the cost of acquisition under section 55(2)(b) of the Income-tax Act, 1961 for the purpose of section 48 of the Act."

15. From the above note it is clear, the assessee had filed the revised return without prejudice to its contention that the consideration received on transfer of brand name is not liable to tax. We are of the view, the additional ground in the interest of justice and in the light of the decision of Hon'ble Jurisdictional High Court cited supra, needs to be admitted and we admit the same and proceed to dispose of the matter on merits.

16. It is an admitted fact that trademark/brand name of "Parachute" and "Saffola" is a self-generated asset and the cost of the same is nil. The receipt on sale of trademark/brand name is not exigible to capital gains tax, prior to the introduction of the words "Trademark or Brand name associated with a business". The same has been clarified by the judgment of the Hon'ble Delhi High Court in the case of Milk Food Ltd. (supra). Therefore, for the relevant assessment year the sale receipts on account of transfer of trademark/brand name mentioned above is not liable to capital gain tax and hence, the additional ground raised by the assessee is allowed.

17. In the result, the appeal filed by the assessee stands allowed.