Syed Shah Mohammed Quadri, J. (Chairman) - (1.) 1. M/s Madura Coats (P) Ltd., Madurai (for short the "MCPL"), one of the members of the Coats Group, filed this application under Section 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 Section 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 ?"
(2.) 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 Section 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 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. 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.
(3.) 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. 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 Section 2(22)(e) of the Act.;