ICD falls under the broader term “deposit” which is why it cannot be distinguished from loans and advances.
Loans and advances find their mention under section 2(22)(e) which reads as –
“dividend” includes- any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company, in either case, possesses accumulated profits.
Reference of loan in the above section makes the distinction between loans and ICDs even more relevant.
In the case of Anil Nanda V. DCIT, it has been held by ITAT that although a distinction between loan and ICDS can be made on the ground that in the case of the former, the debtor approaches the creditor while in the case of ICD, the depositor places the deposit with the recipient, such distinction will hold good in law only in the case of unrelated transaction. If a company with available funds approaches a needy company, through a broker or finance consultant, to place a deposit, then such ICD may be distinguished from loan. However, when the concerned parties are group companies or say, related then the same will be considered to be at par with the loan. In the aforementioned case, two companies had a common shareholder holding more than 60% shareholding in both the companies. One of the two companies had given a loan to another. Consequently, as per the AO, the loan given was deemed dividend and qualified as income of the shareholder. However, the shareholder advocated the thought that what was given was in the nature of ICD, and the same could not be treated as a loan. This thought was refuted by ITAT on the ground that the parties to the transaction were related and the same was not at arm’s length. Hence, the ICD could not be distinguished from loan and qualified as deemed dividend.
Thus, ICD is eligible to fall under “loan and advances” for the purpose of section 2(22)(e).
