if NBFC company gives loan to a company in which shareholder has substantial interest then whether provision of deemed dividend is applicable. NBFC company has given loan only to this company. loan is given at market rate of interest
CA Amit (Service) (38 Points)
08 May 2010if NBFC company gives loan to a company in which shareholder has substantial interest then whether provision of deemed dividend is applicable. NBFC company has given loan only to this company. loan is given at market rate of interest
Aditya Maheshwari
(CA in Practice)
(35867 Points)
Replied 08 May 2010
Deemed dividend will be aplicable as for the purpose of section 2(22)(e) the companies substantial business must be of lending of funds whereas it is not the case in the above company.
CA Dhiraj Ramchandani
(CA, M. com)
(10823 Points)
Replied 08 May 2010
Yes...
Such amount is considered as DEEMED DIVIDEND...
CA Dhiraj Ramchandani
(CA, M. com)
(10823 Points)
Replied 08 May 2010
But ADITYA sir, following is the language of law
"Granting inter-company loans is not uncommon in case of Indian companies. However, undertaking such transfer of funds carries with it income-tax implications, which should be kept in mind. The provisions of the Income-Tax Act, 1961 (the Act) lay down that in case a loan or advance is given by a closely held company to another concern where there is a common shareholder having a substantial interest, the loan or advance shall be taxable as deemed dividend, to the extent of accumulated profits of the concern granting the loan or advance. "
Please, clear my doubt, as i think its considered as deemed dividend as per above statement
CA Amit
(Service)
(38 Points)
Replied 08 May 2010
but as per following it is not deemed dividend i suppose
Scope of Section 2(22)(e)::
Type of Company a Closely Held Company i.e., a Company in which the public is not substantially interested.
Nature of Payments Any payment by way of advance or loan.
Exception: Loan or advance is granted in the ordinary course of its business and lending of money is a substantial part of the company’s business.
To Shareholder’s Covered Any shareholder who is a beneficial owner of 10% or more of Equity Share Capital of the Company.
Or Concern thereof Or to a concern (includes HUF, Firm, AOP or BOI, Company) in which such shareholder is a partner or a member) has substantial interest (when entitled to 20% or more of the income of such concern).
Amount Subject to maximum of Accumulated Profits (up to date of payment of Dividend).
A loan not covered by Accumulated Profits is not deemed to be dividend.
Accrual In the “previous year” in which the payment was made. {Section 8}
Key Points To Be Noted::
1. Provisions of Corporate Dividend Tax (Section 115-O) are not attracted in case of “Deemed Dividend” & as a consequence thereof, exemption u/s 10(32) is not available.
2. Set-Off To Avoid Double Taxation – Subsequently, when the company declares dividend, & any such dividend is set-off against the advance, the dividend so adjusted against the advance (which has been deemed as dividend), will not be again treated as dividend.
3. Company in which public is substantially interested includes:
a. a company owned by the Government or the RBI or more than forty percent of the shares are owned by Government or the RBI or a corporation owned by the RBI.
b. a company registered under section 25 of the Companies Act, 1956.
c. a company not having share capital and declared by the Board to be such company
d. Mutual Benefit Finance Company – business of acceptance of deposits from members and notified by the Central Government u/s 620 of the Companies Act, 1956.
e. a company, whose more than 50% Equity Shares (not being Preference Shares) held by one or more Co-operative Societies throughout the previous year.
f. a company not being a Private Company as defined in the Companies Act, 1956, whose Equity Shares were listed on the 31 March of the previous year in a Recognised Stock Exchange.
g. a ‘Government Company’ not being a ‘Private Company’ (both terms being defined in the Companies Act, 1956).
4. What does not constitute a Loan or Advance?
In the matter of Dr. Fredie Ardhesir Mehta v. Union of
Loan means an advance of money, upon the understanding that it shall be paid back, and it may or may not carry interest. A credit sale resulting in a Book Debt does not amount to a loan.
Inference –>> Therefore, only an actual payment of money by the company, upon the understanding of its repayment, shall be termed as loan.
a. Any interest on the loan, resulting in an increase in the total amount due, shall not be considered a loan for the purpose of Section 2(22)(e).
Author’s Comments: The above decision has been rendered in a Case pertaining to the Companies Act, 1956. The phrase “Loan or advance” has neither been defined under the Income Tax Act, 1961 nor the Companies Act, 1956. However, the cardinal issue in the instant case was the meaning of the term ‘Loan or Advance’, being an issue similar in context, and has been relied on by the Author.
5. Whether a Loan or Advance is in the “Ordinary Course of Business”?
In determination thereof, the following points have to be considered:
(a) Whether the company is an NBFC registered with the RBI?
(b) Whether any Loan or Advance made to any person(s), other than Shareholder(s), Director(s) or their Relatives?
(c) Terms ~ Rate of interest & Terms of Repayment.
The term “substantial part of the company’s business” has not been defined under the Income Tax Act. However, the Tribunal has in Mrs. Rekha Modi v. ITO (2007) (13 SOT 512), held that the ratio of money lending business should be 20% or more to be considered “substantial part of the company’s business”.
Further, for determination of the fact whether the company was engaged in money lending business, factual position for the relevant ‘previous year’ should be considered.
6. “Deemed Dividend” accrues in the ‘previous year’ in which the payment was made. (Section 8(a)). Therefore, only payment(s) made during the “current year” is covered & any outstanding balances / interest on loans are to be ignored. Any loan(s) which were outstanding beyond the limitation period will be exempt from tax.
Nicky
(Chartered Accountant)
(245 Points)
Replied 08 May 2010
Dear Amit,
NBFC's are of various kinds, if it is lending NBFC then without issue you can go ahead aand section 2(22)(e) wont be attracted..
Aditya Maheshwari
(CA in Practice)
(35867 Points)
Replied 08 May 2010
The judgement as posted by Amit states that Tribunal has in Mrs. Rekha Modi v. ITO (2007) (13 SOT 512), held that the ratio of money lending business should be 20% or more to be considered “substantial part of the company’s business”.
However in your case the NBFC is granting loan only to one party and no other outside party. So this judgement will not be of any help.
If u can prove that the amount advance is a deposit given then u can take help of Bombay Oil reproduced as follows:
ITAT, MUMBAI BENCH `H’ : MUMBAI
The Bombay Oil Industries Ltd. v. DCIT Appeal No. ITA NO. 2985/M/2005 Dated : JANUARY 22, 2009
Summary
Section 2(22)(e) enacts a deeming fiction which would not be given a wider meaning than what it purports to do; the requisite condition for invoking section 2(22)(e) is that payment must be by way of loans or advances.
Pratul
(FINANCE MANAGER)
(105 Points)
Replied 28 May 2011
does the defn of substantial interest fr the purpose of sec 2(22)(e) includes shares beneficially held by the shareholder of the company along with his/her relatives or only the shares beneficially held individually by him.?
Live class on PF & ESI Enrollment & Returns Filing(with recording)
CAclubindia
