In a judgment that could have widespread impact on India Inc, the Mumbai Income Tax Tribunal has ruled that loans and advances extended by one group company to another will be taxed.

These loans and advances will be treated as "deemed dividend" and be taxed at the hands of recipients.

In its order passed in a case involving the Ahmedabad-based MB Stock Holdings Pvt Ltd last month, the tribunal has stated that any loans and advances transferred from one group company to other even after the completion of a financial year, could be taxed at the hands of the recipient company.

This means that the assessment year to compute the accounts of the company receiving such loans/advances would get extended up to the date of distribution or payment of such advances.

Usually, such advances are treated as "accumulated profits" for the recipient company.

Theoretically, if company A transfers Rs 20 crore (Rs 200 million) to its subsidiary or another group company B, which had posted Rs 2 crore (Rs 20 million) profit for the financial year 2004-05, following this judgement, after March 31, 2005, the I-T department will levy tax on an accumulated profit of Rs 22 crore (Rs 220 million) for company B for the assessment year 2005-06.

Normally, the company accounts are audited for the balance sheet prepared till March 31 for any financial year.

However, following this judgment, the accounting year can be extended up to the date of transfer of such loans/ advances even after March 31 for taxation purpose.

According to tax consultants, this could have wider ramifications for all those companies, which have extended loans and advances to their group companies out of their profits to avoid paying dividends to shareholders or even attempting to depress profits.

Earlier, this clause was inserted as an amendment to the Income Tax Act in 1987 as Section 2(22)(e) with reference to a Supreme Court case.

"However, the companies used to ignore such a requirement while preparing their accounts. In case any demand was raised by the income tax department, they appeal at various tribunals," pointed out a source.