Question And Answer
Subject: Whether deemed dividend provision is applicable when debentures are issued ?
Querist: Shrikrishna Gujar
Answered by:
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Date: May 15, 2021
Query asked by Shrikrishna Gujar

When a private limited company makes an inter-corporate deposit with another sister company where a common shareholder holds more than 20% in both companies, whether provisions of deemed dividend u/s 2(22)(e) are applicable? What would be the implication of deemed dividend if debentures are issued by one company and subscribed by the other sister company?

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Answer given by

Inter corporate deposit (ICD) is not a loan or advance. Hence, S. 2(22)(e) is not applicable. Following decisions may be referred :
i) IFB Agro Industries Ltd. vs. JCIT (2014) 63 SOT 207 (Kol.)(Trib.)
ii) Bombay Oil Industries Ltd. V. Dy.CIT ( 2009) 28 SOT 383 (Bom.) (Trib.)
iii) KIIC Investment Co. vs. DCIT (2019) 101 19 (Mum.)(Trib.)

In DCIT vs. Sahara India Commercial Corp. Ltd. (2013) 147 ITD 176 (Del.)(Trib.) After considering the scheme of Income Tax Act, Companies Act, Securities Contract Regulation Act, SEBI Act and decision of Supreme Court in Sahara India Real Estate Corp. Ltd. vs. SEBI (2012) 25 118 (SC) it was held that for purpose of S. 269SS debentures is a security and not loan. Same ratio will apply for section 2(22)(e ).

Note : In ACIT v. Jasubhai Engineering (P) Ltd ( 2020) 184 ITD 388/ 118 430 (Mum) ( Trib) the Tribunal held that issue of redeemable debentures cannot be assessed as deemed dividend .

Dr. K.Shivaram Senior Advocate .

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