Whether inter-corporate deposits can be considered as part of loans and advances and same attracts provisions of Sec 2(22)(e) - NO: ITAT

THE issues before the Bench are - Whether inter-corporate deposits can be considered as a part of loans and advances and Whether section 2(22)(e) can be invoked when an assessee involved in financing businesss has taken such deposits from its subsidiary company. And the verdict goes against the Revenue.

Facts of the case

The assessee had taken inter corporate deposits from its subsidiary company Ernst & Young Merchant Banking Services Pvt. Ltd. (EYMBSPL). The AO treated these deposits as loans and advances and held them as deemed dividend u/s 2(22)(e) in the hands of the assessee received from its subsidiary. While the assessee contested that no income on account of deemed dividend was attracted in the instant case since there is a clear distinction between the inter-corporate deposits vis-à-vis loan/advance, however, the AO made the addition. On appeal, the CIT(A) deleted the addition. The Revenue filed this appeal.The counsel of the assessee argued that there is a clear distinction between deposits vis-à-vis loans or advances. He further submitted that the provisions of section 2(22)(e) of the Act is a deeming fiction, and such a deeming fiction should not be given a wider meaning than what it purports to do. The Counsel relied on the case law of Special Bench of this Tribunal in the case of Gujarat Gas Financial Services Ltd. Vs. ACIT wherein it was held that interest on inter corporate deposit and interest on loans or advances are different.

Having heard the parties, the Tribunal held that,

++ we find that this issue is covered now in favour of assessee and against revenue, whereby, according to us, the provisions of section 2(22)(e) of the Act does not apply to inter corporate deposits. The Special Bench of this Tribunal in the case of Gujarat Gas Financial Services Ltd. has considered the issue of inter corporate deposits vis-à-vis the definition of interest as defined u/s. 2(7) of the Interest Tax Act. The Special Bench inturn relied on the decision in the case of Utkarsh Finance (P) Limited wherein it was held that interest on inter-corporate deposits are not chargeable to interest tax, as the deposits are in the nature of loan or advances;

++ looking at the main objects of the company wherein the company was to carry on the business of merchant banking i.e. financing, clearly reveals that the assessee is in the business of financing and once assessee is in the business of financing, the provisions of section 2(22)(e) of the Act will not apply to inter corporate deposits. In the result, the appeal of assessee is allowed