Mumbai ITAT rejects deemed
dividend taxation u/s. 2(22)(e) in hands of assessee (a Mauritian Co.) with
respect to the transaction relating to the Inter Corporate Deposits (ICDs)
between its two wholly owned Indian subsidiaries during AYs 2009-10 & 2010-11;
Noting the common ‘substantial’ shareholding of assessee in the two concerns
(Portescap & Videojet), AO had invoked Sec. 2(22)(e) and had initiated
re-assessment proceedings; ITAT rejects invocation of Sec. 2(22)(e) under the
Income-tax Act, but rules that 'deemed dividend' constitutes 'dividend' under
India-Mauritius DTAA and tax rate @ 5% as per DTAA shall apply; Rejects
assessee’s stand that the said sum is not taxable under the India-Mauritius
DTAA since ‘deemed dividend’ is not covered within the definition of ‘dividend’
under Article 10(4) of DTAA, observes that deemed dividend is covered under the
third facet of ‘dividend’ definition under treaty [i.e. income from corporate
rights which is subjected to same taxation treatment as income from shares by
the laws of contracting state of which the company making the distribution is a
resident]; Rules that "so long as the Indian tax laws consider ‘deemed
dividend’ also as ‘dividend’, then the same is also to be understood as
‘dividend’ for the purpose of the Treaty."; On Sec. 2(22)(e) invocation
aspect, ITAT accepts assessee’s contention that the amount advanced by
Portescap to Videojet was not in the nature of a loan or advance as
contemplated in Sec. 2(22)(e) but was an Inter-Corporate Deposit (ICD), cites
Bombay HC rulings in Durga Prasad Mandelia and Pennwalt India Ltd. , Ahmedabad
ITAT SB ruling in Gujarat Gas Financial Services Ltd. to canvass that a loan
and deposit are distinct transactions; Further rejects Revenue’s stand having
regard to the Deposit agreement, it was the recipient, i.e. Videojet which was
in need of funds and, therefore, the instant transaction has to be understood
as a loan transaction and not a deposit of money by Portescap for interest;
ITAT refers to the Board Resolution and Financial statements of Portescap which
notes the availability of surplus funds, refers to various clauses of the
Deposit agreement and concludes the transaction to be in the nature of ICD; On
reopening aspect, ITAT holds that since on the date of recording reasons, the
ICDs were already subjected to assessment u/s. 2(22)(e) on a substantive as
well as on protective basis in the hands of the two subsidiaries, it could not
be said that the said income had escaped assessment in hands of assessee, cites
Bangalore ITAT ruling in Bullion Investments & Financial Services (P.)
Ltd.; Separately, ITAT rejects deemed dividend invocation in relation to amount
advanced to GVR (a third entity wherein assessee holds 99.99% shareholding) by
Portescap, however, upholds taxability in another transaction involving amount
advanced by Portescap to DHR (yet another entity where assessee holds 100%
shareholding).:ITAT
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