TaxTMI 
TaxTMI 
TaxTMI 
2011 (12) TMI 657
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.... Polytex (P) Ltd. on interest. The percentage share holding of the assessee in M/s. Sun Polytex (P) Ltd. was 23.67%. The AO therefore, issued show cause notice and asked as to why a sum of ₹ 75.00 lacs received from M/s. Sun Polytex (P) Ltd. as loan/ advance be not treated as deemed dividend u/s 2(22) (e) of the Act. 2.3. Before the AO, the assessee filed the following submissions. ''The assessee company has taken loan ₹ 55.00 lacs from M/s. Sun Polytex (P) Ltd. as Inter Corporate Loans instead of ₹ 75.00 lacs and paid interest ₹ 1,05,534/- @ 12% p.a, and also deducted at source ₹ 23m682/-. Balance of loan as on 31-03-2006 in ₹ 57,27,988/-. We are enclosing herewith both revised a/c of M/s. Sun Polytex (P) Ltd. (Trader a/c & loan a/c). Further loan received from Sisarama Plastic (P) Ltd. ₹ 80,000/- was advance against job work done by the assessee . The assessee has taken loan from M/s. Sun Polytex (P) Ltd. in ordinary course of its business. Since M/s. Sun Polytex (P) Ltd. is engaged in the business of manufacturing of PP/HDPE fabric, as well as financing to companies/ firm as inter corporate loan on interest @ prevailing in the market....
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....loan of ₹ 45.00 lacs was received from M/s. Sun Polytex (P) Ltd. on 30-01-2006 and further a sum of ₹ 10.00 lacs was received on 11-03-06. The loan has been taken in ordinary course of business. 2. The object clause No. 18 (B) of the Memorandum of Association of M/s. Sun Polytex (P) Ltd. empowered that the company to carry on the business of financing. 3. The ld. AR submitted that balance of unsecured loans including the loan taken during the year to the extent of ₹ 1,12,31,579/- were of s 1,68,92,348/-. The position of loan given during the year by M/s. Sun Polytex (P) Ltd. is as under:- Name Op. Bal Loan given Received back Cl. Balane Harmoneh Plastics (P) Ltd. 900,000 Nil 900,000 Nil Mewar Polytex Ltd. Nil 5,500,000 Nil Nil Sisarama Plastics (P) Ltd.* Nil 9,249,038 9,249,038 Nil Maple Industries * Nil 9,761,884 9,761,884 Nil *loans were given and received back on current a/c basis ad includes interest earned 4. Before the ld.CIT(A) , ld. AR of the assessee furnished the source of funds in the hands of M/s. Sun Polytex (P) Ltd. as under (A) on 30-01-2006 ₹ 45,00,000/- (Source) Date Name Cheque No.` Amount 19-01-2006 ....
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....refore, inferred by the ld.CIT(A) that M/s. Sun Polytex (P) Ltd. is engaged in money lending to associated concerns on interest out of unsecured loans and not from accumulated profit. The Revenue has not discharged the burden to prove that the conditions mentioned in Section 2(22)(e) have been fulfilled. Sections 2(22) (e) are not applicable in relation to payments such as ICDs, Securities Deposits, trade debt etc. The AO should have also proved that such payment was made to the share holder with a view to give some kind of benefit of gain. The AO has also failed to prove that such loan or advance was not made in the ordinary course of business by M/s. Sun Polytex (P) Ltd.. The ld.CIT(A) held that payment given by the assessee was incorporate deposits and provisions of Section 2(22)(e) will not be applicable. Accordingly the ld.CIT(A) deleted the addition. 2.7. During the course of proceedings before us, the ld. DR referred to the paper book filed by the Revenue. It was stated by the ld. DR that initially the AO wanted to tax the sum of ₹ 75.00 las as deemed dividend uu2 (22)(e) of the Act.There was trading transaction also and therefore, the sum of ₹ 20.00 lacs was ex....
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....kehood of closely held companies not disturbing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders. To forestall his manipulation, sub-cl(e) of cl (22) of Section 2 has been suitably amended. Under the existing provisions, payments by way of loans or advances to the shareholders having substantial interest in a company to the extent to which the company possesses accumulated profits is treated as dividend. The shareholders having substantial interest are those who have a shareholding carrying not less than 20 per cent voting power as per the provisions of cl (32) of Section 2. The amendment of the definition extends its application to payments made (i) to a shareholders holding not less than 10 per cent of the voting power, or (ii) to a concern in which the shareholders has substantial interest. ''Concern' as per the newly inserted explanation 3(a) to Section 2(22) means an HUF or a firm or an association of persons or a body of individuals or a company. A shareholders having a substantial interest in a concern as per part (b) of Explanation 3 is deemed to be one who is beneficially entitled....
