Authority For Advance Rulings
Madura Coats (P) Ltd., In Re
Section 2(22)(e)
Syed Shah Mohammed Quadri, J., Chairman; K.D. Singh & A.S. Narang, Members
AAR No. 645 of 2004
6th April, 2005
Counsel Appeared
S.E. Dastur with P.J. Pardiwalla, for the Applicant : R. Jiya Kumar, for the CIT concerned
Ruling
Syed Shah Mohammed Quadri, J., chairman :
M/s Madura Coats (P) Ltd., Madurai (for short the “MCPL”), one of the members of the Coats Group, filed this application under s. 245Q(1) of the IT Act, 1961 (for short the “Act”), seeking ruling of the Authority on the following questions :
“(1) Whether, on the facts and in the circumstances of the case, the proposed loan to be given by Madura Coats (P) Ltd. (MCPL) to Coats Finance Co. Ltd. (CFL) can be considered to be “deemed dividend” under s. 2(22)(e) of the IT Act, 1961, to the extent of “accumulated profits” ?
(2) Whether, if the said loan is considered as a “deemed dividend”, then in the assessment of which entity will such amount be deemed to be dividend ?
(3) Whether, if the proposed loan gives rise to a charge of tax, what would be the rate at which tax would be payable ?”
The applicant is an Indian company and is a tax resident of India. It is engaged in the manufacture and trading of threads. It proposes to advance interest bearing loan to M/s Coats Finance Co. Ltd. (CFL), a company incorporated in England and Wales (UK) and a tax resident of UK, which is the finance arm of the group and is primarily engaged as a financial trading company. Its activities, inter alia, include borrowing funds from cash surplus companies of the group and lending to other companies of the group. It has accumulated profits, within the meaning of Expln. 2 to s. 2(22)(e) of the Act, out of which it proposes to advance loan to CFL, on commercial terms and subject to the approval of the Reserve Bank of India.
The main pleas of the CIT-I, Madurai (for short the “CIT”), are : that M/s Coats Patons Ltd. (CPL) and Tootal Threads Ltd. (TTL) are subsidiaries of Coats Holdings Ltd. (CHL); the applicant proposed to give a loan to CFL which is a subsidiary of CHL and thus CFL is having a substantial interest in the applicant-company. The applicant is having accumulated profits of Rs. 10,11,044 lakhs, therefore, the loan shall be “deemed dividend” as per s. 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. Para ‘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 per cent.
Mr. S.E. Dastur, learned senior counsel appearing for the applicant, would contend that the requirements of s. 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. CIT, Madurai has argued that as the CPL and TTL are subsidiaries of CHL and as the loan is proposed to be given to CFL, which is a subsidiary of CHL and is having a substantial interest in CFL, the loan will be “deemed dividend” as per s. 2(22)(e) of the Act.
It may be pointed out at the outset that question No. (1) is the germane question and question Nos. (2) and (3) are consequential. We shall, therefore, examine whether the proposed transaction of loan would satisfy the requirements of “deemed dividend” within the meaning of s. 2(22)(e) of the Act, which insofar as is relevant for the present discussions, reads as under : “Sec. 2(22)—dividend includes : (a) to (d) xxxxxx (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987], by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”
6. The definition of the term ‘dividend’ in sub-s. (22) of s. 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. Sarathy Mudaliar (1972) 83 ITR 170 (SC) and Nandlal Kanoria vs. CIT (1980) 122 ITR 405 (Cal)]. Among others cl. (e) embodies payments which must satisfy the following conditions to be deemed “dividend” : (1) the payment is made (after 31 May, 1987) by a company in which the public are not substantially interested; (2) the company is having accumulated profits; (3) the payment is by way of advance or loan : (a) to a shareholder who is the beneficial owner of sharesholding not less than ten per cent of the voting power (but the shares shall not be entitled to a fixed rate of dividend whether with or without a right to participate in profits); or (b) to any concern in which such shareholder is a member or a partner and in which he has substantial interest (these two conditions are cumulative); or (c) by the company on behalf of, or for the individual benefit of such shareholder.
