2016 (7) TMI 62 - HC - Income Tax

Interpretation of Income Tax Act: Loan from money lending company exempt under Section 2(22)(e)

Commissioner of Income Tax, Kolkata Versus R.D. Fan Limited

The High Court of Calcutta dismissed the revenue's appeal in a case concerning the interpretation of Section 2(22)(e) of the Income Tax Act. The Court ... Deemed dividend u/s 2(22) - Held that:- All that was required to be established by the assessee was that the money obtained by way of loan from M/s. DBPL was not hit by the mischief of Section 2(22)(e). In order to do so, the assessee relied on 2(22)(e)(ii) which provides as follows: “ (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;” Mr. Bhowmick did not dispute that the findings, quoted above, do justify an inference that money lending is a substantial part of the business of M/s. DBPL. - Decided in favour of assessee Issues: Interpretation of Section 2(22)(e) of the Income Tax Act regarding loans obtained by the assessee from a company engaged in money lending business.The High Court of Calcutta addressed the appeal against a judgment by the Income Tax Appellate Tribunal related to the assessment year 2006-07. The Tribunal had allowed the appeal by the assessee, stating that the loan obtained from a company did not fall under Section 2(22)(e) of the Income Tax Act due to an exception. The revenue challenged this decision, raising the question of whether the money lending was a substantial part of the company's business. The Court noted that the Tribunal found the company was engaged in money lending, and since the revenue department accepted this as a major source of income in the assessment order, they could not take a contrary view later. The Tribunal also considered the company's memorandum authorizing money lending and the RBI guidelines regarding the principal business of the company. The Court confirmed that the findings were not disputed and that the money lending was indeed a substantial part of the company's business, as required by Section 2(22)(e)(ii). Therefore, the appeal was dismissed in favor of the assessee.In this judgment, the High Court analyzed the provisions of Section 2(22)(e) of the Income Tax Act in the context of a loan obtained by the assessee from a company engaged in money lending business. The Court emphasized the importance of establishing that the loan fell within the exception provided in the said section, which exempts loans made in the ordinary course of business where money lending is a substantial part of the company's business. The Court relied on the findings of the Tribunal, which confirmed that the company in question was indeed involved in money lending activities, as evidenced by its memorandum and the acceptance of this source of income by the revenue department. The Court highlighted that the RBI guidelines were also considered, emphasizing the significance of money lending as a substantial part of the company's business to qualify for the exception under Section 2(22)(e)(ii).Overall, the judgment underscores the importance of interpreting and applying the provisions of the Income Tax Act, specifically Section 2(22)(e), in cases involving loans obtained from companies engaged in specific business activities such as money lending. The Court's analysis focused on the factual findings regarding the nature of the company's business and the acceptance of money lending as a significant source of income, ultimately leading to the dismissal of the revenue's appeal. The decision highlights the need for a thorough examination of the business activities of companies when determining the applicability of tax provisions related to loans and advances, ensuring compliance with the legal framework and relevant guidelines.