TaxTMI 
TaxTMI 
2005 (5) TMI 579
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....end under section 2(22)(e) of the Income-tax Act, 1961. (ii)On the facts and circumstances of the case and in law the ld. CIT(A) has erred in admitting the new evidence in contravention of Rule 46A of the IT Rules. (iii)While doing so the CIT(A) has erred further in holding the view that lending and investment activity was substantial part of the business of the lender company M/s. Oscar Laboratories P. Ltd." 3.1 As all the above three grounds are inter-related and constitute single issue, so we are taking them up together for our consideration. 4. The relevant facts, briefly stated, are that the assessee is an investment company and listed on stock exchange. The assessee was having financial transactions with M/s. Oscar Laboratories (P.) Ltd. (hereinafter referred to as "OLPL"), a closely held company within the same group. The Assessing Officer made an addition of Rs. 3,39,37,000, being amount of loan, raised by the assessee-company from OLPL treating such loan as deemed dividend under the provisions of section 2(22)(e) of the Income-tax Act, 1961 (for short 'Act') because one common shareholder, namely, M/s. Jupiter Investments (P.) Ltd. holding 21.36 per cent shares....
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....the other hand, argued as under : (i)The assessee-company is a public limited company listed in Stock Exchange in which public are substantially interested and, therefore, provisions of section 2(22)(e) of the Act are not applicable. (ii)M/s. Jupiter Investments (P.) Ltd. became a common shareholder in both the companies, i.e., borrower company (the assessee) and the lender company (OLPL) on 9th January, 1996. Hence, amount of loan outstanding in books of the assessee before that date could not be treated as deemed dividend. In support of his contention he relied on the decisions in the cases of Rajagiri Rubber & Produce Co. Ltd. v. CIT [1996] 219 ITR 611 (Ker.) and CIT v. H.K. Mittal [1996] 219 ITR 420 (All.). (iii)Since OLPL, the lender company, gave advances/loans in its ordinary course of business activities, hence such loans/advances were not to be treated as deemed dividend being specifically excluded from the deemed dividend as per the provisions of sub-clause (ii) of section 2(22)(e) of the Act. With reference to this contention, he drew our attention to the assessment order of OLPL for the relevant assessment year, financial statements and activity-wise financial ....
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....because the provisions of section 2(22)(e) are attracted when any payment is made by a company, not being a company in which the public are substantially interested, by way of advance or loan to any concern in which a shareholder, who holds not less than 10 per cent of voting power of such company, is a member and has a substantial interest in the said concern. In clause (a) of Explanation 3 to section 2(22)(e), we find that the "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company. Since OLPL is closely-held company which has advanced loan to a concern, i.e., assessee-company and the common shareholder M/s. Jupiter Investments (P.) Ltd. holds specified percentage of shares of both companies, therefore, the transaction of loan/advance in the present case can be treated as deemed dividend to the extent of accumulated profits in the books of account of the OLPL. 10. M/s. Jupiter Investments (P.) Ltd. became a shareholder of both companies on 9-1-1996 as evidenced by records of Registrar of Companies and, therefore, amount of loans taken by the assessee-company from OLPL up to the date cannot be treated as deemed divi....
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....03 31,36,38,957 Profit before Tax 8,30,77,769 (5,17,625) 8,25,60,144 Pages 13 to 16 of the Paper Book contain details of interest received by the lender company and pages 17 to 19 contain details shareholders of OLPL. These details indicate that OLPL received major portion of interest from companies which are shareholders of OLPL and further such companies appear to be interlinked because of common addresses, common name etc. From the details of investment at pages 30 to 33 it is observed that OLPL has made investment in the shares of the listed companies of the pharma sector and in particular of Ranbaxy Laboratories Ltd. whose associated companies have also paid interest to OLPL (Serial Nos. 14 to 15 of page No. 14 of the Paper Book). The investment in unquoted shares has been made mostly in the share capital of closely-held private limited companies only which also appear to be inter-connected, directly or indirectly. Unsecured loans/secured loans are also from the companies (page 28 of the paper book) however party-wise details are not in the records. The observations of the Auditors in clauses 7, 8, 9 and 13 of their report (page 22/23 of Paper Book), being re....
