No deemed dividend on advances made by Subsidiary Co where Holding Co advances the same to other subsidiaries


Farida Holdings (P.) Ltd. v Deputy Commissioner of Income-tax [2012] 21 taxmann.com 462 (Chennai – Trib.)

The assessee is a private limited company, mainly functioning in the role of a holding company over a number of hundred-percent subsidiary companies. The assessee company is exercising administrative control over the subsidiaries in its status as holding company. In that status the assessee company is also managing the financial affairs of its subsidiaries. The assessee company is monitoring the inflows and outflows of the subsidiary companies in its attempt to utilize the available funds to the maximum advantage of the group companies. The Assessing Officer found that the assessee company had received loan amounts from different subsidiaries and those borrowed funds were in turn advanced to other subsidiaries. According to the assessing authority, the loans obtained by the assessee from its subsidiaries were in the nature of deemed dividends as per section 2(22)(e) of the Income-tax Act, 1961 and, therefore, liable to be taxed.

Held:

  • As a holding company, the assessee is bound to monitor the financial discipline of its subsidiaries, especially when all the subsidiaries are fully owned by the holding company.
  • The main business carried on by the assessee company is to act as the holding company of its fully owned subsidiaries. Therefore, it is to be seen that monitoring the financial management of the subsidiaries is an activity carried on by the assessee in the ordinary course of carrying on of its business.
  • It is for the purpose of meeting the requirements of the subsidiary companies which are in need of finance, that the assessee company is availing loans from other subsidiaries having disposable funds, in its capacity as the holding company exercising management control over its subsidiaries. Therefore, it is to be seen that the assessee was transacting the loans as a treasury manager for its fully owned subsidiaries.
  • The assessee company has not availed any benefit out of those loans availed from its subsidiaries. The assessee company had not retained those loan funds for its own activities. All the loan amounts have been redistributed to subsidiaries.
  • These are normal business transactions carried out by any holding company.
  • Where regular business transactions are carried on by an assessee in its ordinary course of business in the above manner, they cannot be treated as deemed dividend for the purpose of section 2(22)(e) of the Act.

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