2014 (10) TMI 691 - AT - Income Tax

Tribunal Misapplied Tax Law: Loans Deemed Dividends

The High Court found that the Tribunal misapplied the provisions of section 2(22)(e) of the Income-tax Act, 1961. The Court held that the loans advanced ... Deemed dividend u/s 2(22)(e) – Loans and advances received - substantial part of business in money lending - ordinary course of business of the company - Held that:- If the assessee receives loans or advances from a company, in which it has substantial interest, the same loan and advances would be treated as deemed dividend in the light of provisions of section 2(2)(e) of the Act - But there are exceptions in this provision and as per exclusory clause (ii), if the assessee establish that advance or loan made to shareholders/assessee by a company in the ordinary course of its business and the lending of money is substantial part of business of the company - Loan and advances by the company would not be deemed dividend - the advance or loan was given to the assessee in the ordinary course of its business - the assessee has failed to establish that substantial part of business of the company is money lending - where the money lending business of the company constitutes less than 20% of its total business, lending of money was not substantial part of business of the company – relying upon CIT vs. Parle Plastics Ltd. and Another [2010 (9) TMI 726 - BOMBAY HIGH COURT] - expression substantial part does not connote an idea of being the “major part” or the part that constitutes majority of the whole - the capital employed by a company for carrying on a particular division of its business as compared to the total capital employed by it, would also be relevant while considering whether the part of the business of the company constitutes “substantial part of the business” of the company. There should not be any controversy that “substantial part of business” is not equivalent to the word “major part of business”, as the Legislature has not used the words “major part of business” in place of “substantial part of business” - But the Legislature has consciously used the words “substantial part of business” which means that any business of a company which the company does not regard as small, trivial, or inconsequential as compared to the whole of the business is substantial business - if particular per cent of capital of the company is employed in the money lending business, the company can be called to have substantial part of business in money lending - In the light of Explanation 3(b) below section 2(22)(e) of the Act, where a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of that concern - if 20% of the capital of the company is deployed in money lending business of the company, the company shall be held to have a substantial part of business in money lending. Two companies i.e. Kukki Color Photos Pvt. Ltd. and Kukki Color Prints Pvt. Ltd., in which the assessee has more than 10% shareholding and has substantial interest therein, have given loan and advance to assessee only - Except the assessee, they have not given any loan or advance to any other person - the company has substantial part of business in money lending - If the company is engaged in advancing loans to different persons apart from assessee and fulfils the conditions of percentage of capital employed in money lending business, the company has substantial part of business in money lending - loans and advances were given only to the assessee and not to others, therefore, the company cannot be called to have a substantial part of business in money lending - Thus, the second ingredient of exclusion clause (ii) contained in section 2(22)(e) of the Act is not satisfied and the assessee cannot get the benefit of exceptional clause - the A.O. has rightly treated the advance or loan given to the assessee by the company i.e. Kukki Color Photos Pvt. Ltd. and Kukki Color Prints Pvt. Ltd. as deemed dividend - CIT(A) who has not examined all the aspects while granting relief to the assessee – the order of the CIT(A) is set aside and the matter is to be remitted back to the AO – Decided in favour of revenue. Issues Involved:1. Disallowance of deduction under section 80IB of the Income-tax Act, 1961.2. Addition made under section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 80IB:This issue was not elaborated upon in the judgment, indicating that the primary focus was on the second issue.2. Addition under Section 2(22)(e) - Deemed Dividend:The main contention in this issue was whether the loans advanced to the assessee by two companies could be considered as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.Tribunal's Initial Decision:The Tribunal initially held that the loans advanced were not in the ordinary course of business as the companies were not engaged in money lending business. This decision was challenged by the assessee in the Hon'ble High Court of Allahabad.High Court's Observations:The High Court found merit in the assessee's contention that the Tribunal misapplied its mind to the ingredients of section 2(22)(e). The High Court noted that:- The first ingredient of the exclusionary clause (ii) of section 2(22)(e) does not require the company to be engaged in money lending business, but rather that the loan was made in the ordinary course of business.- The second ingredient requires that lending of money should be a substantial part of the business of the company. This determination is factual and was not adequately considered by the Tribunal.The High Court restored the matter to the Tribunal to consider whether the second ingredient of clause (ii) was fulfilled, specifically if lending money was a substantial part of the business.Tribunal's Reconsideration:Upon reconsideration, the Tribunal examined the balance sheets of the two companies, Kukki Color Photos Pvt. Ltd. and Kukki Color Prints Pvt. Ltd.:- Kukki Color Photos Pvt. Ltd.: Loans constituted 69.87% of total assets.- Kukki Color Prints Pvt. Ltd.: Loans constituted 38.67% of total assets.Arguments by the Assessee:The assessee argued that 'substantial part of business' is not defined in the Act and should not be equated with 'major part of business.' The assessee cited the Bombay High Court's judgment in CIT vs. Parle Plastics Ltd., which held that 'substantial part' does not mean 'major part' and that if more than 20% of the capital is employed in money lending, it should be considered substantial.Arguments by the Revenue:The Revenue contended that substantial part of business should be evaluated based on loans given to parties other than the assessee. If the loans were only to the assessee, it could not be considered substantial. The Revenue relied on the judgment of the jurisdictional High Court in Krishna Gopal Maheshwari vs. ACIT, which emphasized that substantial business involves regular and diversified lending activities.Tribunal's Final Decision:The Tribunal concluded that:- The companies only lent money to the assessee and not to any other parties.- Substantial part of business in money lending requires lending to various persons, not just one.- Excluding loans to the assessee, the companies did not engage in substantial money lending activities.Thus, the Tribunal held that the second ingredient of the exclusion clause (ii) of section 2(22)(e) was not satisfied. Consequently, the loans advanced to the assessee were deemed dividends under section 2(22)(e), and the appeal of the Revenue was allowed.Conclusion:The Tribunal set aside the order of the CIT(A) and restored the Assessing Officer's decision to treat the loans as deemed dividends, thereby allowing the Revenue's appeal. The judgment emphasized the importance of diversified lending activities to qualify as substantial part of business under section 2(22)(e).