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TMI Blog2005 (4) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ember) Present for the Department Mr. R. Jiya Kumar, Addl. Commissioner of Income tax Range- I, Madurai Present for the Applicant Mr. S.E. Dastur, Sr. Advocate RULING (By Mr. Justice Syed Shah Mohammed Quadri) - M/s Madura Coats Private Limited, Madurai (for short the "MCPL"), one of the members of the Coats Group, filed this application under section 245Q(1) of the Income-tax Act, 1961 (for short the "Act") seeking ruling of the Authority on the following questions:- • Whether on the facts and in the circumstances of the case, the proposed loan to be given by Madura Coats Private Limited (MCPL) to Coats Finance Co. Limited (CFL) can be considered to be "deemed dividend" under section 2(22) (e) of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the loan shall be "deemed dividend" as per section 2(22)(e) of the Act. If the dividend income is brought to tax, it should be taxable in the hands of the shareholder - J. P. Coats Ltd. (JPC) - which is the major shareholder of the company. Paragraph 'E' of the Finance Act, 2004, is quoted for the purpose of rate of tax and it is stated that the applicable tax rate would be 50%. 4. Mr. S.E. Dastur, learned Senior Counsel appearing for the applicant, would contend that the requirements of section 2(22)(e) are not satisfied so the proposed loan will not be within the mischief of the said provision to be taxable as dividend. Mr. R. Jiya Kumar, Addl. Commissioner of Income-tax, Madurai has argued that as the CPL and TTL are su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated profits; 6. The definition of the term 'dividend' in sub-section (22) of section 2 is both circular and artificial. The definition contains the very term it seeks to define and adds specified payments within its ambit. It is a deeming provision and by a catena of decisions it is well settled that it has to be construed strictly [see CIT vs C.P. Sarthy Mudaliar(infra 1) and Nandlal Kanoria Vs. CIT Central, Calcutta (infra 3)]. Among others clause(e) embodies payments which must satisfy the following conditions to be deemed "dividend": • the payment is made (after 31 st may, 1987) by a company in which the public are not substantially interested; • the company is having accumulated profits; • the payment is by way of advance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was contended that loan has been advanced on behalf of or for the individual benefit of the shareholders. Before the Hon'ble Supreme Court, both the above mentioned contentions were urged by the Revenue. It was held that when the Act spoke of the shareholder, it referred to the registered shareholder and that the loans advanced to the shareholder alone could be deemed as dividend. This was followed in Rameshwarlal Sanwarmal v. CIT, Assam 2. 8. Now turning to the facts of this case, there are 360 companies in Coats Group and the members of the Group, which have a bearing on the proposed transactions, are depicted by the applicant in the chart of shareholding pattern (Annexure-V), which is reproduced below: WOS. Wholly owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JPC is not a member or a partner much less has it any substantial interest in CFL as defined in section 2(32) of the Act. For the above mentioned reasons, we cannot accede to the contention of Mr. Jiya Kumar that as CFL and CPL are wholly owned subsidiary of CHL and JPC (the shareholder of MCPL) is also a wholly owned subsidiary of CPL, the proposed loan to CFL shall be treated as "deemed dividend". It is also necessary to note that to be treated as 'deemed dividend' under section 2(22)(e) of the Act, the loan must be given directly by the company to the shareholder [see Nandlal Kanoria v. CIT, Central, Calcutta 3 ]. This aspect is also lacking here. It follows that condition (b) is also not fulfilled. Now adverting to condition (c), it spe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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