Inter-corporate deposits not deemed dividend under tax law

The Tribunal held that the Assessing Officer's addition of Rs. 69,60,262/- as deemed dividend under section 2(22)(e) was not justified. It found that inter-corporate deposits are distinct from loans or advances and that the lending company's money lending activities constituted a substantial part of its business, meeting the exception under section 2(22)(e)(ii). The appeal by the revenue was dismissed, and the CIT(A)'s decision was upheld.

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Issues Involved:
1. Whether the addition made by the Assessing Officer (AO) treating the loan as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 was justified.
2. Whether the business of the lending company qualifies as "substantial part of the business" under section 2(22)(e)(ii) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Addition as Deemed Dividend under Section 2(22)(e)
The primary issue in this appeal is the AO's addition of Rs. 69,60,262/- as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The AO considered the inter-corporate deposits received by the assessee from its subsidiary, Ernst & Young Merchant Banking Services Pvt. Ltd. (EYMBSPL), as loans or advances, leading to the addition based on the accumulated profits of EYMBSPL. The assessee contested this addition, arguing that inter-corporate deposits are distinct from loans or advances and should not attract the provisions of section 2(22)(e). The CIT(A) deleted the addition, agreeing with the assessee's argument and referencing the legislative intent and judicial precedents, including the ITAT Kolkata decisions in similar cases.

Issue 2: Substantial Part of Business
The second issue is whether the lending company, EYMBSPL, engaged in money lending as a substantial part of its business. The CIT(A) and the Tribunal examined the business activities of EYMBSPL and found that a significant portion of its income (45.45% in the relevant year) and funds (82% of total funds) were derived from money lending activities. The Tribunal referred to the legislative language in section 2(22)(e)(ii), which exempts loans or advances made in the ordinary course of business where lending is a substantial part of the company's business. The Tribunal upheld the CIT(A)'s finding that EYMBSPL's money lending activities constituted a substantial part of its business, thus falling within the exception provided in section 2(22)(e)(ii).

Conclusion:
The Tribunal concluded that the AO's addition of Rs. 69,60,262/- as deemed dividend under section 2(22)(e) was not justified. It held that inter-corporate deposits are distinct from loans or advances and that EYMBSPL's money lending activities constituted a substantial part of its business, thus qualifying for the exception under section 2(22)(e)(ii). The appeal by the revenue was dismissed, and the order of the CIT(A) was upheld.

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