Unsecured inter-corporate deposits not treated as loans under section 2(22)(e); sale of self-generated trademarks not taxable capital gains

ITAT MUMBAI - AT held that unsecured inter-corporate deposits could not be treated as loans or advances for section 2(22)(e) and therefore were not includible as deemed dividend; authorities below erred in equating deposits with loans. The tribunal also held sale consideration received for self-generated trademarks/brand names (cost nil) did not attract capital gains for the relevant assessment year. Matter decided in favor of the assessee.

---

---

Issues: (i) Whether amounts received by the assessee from three companies as inter-corporate deposits (ICDs) can be treated as 'loans or advances' and thereby as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961; (ii) Whether consideration received on transfer of the trademarks/brand names 'Parachute' and 'Saffola' is chargeable to tax as long-term capital gains for assessment year 2001-02.

Issue (i): Whether inter-corporate deposits received by the assessee are within the scope of 'loan or advance' so as to attract deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.

Analysis: The distinction between deposits and loans/advances as recognised in precedent was applied. Evidence on record established that the amounts were inter-corporate deposits and the lending companies did not carry on money-lending as a substantial part of their business; interest income from such deposits was a minimal fraction of their gross income and lending was from surplus funds. The statutory deeming provision in Section 2(22)(e) requires the payment to be by way of 'loan or advance'; fiscal provisions were held to require strict construction and not to be extended beyond their textual limits.

Conclusion: The ICDs do not constitute 'loans or advances' within Section 2(22)(e) and therefore cannot be treated as deemed dividend. This conclusion is in favour of the assessee.

Issue (ii): Whether consideration received on assignment of the trademarks/brand names 'Parachute' and 'Saffola' is chargeable to tax as long-term capital gains for assessment year 2001-02.

Analysis: The trademarks/brand names were self-generated assets with nil cost of acquisition for the relevant year. The statutory amendment expressly referring to 'trademark or brand name associated with business' was applicable only from 1-4-2002; for the assessment year in question the pre-amendment position and authoritative decisions support that receipts from transfer of self-generated trademarks/brand names are not exigible to capital gains tax. The assessee had alternatively offered the amount as long-term capital gains without prejudice, and the additional ground was admitted and adjudicated on merits.

Conclusion: The consideration received on transfer of the trademarks/brand names is not chargeable to capital gains for the assessment year 2001-02. This conclusion is in favour of the assessee.

Final Conclusion: The appeal is allowed on the substantive issues decided: ICDs cannot be treated as loans/advances attracting deemed dividend under Section 2(22)(e), and receipts from sale of the specified self-generated trademarks/brand names are not taxable as capital gains for the assessment year concerned.

Ratio Decidendi: For the purposes of Section 2(22)(e) a payment must be a 'loan or advance' in the statutory sense to attract the deeming provision; inter-corporate deposits that are investments of surplus funds and not loans/advances do not fall within the scope of deemed dividend, and receipts from disposal of self-generated trademarks/brand names prior to inclusion of such words in Section 55(2) are not chargeable to capital gains.

---