2014 (12) TMI 442 - HC - Income Tax

Court rules lending activity not substantial for exclusion under Income Tax Act.

Shashi Pal Agarwal Versus Commissioner of Income Tax

The High Court dismissed the appeal under Section 260A of the Income Tax Act, 1961, regarding the addition of a deemed dividend to the assessee's total ... Addition made to total income – Addition treated as dividend income u/s 2(22)(e) - Whether the Tribunal was justified in drawing an adverse conclusion against the appellant by overlooking the specific finding of the CIT (A) that both the lending companies have advanced 69% and 38% of their total capital/assets to the appellant as interest bearing loan, which forms substantial part of the business of the lending company - Held that:- The Tribunal was rightly of the view that the AO had correctly treated the advance or loan given to the assessee by two private limited companies as deemed dividend – assessee held more than 10% of the shareholding of two private limited companies, namely Kukki Color Photos Pvt. Ltd. and Kukki Color Prints Pvt. Ltd. - The assessee had received loans and advances from the two companies during the assessment year - neither of the companies lent any money to any entity, save and except to the assessee - The lending of money was not a part of the business of the Company, nor for that matter, could it constitute a substantial part of the business - there was no organized course of activity involving dealings with anyone else, save and except for the assessee - The assessee was unable to establish that the exclusion was attracted – thus, the order of the Tribunal is upheld, as such no substantial question of law arises for consideration – Decided against assessee. Issues:1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividend.2. Application of exclusionary clause (ii) of Section 2(22)(e) to determine if a loan is made in the ordinary course of business.Analysis:1. The case involved an appeal under Section 260A of the Income Tax Act, 1961, regarding the addition of a deemed dividend to the total income of the assessee. The Assessing Officer treated a specific amount as deemed dividend under Section 2(22)(e) of the Act, leading to subsequent appeals and judgments.2. The exclusionary clause (ii) of Section 2(22)(e) was a crucial aspect in determining whether the loan given to the assessee by two private limited companies qualified as a deemed dividend. The clause requires that the loan must be made in the ordinary course of the company's business, and the lending of money should be a substantial part of the company's business.3. The High Court emphasized that for the exclusionary provision to apply, the lending of money must constitute a substantial part of the company's business. This determination is based on factual analysis, considering whether the lending activity is a significant aspect of the company's operations.4. In this case, it was established that the assessee held more than 10% shareholding in the lending companies and received loans exclusively from them. The court found that the lending activity was not a part of the company's business, and it did not constitute a substantial part of their operations.5. The court clarified that the term 'substantial part of the business' implies a significant involvement in lending activities by the company. The absence of organized lending activities with entities other than the assessee indicated that the exclusionary clause was not applicable in this scenario.6. Ultimately, the court dismissed the appeal, stating that no substantial question of law arose from the case. The decision was based on the failure to establish that the exclusionary provision of Section 2(22)(e) applied, leading to the restoration of the Assessing Officer's order treating the loan as deemed dividend.