TaxTMI 
TaxTMI 
2014 (8) TMI 866
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....reserve of Rs. 2,62,817/- was liable to be excluded from accumulated profit as it was merely a book entry. 5. Because the learned 1st appellate authority erred in confirming the addition of Rs. 11,245/- being interest paid by the Appellant on loan obtained Sarnath Finance Limited for business purposes. Moreover this amount has already been subjected to tax in the hands of Sarnath Finance Limited and hence the amount has been subjected to double taxation. 6. Because the learned 1st appellate authority erred in confirming the addition of Rs. 68,879/- being interest paid by the Appellant on loan obtained from persons covered u/s 40A(2)(b) of the I.T. Act, 1961 as the rate of interest was neither excessive nor unreasonable having regard to market rate of interest prevailing at the relevant time. Moreover this amount has already been subjected to tax in the hands of various depositors and hence the amount has been subjected to double taxation. 7. Because the learned lower authority ought not to have confirmed the addition of Rs. 42,000/- under the heading "Unexplained House Hold Expenses." 8. Because....
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....rongly referred to provisions of sub clause (iii) in place of provisions of sub clause (ii). Since the loans & advances were given to the assessee in the ordinary course of business of the company i.e. SFL, as they are engaged in the finance business, the loans & advances taken by the assessee cannot be treated to be deemed dividend in view of sub clause (ii) of section 2(22)(e) of the Act as the company was engaged in the money lending business. Moreover, the accumulated profits are not sufficient to meet the quantum of loans & advances. The explanations furnished by the assessee were duly examined by the Assessing Officer but he was not convinced with it and treated the loan received from SFL as deemed dividend and made an addition of Rs. 21,20,000/- under the head 'income from other sources'. The relevant observations of the Assessing Officer are extracted hereunder for the sake of reference: "3.3 The provisions of sec 2(22(e) say that any payment by a company, not being a 'company in which the public are substantially interested', of any sum ( whether as representing a part of the assets of the company or otherwise) made after the 31st day of the M....
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.... without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more co-operative societies; (b) if it is a company which is not a "private company as defined in the Companies Act, 1956 (1 of 1956,) and the conditions specified either in item (A) or in item (B) are fulfilled, namely: (A) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act,1956 (42 of 1956), and any rules made there under; (B) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participants in profits) carrying not less than f....
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.... Total 5,24,76,926 5,49,19,643 During the year under consideration investment in loans and advances was only at Rs. 56,64,659/-which is only 10.79% of total investment of Rs. 5,24,76,926/. Since the company is mainly engaged in advancing of hire purchase of Transport vehicles, only 10.79% investment in loans and advances cannot be termed as substantial part of business of the company. During hearing, the counsel orally argued that giving loan and advances together with stock on hire Constitute the main business of the assessee in terms of purpose for which company was formed. This contention of the assessee is not tenable in view of the facts and figures mentioned above. It would be relevant to refer the meaning of 'substantial' envisaged by the statute in clause (b) of explanation 3 to sec. 2(22)(e) reproduced as under :- "a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern." Since the investment ....
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....s on the dates of loans taken by the assessee. For computation of deemed dividend it is reasonable to compute the accumulated profit and deemed dividend as on the dates of advances calculated as under Date Amt of loan Accumulated profit Deemed dividend Closing Balance of Accumulated Profit 28.05.02 12,50,000 Op. balance 16,09,227 On pro rata basis out of new accumulated profit of Rs.l4,45,970/-F.Y.02-03 2,29,771 Total 18,38,998 12,50,000 5,88,998 04.06.2002 70,000 Op balance 5,88,998 On pro rata basis out of new accumulated profit of Rs. 14,45,970/-F.Y.02-03 27,731 Total 6,16,729 70,000 5,46,729 31.07.02 3,00,000 Op. balance 5,46,729 On pro rata basis out of new accumulated profit of Rs. 14,45,970/- F.Y.02-03 2,25,809 Total 7,72,538 3,00,000 4,72,538 31.08.2002 5,00,000 Op. balance 4,72,538 ....
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....re in loans and advances and hence money lending is not the main business of the company from which the loan was taken namely SFL. The assessee on the other hand states that 92% of money is utilized towards lending. The statement of the assessee is misleading. The assessee is mis-representing the facts. This would be clear from the fact that while submitting in appeal No.-81, 82 and 83/DC Raqnge-II, Bly/02-03 for the assessment years 1996-97 to 1999-2000 in the case of appeal u/s 8(2)/10 of the Interest Tax Act, 1974 in the case of Sarnath Finance Ltd. the same AR is on record stating that the hire charges cannot be termed as interest. That statement of his has been accepted by my predecessor in office vide his order dated 09-09-2002. In the above appeals after accepting the said submission my predecessor in office has held that SFL was not liable for payment of interest tax. Thus interest would be interest wherever it is sought to be taxed. It cannot be interest in one place and something else in the other. If it is being shown as interest, here to substantiate that the assessee is in the money lending business then it was interest, which was taxable under the Interest Tax Act. By....
