AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (10) TMI 691
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....that the lending of money has been specifically mentioned in the Memorandum of Association of both the companies in the objects which are ancillary to carry out the main objects of the company". Vide judgment dated 17.4.2014, the Hon'ble High Court of Allahabad has disposed of the appeal bearing Income Tax Appeal Defective No.35 of 2014 and has restored the appeal to the Tribunal with a direction to consider the applicability of the second ingredient of clause (ii) of the exclusion contained in section 2(22)(e) of the Act. The relevant observation of the Hon'ble High Court is extracted hereunder for the sake of reference:- "We find merit in the contention of the assessee that the Tribunal has manifestly misapplied its mind to the ingredients set out in section 2(22) (e). The first ingredient of exclusionary clause (ii) of section 2(22)(e) is that the advance or loan must be made to the shareholder by a company in the ordinary course of its business. The first ingredient does not require that the company must be engaged in money lending business. Moreover, where the advance or loan was made in the ordinary course of the business of the company, the fact that the lending of ....
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....i) of the exclusion contained in section 2(22)(e). In this view of the matter, it is not necessary for the Court to finally decide the substantial question of law as framed. We, however, find no merit in the contention of learned counsel appearing on behalf of the revenue that the appeal by the assessee does not give rise to any substantial question of law. Undoubtedly, an appeal under section 260-A must raise a substantial question of law and not an issue pertaining merely to appreciation of facts (Commissioner of Income Tax Vs. P. Mohanakala). The test is fulfilled." 3. Consequently, the appeal was listed for hearing and the arguments advanced by the ld. counsel for the assessee and the Departmental representative were heard. 4. The ld. counsel for the assessee has contended that the Hon'ble High Court was satisfied while restoring the matter back to the Tribunal that the advance or loan was given to the assessee by a company in the ordinary course of its business. Their Lordships have restored the matter to the Tribunal for adjudication of the second ingredient of clause (ii) of the exclusion contained in section 2(22)(e) of the Act, "whether the lending of money was a su....
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....hat concern. Therefore, in the same manner, the definition of "substantial business" should be examined and if the company's capital employed in the money lending business is more than 20%, then it should be held that substantial part of business of the company is money lending business. In the instant case, more than 38% in the case of Kukki Color Prints Pvt. Ltd. and more than 69% in the case of Kukki Color Photos Pvt. Ltd. of the capital was employed in the money lending business. Therefore, it cannot be held that lending money is not substantial part of business of the assessee-company. 7. Per contra, the ld. CIT (D.R.) has contended that substantial part of business of the assessee-company in money lending business is to be examined in the light of percentage of capital employed in money lending business with the persons or parties other than the assessee. If the assessee is the sole borrower of the company and apart from assessee, the company has not given any loan or advance to any other person, it cannot be called that substantial part of business of the company is money lending. The ld. CIT (D.R.) has further contended that the business is occupation or profession which o....
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....ons of section 2(2)(e) of the Act. But there are exceptions in this provision and as per exclusory clause (ii), if the assessee establish that advance or loan made to shareholders/assessee by a company in the ordinary course of its business and the lending of money is substantial part of business of the company. Loan and advances by the company would not be deemed dividend. Thus, in order to get out of the clutches of section 2(22)(e) of the Act, the assessee is required to establish two ingredients i.e. (1) loan or advance was given to the assessee or shareholder by a company in the ordinary course of its business and (2) lending of money is substantial part of business of the company. In the instant case, the Hon'ble High Court of Allahabad is satisfied, relying upon the memorandum of association, etc., that the advance or loan was given to the assessee in the ordinary course of its business. But for second ingredient whether the money lending business is substantial part of business of the company, the matter has been restored to the Tribunal. 10. During the course of hearing, our attention has been invited to the balance sheet of both the companies i.e. Kukki Color Prints ....
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....s no chance to accumulate the profits pertaining to the available funds. Therefore, question (iv) cannot be answered. 11. It also appears from the record that not a single rupee income has been shown from the money-lending activity. The interest earned on FDRs no stretch imagination, can be said to have been earned from money-lending business. What is now being claimed, i.e., an interest of Rs. 62,280 from the appellant on the advances given. Thus, the explanation being offered by the assessee is contrary to the facts on record. Further, it is also evident that the assessee did not take interest bearing loans, from advances or different parties. The auditor has claimed that the company has not granted but taken unsecured loan interest-free from other parties covered in the register maintained under section 30A of the Companies Act, 1956. In money-lending business the transaction are taken and given money to earn interest. The hon'ble Supreme Court in the case of State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 19 STC 1 (SC), has held that the word "business" used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, nor....
