TaxTMI 
TaxTMI 
2016 (12) TMI 1297
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....see company declared dividend @ 5% on the paid up capital and paid Rs. 16.15 lacs as dividend to its share holders and also paid tax on dividend amounting to Rs. 2,26,504/-. During the relevant assessment year the assessee had taken loan of Rs. 1,32,20,000/-. The Assessing Officer ('AO') vide notice dated 31.7.08 directed assessee company to furnish the break up of the above loan amount. The assessee through reply dated 6.8.08 gave the break up of loan amount as under : Sun Polytex Pvt. Ltd. (Interest paid) Rs.75,00,000/- Crescent Polytex P.Ltd.(Interest paid) Rs.7,75,000/- Galaxy Industries (Interest paid) Rs.23,50,000/- Sisarama Plastic P.Ltd.(Interest paid) Rs. 8,00,000/- Crescent Polytex Pvt.Ltd.(Interest paid) Rs.25,15,000/- Total Rs.1,32,20,000/- 3. The assessee company was share holder in the above companies from which the loan had been received by it. Under the directions of the AO, the assessee company furnished the details of its share holdings in the above companies. The percentage of share holdings of the assessee company in M/s Sun Polytex was 23.67% and in M/s Sisarama Plastic Pvt. Ltd. 14.7%. Considering the share hold....
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....added to its income under Section 2(22)(e) of the Act of 1961. 5. Aggrieved by the assessment order dated 30.9.08 passed by the AO for the assessment year 2006-07, the assessee company preferred an appeal before the Commissioner of Income Tax (Appeals) Udaipur [CIT(A)]. The assessment order dated 1.11.09 passed by the AO for assessment year 2007-08 was also appealed against by the assessee company before the CIT (A). 6. The CIT(A) opined that amount given by the Sun Polytex Pvt. Ltd. to the assessee company was in the nature of inter corporate deposit, which cannot be treated as loan for the purposes of Section 2(22)(e) of the Act of 1961 and accordingly, the addition made by the AO was ordered to be deleted by the CIT(A) vide order dated 29.5.09. For the parity of the reasons, the appeal preferred by the assessee against the order of the AO making addition as aforesaid during the assessment year 2007-08 was also allowed by the CIT(A) vide order dated 11.3.10 and the addition made was deleted. 7. Aggrieved by the orders passed by the CIT(A), the Revenue preferred two separate appeals before the ITAT. The appeal preferred by the Revenue for the assessment year 2006- 07 has ....
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.... counsel submitted that the provisions of Section 2(22)(e) were brought so as to tax deemed dividend in the form of payments by way of advance or loan to a shareholder, holding not less than 10% of voting power, where the real object of such payment is distribution of accumulated profits and not giving of loan in its true perspective. Learned counsel urged that the loans and advances covered by Section 2(22)(e) are such loans and advances which are not genuine and made solely with a view to evade tax on dividend income. In support of the contention, learned counsel has relied upon a decision of the Hon'ble Supreme Court in the matter of 'Navnit Lal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of Income Tax, Bombay' (1965) 66 ITR 198 (SC). According to the learned counsel, the normal transactions made on account of commercial expediency with profit motive to earn interest do not fall within the purview of Section 2(22)(e) of the Act of 1961. In support of the contention, learned counsel has relied upon a decision of High Court of Delhi in the matter of 'Commissioner of Income Tax Vs. Creative Dyeing & Printing (P) Ltd.' (2009) 318 ITR 476 and a decision of High Court of ....
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....ned counsel submitted that after due consideration of rival submissions the ITAT has categorically held that the money received by the assessee company was not inter corporate deposits and thus, the money lending being not substantial part of the business of the said company, the short term loan taken by the assessee cannot be construed to be in course of money lending business. Learned counsel urged that the order passed by the ITAT does not suffer from any infirmity or illegality and as a matter of fact, no substantial question of law arises for consideration of this Court out of the orders impugned and therefore, the appeals deserve to be dismissed. 11. We have considered the rival submissions and perused the material on record. 12. Indisputably, in the first instance, the provision, to bring within the tax net the monies paid by a closely held companies to their principal shareholders in the guise of loan or advance out of their accumulated profits to avoid payment of tax was introduced by inserting clause (e) to Section 2 (6A) in the Income Tax Act, 1922 ('the Act of 1922'). The definition of "Dividend" as incorporated in Section 2(22) of the Act of 1961, corresponds to ....
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....of Rs. 55,00,000/-. According to the assessee company, since the Sun Polytex Pvt. Ltd. is engaged in business of manufacturing of PP/HDPE Fabric as well as financing to the companies/Firms as inter corporate loan on interest at the prevailing market rate, it was inter corporate loan taken in ordinary course of business. The assessee company claimed that it has already paid interest on the loan advanced a sum of Rs. 1,05,534/- @ 12% and also deducted the tax at source a sum of Rs. 23,682/-. The further stand of the assessee company before the Assessing Officer was that in light of para (ii) of Section 2 (22)(e), any advance or loan made to a share holder (or the said concern), a company, in ordinary course of business is excluded from the definition of "deemed dividend". 16. In Navnit Lal C. Javeri's case (supra) relied upon by the learned counsel appearing for the appellant, the Hon'ble Supreme Court while rejecting the challenge to the validity of Sections 2 (6A) (e) and 12 (IB) of the Act of 1922 observed that to meet the mischief by the private controlled companies in adopting the device of making advances or giving loans to their shareholders with the object of evading payme....
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....in refundable excise duty. Suffice it to say that the other advances in no manner could be construed as advances for the purpose of money lending. That apart, during the relevant assessment year, M/s Sun Polytex Pvt. Ltd. is alleged to have earned a meagre Rs. 2,97,552/- as interest. Thus, the conclusion arrived at by the Assessing Officer, affirmed by the ITAT that the perusal of the balance sheet and profit & loss account of M/s. Sun Polytex Pvt. Ltd. did not inspire any confidence that M/s. Sun Polytex Pvt. Ltd. was having money lending as substantial part of business, cannot be faulted with and therefore, the loan advanced by the closely held company M/s. Sun Polytex Pvt. Ltd. to the assessee company does not fall within the exception carved out under para (ii) of Section 2 (22)(e) of the Act of 1961 either. 20. At this stage, it would be appropriate to refer to the decisions of various High Courts cited by the learned counsel appearing for the appellant. 21. In Creative Dyeing & Printing (P) Ltd.'s case (supra), wherein the assessee company received funds for expansion of production capacity from a company PE Ltd. having 50% of the shareholdings in the assessee company a....
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.... lending company. The Court observed that the "substantial part" does not connote an idea of being the 'major part' or the part that constitutes majority of the whole. The Court further observed that any business of a company which company does not regard as small, trivial or inconsequential as compared to the whole of business is substantial business. The Court opined that percentage of turnover in relation to the whole as also percentage of profit in relation to whole and sometimes even percentage of manpower used for a particular part of business in relation to the total manpower or working force of the company would be required to be taken into consideration. 25. In view of the conclusion arrived at by us after due consideration of the facts situation emerging in the present case that money lending cannot be treated to be substantial part of the business of the closely held company, the decision of the Bombay High Court in Parle Plastic Ltd.'s case (supra), also does not help the appellant. 26. Accordingly, the question no.1 framed as aforesaid is answered in terms that the ITAT has committed no error in construing the provision of Section 2 (22)(e) of the Act of 1961 whi....