7. Being a shareholder of the lender company is a common factor of these requirements. To attract cl. (e), the shareholder must be the registered shareholder of the company. In support of this proposition, Mr. Dastur relied upon the decision of the Hon’ble Supreme Court in CIT vs. C.P. Sarathy Mudaliar (supra). In that case, the assessee was the Hindu undivided family (HUF). Three of the members of HUF were shareholders in a private limited company. They acquired shares from out of the family funds. The company advanced the loan to the HUF from the accumulated funds of the company which was treated as dividend within the meaning of that expression in s. 2(6A)(e) of the Indian IT Act, 1922. The contention of the Revenue that the loan was, in fact, advanced to the shareholders of the company was not accepted by the Tribunal, which held, that though the shares were acquired from out of the family funds, in law, the members were the shareholders and not the HUF. However, before the High Court, it 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 abovementioned 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 vs. CIT (1980) 14 CTR (SC) 372 : (1980) 122 ITR 1 (SC).
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 (Annex.-V), which it reproduced below : Shareholding Pattern Coats Holdings Limited (CHL) HSDL Nominees J&P Coats Ltd. (JPC) WOS Tootal Threads Ltd. Proposed loan (TTL) UK India 99.9998% 0.0002% (100 (41,922,111 shares) shares) Madura Coats Private Limited (MCPL) (total shares outstanding = 41,922,211) WOS. Wholly owned subsidiary A perusal of the above chart of shareholding pattern shows that CHL is the main holding company. Three of its subsidiary companies are Coats Patons Ltd. (CPL), Tootal Threads Ltd. (TTL) and Coats Finance Co. Ltd. (CFL), which is itself a holding company of J&P Coats Ltd. (JPC) which holds 99.9998 per cent (41,922,111 shares) and TTL holds 0.0002 per cent (100 shares) out of 41922211 shares of the applicant– MCPL. The proposed transactions of loan is between MCPL and CFL.
9. It is common ground that the aforementioned requirements (1) and (2) of s. 2(22)(e) of the Act, are satisfied. What needs to be determined is whether any of the conditions (a) to (c) of the third requirement is also satisfied; if so, the proposed loan will be within the meaning of “dividend”. The first category of the payee—in (a)—is a shareholder who is the beneficial holder of shares, holding not less than ten per cent of the voting power in MCPL. It’s nobody’s case that CFL is a registered shareholder of MCPL. Therefore, the transaction does not fulfil condition (a) of the third requirement. Insofar as condition (b) is concerned,—CFL—the proposed borrower is a concern and JPC—the shareholder—is having not less than ten per cent voting power in MCPL—the proposed lender. Further JPC should also be a member or a partner of CFL and having substantial interest in it as defined in sub-s. (32) of s. 2 of the Act. The proposed loan by MCPL to CFL cannot be treated as dividend because JPC is not a member or a partner much less has it any substantial interest in CFL as defined in s. 2(32) of the Act. For the abovementioned 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 s. 2(22)(e) of the Act, the loan must be given directly by the company to the shareholder [see Nandlal Kanoria vs. CIT (supra)]. This aspect is also lacking here. It follows that condition (b) is also not fulfilled. Now adverting to condition (c), it speaks of payment made by the company on behalf of, or for the individual benefit of such shareholder. There is nothing on record to suggest nor is it so contended by Mr. R. Jiya Kumar that the proposed loan is being advanced by MCPL to CFL on behalf of, or for the individual benefit of JPC. Thus, it is seen that none of the essential conditions of the third requirement of sub-cl. (e) of sub-s. (22) of s. 2 of the Act, is satisfied and, therefore, the proposed loan would not be “deemed dividend” as defined thereunder. For the abovementioned reasons, we rule on— Question No. 1—that on the facts and circumstances of the case, mentioned above, the proposed loan to be given by Madura Coats (P) Ltd. (MCPL) to Coats Finance Co. Ltd. (CFL) would not be “deemed dividend” under s. 2(22)(e) of the IT Act, 1961, to the extent of “accumulated profits”. Question Nos. 2 and 3—having regard to the ruling on question No. (1), in our view, question Nos. (2) and (3) do not survive for pronouncement of ruling.
[Citation : 274 ITR 609]