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.... cent. or more voting power in the closely-held company. Therefore, for example, if a closely held company gives a loan to its director who holds 10 per cent. of the voting power of the company, then the amount received by the director from the company will be taxed in his hands. In the present case, this condition is fulfilled. 17. A "dividend" is not capital but the produce of capital. Subject to well recognised limitations, "dividend" is a word of general and indefinite meaning without any narrow, technical or rigid significance. As explained above, the term "dividend" is applied to a distributive sum, share or percentage arising from some joint venture as profits of a corporation. In the second sense, it is proportionate amount paid on liquidation of a company. In this context, "dividend" is referred to as corporate profits set apart for rateable division amongst the shareholders being surplus assets obtained in excess of capital. 18. Needless to mention that the definition of the word "dividend" is inclusive and not exhaustive and since it creates an artificial liability to tax, it should be strictly construed, as per the ratio laid down in the case of Kantilal Manilal v. CI....
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.... be "any payment". (v) (a) the payee must be a shareholder of the company having substantial interest in the company, or (b) the payee must be a person who is acting on behalf of or for the individual benefit of such shareholder. 21. The expression "person who has a substantial interest in the company" is defined in section 2(32), as meaning "a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent. of the voting power". If these conditions are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. 22. Further, from the assessment year 1988-89 (onwards) the provisions of section 2(22)(e) have undergone modification by the Finance Act, 1987. Accordingly, it also includes advances or loans made to any concern in which such shareholder is a member or partner and in which he has a substantial interest. In the latter case, the advance or loan will logically have to be treated as dividend in the hands of the shareholder concerned and not the concern because the scope of the sub-clause is only ....
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....nds no reason to interfere with the impugned order passed by the lower authorities who have rightly observed that the amount of Rs. 37,28,059 is to be included in the income of assessee as deemed dividend under section 2(22)(e) of the Act. Hence, the impugned order is hereby sustained along with the reasons mentioned therein." 12. We have also examined the other order of the Tribunal in the case of Mrs Rekha Modi vs. Income Tax Officer, New Delhi (supra), in which it has been held that where the money lending business of the company constitutes less than 20% of its total business, lending of money was not substantial part of business of the company. The relevant observation of the Tribunal is extracted hereunder:- "The expression 'substantial part of the business' used in item (ii) of section 2(22)(e) has not been defined in the statute. However, a similar expression 'substantial interest' is used in subclause (e) of section 2(22) and the same has been defined in Explanation 3(b) to section 2(22)(e). Although the term 'substantial interest as defined in Explanation 3(b) to section 2(22)(e) is different than the expression 'a substantial part of the busines....
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....ed by a company for carrying on a particular division of its business as compared to the total capital employed by it, would also be relevant while considering whether the part of the business of the company constitutes "substantial part of the business" of the company. The relevant observation of the Hon'ble Bombay High court is also extracted hereunder for the sake of reference:- "A plain reading of clause (ii) of section 2(22)(e) of the Act shows that any advance or loan made by a company to a shareholder or a concern in which the shareholder has a substantial interest would not be regarded as a dividend if the advance or loan was made by the lending company, if two conditions are satisfied namely, (i) that the loan or advance was made by the lending company in the ordinary course of its business and (ii) lending of money was a substantial part of the business of the lending company. The expression used under clause (ii) of section 2(22)(e) is "substantial part of the business". The expression "substantial part" does not connote an idea of being the "major part" or the part that constitutes majority of the whole. If the Legislature intended that a particular minimum percent....
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....ess", as the Legislature has not used the words "major part of business" in place of "substantial part of business". Had it been used, then it would have to be examined that assessee's business should be more than 50% in that particular activity. But the Legislature has consciously used the words "substantial part of business" which means that any business of a company which the company does not regard as small, trivial, or inconsequential as compared to the whole of the business is substantial business. Therefore, if particular percent of capital of the company is employed in the money lending business, the company can be called to have substantial part of business in money lending. In the light of Explanation 3(b) below section 2(22)(e) of the Act, where 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 per cent of the income of that concern and the order of the Tribunal in the case of Mrs Rekha Modi vs. Income Tax Officer, New Delhi (supra) and other judgment of the Hon'ble High Court, we are of the view that if 20% of the capital of the com....