2019 (6) TMI 694 - AT - Income Tax

Tribunal rules loans were not deemed dividends, supports business purpose, directs deletion of additions.

The tribunal concluded that the Assessing Officer was not justified in making additions under section 2(22)(e) as deemed dividends. The loans and advances ... Deemed dividend u/s 2(22)(e) - loan or advance given in return to an advantage conferred upon the company by such shareholder - HELD THAT:- We observe that 69.71% of the total assets of SDPL as on 31.3.2015 and 32.45% of the total assets of AIPL as on 31.3.2015 were deployed by the above lender companies by way of total loans and advances. By no means, the deployment of about 69.71% and 32.45% of the total assets into the business of lending could be regarded as an insignificant part of the business of SDPL and AIPL. We find that find that the SDPL had received by way of interest of ₹ 1,67,16,067 while its total profit was ₹ 50,48,266 excluding interest income earned by SDPL by way of interest, Similarly AIPL has earned interest income of ₹ 17,68,467 and other business had resulted into insignificant income. Therefore, we are of the considered opinion that considering the relevant factors and as ratio laid down by Hon’ble Bombay High Court in CIT VERSUS PARLE PLASTICS LTD. [2010 (9) TMI 726 - BOMBAY HIGH COURT] , the lending of money was substantial part of the business of the both lender companies under consideration from whom the assessee has received loans and advances. Since lending of money was a substantial part of the business of SDIPL and AIPL, the money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it has to be excluded from the definition of “dividend” by virtue of clause (ii ) of Section 2(22) of the Act. We therefore, hold accordingly. Issues Involved:1. Confirmation of addition by applying provisions of section 2(22)(e) of the Income Tax Act, 1961.2. Applicability of exemption under sub-clause (ii) of section 2(22)(e).3. Determination of whether lending of money is a substantial part of the business of the companies involved.4. Impact of interest payments on the applicability of section 2(22)(e).Issue-wise Detailed Analysis:1. Confirmation of Addition by Applying Provisions of Section 2(22)(e):The primary issue in this case was whether the additions made by the Assessing Officer (AO) under section 2(22)(e) of the Income Tax Act, 1961, were justified. The AO had treated loans and advances received by the assessee from two companies, Shreem Design & Infrastructure Pvt. Ltd. (SDIPL) and Aatrey Infrastructure Pvt. Ltd. (AIPL), as deemed dividends based on the assessee's shareholding in these companies and the accumulated profits of these companies.2. Applicability of Exemption Under Sub-Clause (ii) of Section 2(22)(e):The assessee argued that the loans and advances received were exempt under sub-clause (ii) of section 2(22)(e), which excludes advances or loans made in the ordinary course of business where lending of money is a substantial part of the business of the company. The assessee contended that both SDIPL and AIPL were engaged in the business of money lending, as evidenced by their financial ratios and the Memorandum of Association (MOA).3. Determination of Whether Lending of Money is a Substantial Part of the Business:The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] had rejected the assessee's claim on the grounds that the main objects of the companies did not include money lending, and no licenses for money lending were obtained. However, the tribunal observed that the financial ratios indicated that a substantial part of the business of both companies involved lending money. For SDIPL, the percentage of loans and advances to total assets was 69.71%, and for AIPL, it was 32.45%. The tribunal referred to Explanation 3(b) to section 2(22)(e) and section 2(32) of the Act, which define 'substantial interest' as not less than 20% of the income or voting power, respectively. Thus, the tribunal concluded that the lending activities of both companies constituted a substantial part of their business.4. Impact of Interest Payments on the Applicability of Section 2(22)(e):The assessee also argued that since interest was paid on the loans at a market rate of 9%, the loans were not gratuitous and did not confer any individual benefit to the assessee. The tribunal supported this view, citing the decision of the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT, which held that loans given for consideration beneficial to the company do not fall under the purview of deemed dividends. The tribunal noted that the assessee had paid interest and deducted TDS, indicating that the loans were not gratuitous.Conclusion:The tribunal concluded that the AO was not justified in making additions under section 2(22)(e) as deemed dividends. The loans and advances received by the assessee from SDIPL and AIPL were in the ordinary course of business, where lending of money was a substantial part of their business. Additionally, the interest payments made by the assessee further supported the view that the loans were not gratuitous. Therefore, the tribunal directed the deletion of the additions made by the AO, allowing the appeal of the assessee.