2009 (1) TMI 519 - AT - Income Tax

Deemed dividend - Inter corporate deposit vis a vis Loan & Advances - Unsecured loan from various companies - lending substantial part of business of assessee - Held That - Deposits cannot be equated with loans or advances. (Durga Prasad Mandelia s case) - 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. - 2(22) is a deeming fiction and cannot be give a wider meaning - 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. Capital Gain - Held That - Self generated assets are not liable to tax prior to the introduction of the words Trademark or Brand name associated with a business .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. - The same has been clarified by the judgment of the Hon ble Delhi High Court in the case of Milk Food Ltd. (2005 - TMI - 9369 - DELHI High Court ) - Decided in favor of assessee.

Issues Involved:

1. Deemed Dividend under Section 2(22)(e) of the Income-tax Act.
2. Taxability of Consideration Received on Sale of Brands as Long-Term Capital Gain.

Issue-wise Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e) of the Income-tax Act:

The primary issue raised by the assessee was the confirmation of the addition of Rs. 1,03,11,500 as deemed dividend under section 2(22)(e) of the Income-tax Act. The assessee had taken unsecured loans from three companies: Madhav Nandini Trading & Investment (P.) Ltd., Anandita Arnav Trading & Investment (P.) Ltd., and Rajvi Rishabh Trading & Investment (P.) Ltd. The Assessing Officer proposed treating these unsecured loans as deemed dividends under section 2(22)(e), which the assessee objected to, arguing that these were inter-corporate deposits (ICDs) used for business purposes and not loans or advances. The assessee further argued that lending money was a substantial part of the business of these companies, thus falling under the exception provided in section 2(22)(e)(ii).

The CIT(A) rejected the assessee's objections, stating that the lending of money was not a substantial part of the business of the three companies, as the interest income from loans was a minuscule fraction of their total income. The Tribunal, however, found that the authorities below had not controverted the assessee's claim that the amounts received were ICDs. It was established that deposits cannot be equated with loans or advances, as per the jurisdictional High Court's decision in Durga Prasad Mandelia v. Registrar of Companies. The Tribunal concluded that inter-corporate deposits are distinct from loans or advances and do not fall within the purview of deemed dividend under section 2(22)(e). Consequently, the addition of Rs. 1,03,11,500 as deemed dividend was deleted.

2. Taxability of Consideration Received on Sale of Brands as Long-Term Capital Gain:

The second issue raised was the treatment of consideration received on the sale of brands "Parachute" and "Saffola" as long-term capital gain. The assessee initially did not offer the net consideration for tax, arguing that the trademarks and copyrights did not have any cost of acquisition. However, a revised return was filed, offering the consideration to long-term capital gain, while still contending that the net consideration was not liable to tax.

The Tribunal admitted the additional ground raised by the assessee, noting that the facts were already on record and no fresh investigation was necessary. On merits, it was established that the trademarks/brand names "Parachute" and "Saffola" were self-generated assets with nil cost. The receipt on the sale of such self-generated assets was not exigible to capital gains tax prior to the introduction of the words "Trademark or Brand name associated with a business" in section 55(2) with effect from 1-4-2002. The Tribunal relied on the decision of the Hon'ble Supreme Court in CIT v. B.C. Srinivasa Setty and the Hon'ble Delhi High Court in CIT v. Milk Food Ltd., concluding that for the relevant assessment year, the sale receipts on account of the transfer of trademark/brand name were not liable to capital gains tax. Therefore, the additional ground raised by the assessee was allowed.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting the addition of Rs. 1,03,11,500 as deemed dividend under section 2(22)(e) and holding that the consideration received on the sale of brands "Parachute" and "Saffola" was not liable to capital gains tax for the relevant assessment year.

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