2014 (4) TMI 780 - AT - Income Tax

Tribunal directs detailed review of loan transaction to determine ordinary course of business.

M/s. Meghvarsha Securities P. Ltd. Versus Income Tax Officer

M/s. Meghvarsha Securities P. Ltd. Versus Income Tax Officer - TMI Issues:Applicability of section 2(22)(e) of the Act in transactions with subsidiary company.Analysis:The judgment pertains to an appeal by an assessee company against the order passed by the CIT(A)-8, Mumbai regarding the applicability of section 2(22)(e) of the Act in transactions with its subsidiary company, M/s. Bankers Shares and Stock Brokers Pvt. Ltd. The AO issued a show cause notice questioning the treatment of accumulated profits as deemed dividend under section 2(22)(e) due to an unsecured loan received by the assessee from its subsidiary. The assessee contended that the loan was given as an inter corporate loan in the ordinary course of business, falling under exception (ii) of section 2(22)(e). The AO argued that the loan was not given in the ordinary course of business, as the lending company was primarily engaged in share trading and lacked a license for financing activities. The CIT(A) upheld the AO's order, emphasizing that the main business of the lending company was share trading, not money lending.The assessee appealed to the Tribunal, presenting additional evidence to support its claim that the loan was given in the ordinary course of business. The Tribunal considered the submissions and the judgment of the Hon'ble Bombay High Court, which highlighted the need to assess various factors to determine if a part of a company's business is substantial. The Tribunal found that the CIT(A) did not adequately consider the evidence provided by the assessee, such as the Balance Sheet of the subsidiary company. The Tribunal emphasized that to establish the loan as a substantial business activity, the nature of the lending company's business must be assessed, including its Memorandum and Articles of Association.The Tribunal set aside the matter to the file of the CIT(A) for a detailed analysis of whether the loan was given in the ordinary course of business and constituted a substantial activity for the lending company. The Tribunal directed the CIT(A) to obtain and review the details of the subsidiary company to make a more informed decision. The assessee was granted a reasonable opportunity for a hearing in this regard. The appeal filed by the assessee was treated as allowed for statistical purposes, emphasizing the need for a thorough assessment of the business activities involved in such transactions.