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....e been rightly applied. The addition is being rightly made. It is confirmed." 5. Aggrieved, the assessee has preferred an appeal before the Tribunal. Instead of advancing the oral arguments, the learned counsel for the assessee Shri P. K. Kapoor, C.A. has filed written submissions, which were taken on record. Through the written submissions, the main thrust of arguments of the appellant is that he has received the sums in question from SFL as a loan in the ordinary course of business as the lending of money is substantial part of business of the said company. It was also contended on behalf of the assessee that the CIT(A) has placed reliance upon the orders of CIT(A) pertaining to assessment year 1996-97 to 1999-2000 in the case of SFL in which the hire charges were not termed to be interest under the Interest Tax Act. But this order of CIT(A) was reversed by the Tribunal and matter was restored back to Assessing Officer to readjudicate the issue in the light of the directions in the case of Commercial Motor Finance Ltd. In the case of Commercial Motor Finance Limited, the matter has travelled upto Hon'ble High Court and the Hon'ble High Court has held that the transacti....
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....t is improper to hold that lending of money is substantial part of the business of SFL and the assessee gets the protection of sub clause (ii) of section 2(22)(e) of the Act. The learned D.R. further contended that the activity of making investment in hire purchase of vehicles are all together different activities than the ordinary lending of money. In case of hire purchase, the company gets all sort of security of the advanced amount as the vehicle was registered in the name of the company and the option was given to the hirer only to get the vehicle registered in his own name on payment of last installment but in the case of ordinary lending of money to the borrower, no such type of arrangement was made. Therefore, the money lending business cannot be equated with the hire purchase business and the Revenue authorities have rightly held the loan received by the assessee as deemed dividend as lending of money is not substantial part of the business of SFL. 7. Having given a thoughtful consideration to the rival submissions and from a careful perusal of orders of the lower authorities and the written submissions and the other documents placed on record, we find that undisputedly ....
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..../DC Range- II, Bly/02-03 for the assessment years 1996-97 to 1999-2000 in the case of appeal u/s 8(2)/10 of the Interest Tax Act, 1974 in the case of Sarnath Finance Ltd. the same AR is on record stating that the hire charges cannot be termed as interest. That statement of his has been accepted by my predecessor in office vide his order dated 09-09-2002. In the above appeals after accepting the said submission my predecessor in office has held that SFL was not liable for payment of interest tax. Thus interest would be interest wherever it is sought to be taxed. It cannot be interest in one place and something else in the other. If it is being shown as interest, here to substantiate that the assessee is in the money lending business then it was interest, which was taxable under the Interest Tax Act. By conveniently stating there that it was not interest and having his argument accepted the AR cannot be turn around here and say that it is interest and that the SFL is in the business of money lending. In fact in his submission before my predecessor in office to describe the nature of hirecharges he submitted as under: - "Next a Hire purcha....
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....abad High Court in favour of the assessee by following the judgment of the Hon'ble Apex Court rendered in the case of Sundaram Finance Ltd. vs. State of Kerala and Other, AIR 1966 SC 1178. For the sake of ready reference, we reproduce the relevant paras of the judgment of Hon'ble Apex Court reproduced by the Hon'ble Allahabad High Court in the said judgment. These paras are para No.23, 24 and 28 which are reproduced by the Hon'ble Allahabad High Court in para 10 of its judgment and hence, we reproduce para 10 of the judgment of the Hon'ble Allahabad High Court:- "10. In the case of Sundaram Finance Ltd. (supra) the Hon'ble Supreme Court considered the distinction between the hire purchase transaction and financing transaction and held in paragraphs 23, 24 and 28 as under: "23. A hire-purchase agreement is normally one under which an owner hires goods to another party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when the hire-rental payments have reached the hire-purchase price stipulated in the agreement. B....
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....ich become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments are paid and not before. In 'such a hire-purchase agreement there is no agreement to buy goods; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of h....
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....on'ble Allahabad High Court, in which three paras of the judgment of the Hon'ble Apex Court have been reproduced, we find that as per this judgment of the Hon'ble Apex Court, all the hire purchase transactions are not uniform and same and they can be distinguished as per facts of each case. Hence, we now examine the facts of the present case. In the present case, the audited balance sheet of SFL for the present assessment year is appearing at pages 9 to 28 of the paper book and on page No.16 of the paper book is Schedule III of the balance sheet. As per this Schedule, SFL has obtained secured loan from Bank of Baroda against hypothecation of stock on hire. On page 14 of the paper book is a balance sheet of SFL where stock on hire is shown separately and loan and advances are shown separately, which means stock on hire is not loans and advances. In fact, stock on hire is owned by SFL and only then, SFL can hypothecate the same to Bank and Bank had accepted stock on hire under hypothecation to Bank. These facts go to show that in the present case, hire purchase transaction conducted by SFL is not in the nature of loan, but SFL is owning assets given on hire by it and ther....