ICD to Holding Company--Deemed Dividend?Rejoinder

Hi Mr Agarwal,

Section 2(22)(e) wouldn't be applicable in case the company advancing the money happens to be one in which public are substantially interested. Only private and closely-held public companies. i.e. those that aren't listed at a stock exchange have to take care they don't advance monies to their shareholders having more than 10 per cent holding. Now the point is: Will a subsidiary company be the one in which public are substantially interested if its holding company happens to be a listed company? In terms of item (B) of Section 2(18)(b), I don't think a subsidiary of a listed holding company becomes a company in which public have a substantial interest. To buttress this conclusion, we have a case law viz Madura Coats (P) Ltd [2005] 145 Taxman 366/274 ITR 609 (AAR). In this case the Authority for Advance Rulings held that loan to a holding company of the holding company would not be treated as deemed dividend u/s 2(22)(e). Madura Ltd intended to advance a loan to CFL Ltd. Another company, CHL Ltd, was the holding company of CFL Ltd. Some subsidiaries of CHL Ltd (other than CFL) held shares in Madura Ltd. JPC Ltd, a subsidiary of CFL, held shares in Madura too. The AAR held the advance by Madura Ltd to CFL Ltd as not deemed dividend, one of the grounds being that CFL Ltd wasn't a registered shareholder of Madura Coats (P) Ltd. This case had a very complicated shareholding pattern involving scores of companies. Obviously, nexus between the advance of money and the benefit to the registered shareholder( s) wasn't established beyond any doubt. As such, the AAR ruled in the assessee's favour. But in your case, there's no complication. Money has been advanced to the holding company directly. The fact of holding company being listed wouldn't matter—-holding company having its equity held by public at large doesn't make those members of public acquire a substantial interest in the subsidiary. A private company would become a public company the moment it becomes the subsidiary of a non-private company, whether listed or not. But it'd be only a closely-held public company and not one in which public is interested, even if the holding company is widely-held. So, deemed dividend provisions would have an applicability in your case. As regards the absence of any accumulated profits, of course, there's no question of Section 2(22)(e) getting attracted in that event. But please note that the date of determination of accumulated profits is the date on which the loan was granted. Any accretion to or deletion from the revenue reserves of the company subsequent to the advance of money won't have any impact on the determination of deemed dividend. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Naresh Agarwal" wrote:>> Dear Sanjeevji> > > > I agree with you, but what about Section 2(18) in respect to the definition> of " company in which public are substantially interested".> > > > Section 2(22)(e) starts with " any payment by a company , not being a> company in which the public are substantially interested". Will the> subsidiary company fall in the above definition , where the holding company> is listed.> > > > Naresh