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....iv) - If the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been made therein, and also whether the shares, securities, debentures and other investments have been held by the company in its own name except to the extent of exemption, if any, granted under section 49 of the Companies Act, 1956." Further the Assessing Officer of OLPL has, in the assessment order, dealt with the aspect of investment in the shares by OLPL with limited objec- tives of treatment of profits on sale of shares either as capital gain or business profits, and in the process he has not given any finding regarding borrowing and lending of money by OLPL being an activity carried on by OLPL in the ordinary course of its business. The conclusions of the Assessing Officer that company was dealing or trading in shares and not holding shares as investment are not supported by the facts and material on record as narrated hereinbefore. Merely holding of investments per se will not make a company an investment company unless it was the business of the company to hold the investments or deal in these investments in a systematic or organized manner. Ev....
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.... clearly established from the activity-wise profit results at page 43 of Paper Book. Hence, the activities of borrowings and lending of money on interest, that too, within the group/associated companies cannot constitute an activity in the ordinary course of business and the financial results alone of such transactions cannot be a determinate factor if all other factors required to constitute a business in the real sense are absent. Earning of income from financing/investment activities in such circumstances and in particular situation where such transactions give an impression of facilitation and rotation of money within a specific group of entities would be merely an incidental and natural off shoot of deployment of borrowed funds and hence cannot be termed as a result of organized business activity. 12.5 All activities carried on by the lender company need to be considered to determine the ordinary business of the company. The lender company, no doubt, is engaged in pharma business in an organized manner as is evident from the financial statements and activity-wise results filed by the assessee. The turnover of pharma business is quite substantial and merely on the basis of l....
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....s alone is not sufficient and conclusive to treat the financial investment activities of OLPL as being carried out in the ordinary course of its business and forming a substantial part of business. 13. In view of the above facts and provisions of law we summarize our findings as under : (i)The loans/advances raised by the assessee-company would fall within the ambit of provisions of section 2(22)(e) as the lender company is a closely-held company in which public are not substantially interested. (ii)The objects clause of memorandum of association of a company is not as conclusive proof for determining the nature of activity as substantial part of business as it only enables the company to carry out activities specified therein. (iii)The pattern or trend of capital employed, utilization of assets and composition of income over a period of years and not of one year shall be the factor that will influence the determination of activity substantial as part of business. Significance/contribution of each activity would play a crucial role in deciding the business carried on by the company in ordinary course and substantial part thereof, even if such contribution is a negative ....
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....sessment year 1996-97, the only effective ground taken is that the ld. CIT(A) has erred in upholding the loans raised from M/s. Oscar Pharmaceuticals (P.) Ltd. (OPPL) as deemed dividend under section 2(22)(e) of the Act and thereby confirming the addition of Rs. 23,822. The facts relating to this issue are identical with those as narrated in the Revenue's appeal No. 2703/M/2000. The Assessing Officer has treated Rs. 23,822 as deemed dividend out of the amount of loans raised by the assessee from lender company OPPL being to the extent of accumulated profits in the books of account of the lender company. The ld. CIT(A) confirmed the addition by holding that after treating the loan as deemed dividend one need not come to the last day of the accounting period because section 2(22)(e) requires that whenever loan is advanced to a shareholder or to a concern, accumulated profits up to the date of such advance must be ascertained and since on the date of loan the loss etc. was not determinate, therefore, the accumulated profits were taken at Rs. 23,822 and amount of loan to this extent was treated as deemed dividend. 15. With regard to the said addition the ld. Authorised Representativ....
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....Ranchi Club Ltd. [2001] 247 ITR 209 decided the issue on facts and did not declare any law. Subsequently, in the matter of CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1, Larger Bench of Hon'ble Supreme Court held that interest under sections 234A, 234B and 234C was mandatory in nature and this decision was affirmed by the Hon'ble Supreme Court in the matter of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 and again in the matter of CIT v. Santram Mangatram Jewellers [2003] 264 ITR 564 (SC). In the matter of Vinod Khurana v. CIT [2002] 253 ITR 578 , Hon'ble Punjab and Haryana High Court considered the issue of relationship between assessment order and notice of demand and after following the decision of Hon'ble Supreme Court in the matter of Kalyan Kumar Ray v. CIT [1991] 191 ITR 634 held that demand notice is a part of assessment order and conclusion of interest is mentioned on the calculation sheet attached with notice of demand and signed by Assessing Officer, then it would be deemed that Assessing Officer had charged the interest according to law. The interpretation of sections 234A, 234B and 234C has considerably changed after decision of Hon'ble Supreme Court in Anjum M.H....