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....usiness of the company ; (iii) ………… [(iv) ……… 2.10. The main contention of the assessee is that the assessee is engaged in the business of money lending as permissible in clause 18 of Memorandum of Association. Clause 18 is reproduced as under:- ''18. subject to the provisions of the Companies Act, 1956 to lend, advance money otherwise provide financial assistance, either with or without security to such person (including government) having dealing with the company engage in any such business as may be considered likely directly or indirectly to further the main objects of the company or interests of its shareholders on such terms and conditions as may be deemed in the interest of the company.'' 2.11. We have gone through the Memorandum of Association. The Memorandum of Association in the case of a company most consists number of business which company may undertake. However, the main objects are mentioned in the beginning of the Memorandum of Association. In the case of M/s. SPL, the main objects to be perused by the company on its incorporation are mentioned in Part A of the Memorandum of Association and these are only two ....
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....ess only on account of object clause in the Memorandum of Association. One has to consider the actual state of affairs to ascertain as to whether the money lending has been a substantial business of the assessee . The meaning of word 'substantial part' has been considered by the The Hon'ble Bombay High Court in the case of CIT vs Parle Plastics Ltd. and Another, 332 ITR 63. It will be useful to reproduce the following para from the above decision available at para 13 of the order. ''The expression used under clause (ii) of section 2(22)(e) is "substantial part of the business". We would, therefore, have to ascertain the meaning of the word "substantial", appearing in the expression "substantial part of the business". Stroud's Judicial Dictionary, Fifth Edition, gives the first meaning of the word "substantial" as "A word of no fixed meaning, it is an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole". The decision of Terry's Motors Ltd. v. Rinder [1948] SASR 167 is given in support of this meaning. In the meaning No. 8, while considering "substantial amount", it is stated that out of a rent of oe 80 per annum, oe 13 per annum attributab....
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.... as the profit of the first division is 40 per cent. ; turnover and the profit of the second division is 30 per cent. and the turnover and the profit of the third division of the business is 30 per cent. In the case of this company no part of the business has turnover exceeding 50 per cent. and no part of the business company generates profit of more than 50 per cent. of the total. In such a case can it be said that none of the businesses of the said company is a substantial business of the company. In our view not. The first business which constitutes 40 per cent. of the turnover and contributes 40 per cent. to the profit would be the single largest part of the business of the company, the second and third divisions of the business, each of which contributes 30 per cent. of the turnover as well as profit of the company, though not the major and not even the single largest part of the business of the company, would still be a substantial part of the business of the company, because if any part of the three divisions of the business of the company was to be closed down, that would result in loss of turnover and/or business of 30 per cent., ordinarily no company would regard such par....
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....dvances 44,232,763 Current liabilities 8,205,074 - - 72,100,187 72,100,187 2.15. The current assets, loans and advances show the figure of loan and advance of ₹ 2,02,09,379/-. The other items in current assets are inventory , sundry creditors and cash in bank balance. The sundry creditors are for the purpose of main business. The details of loans and advances are available at page 62 of the paper book filed by the ld. AR which contains the figure of ₹ 8,94,324/- as security deposit and therefore, it cannot be considered a part of the money lending business. Other items shown in advance are available at page 62 of the paper book and are as under. We are only mentioning the figures which exceed ₹ 1.00 lac Advance Income tax & TDS ₹ 28,82,792 Cenvat credit ₹ 1,40,866 Cenvat credit ₹ 2,64,015 Cenvat credit of input ₹ 24,50,295 Deferred tax Rs. 1,23,975 Excel Industries ₹ 8,674,867 Excise Duty refundable ₹ 60,95,140 (last year 16,34,446) Prepaid expenses ₹ 1,93,511 Reliance Inds. Ltd. ₹ 1,15,188 Mewar Polytex Ltd. - Assessee's loan account ₹ 57,23,987/- 2.16 From the above, it is cle....
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....the assessee. The assessee has not been ale to show that M/s. Sun Polytex (P) Ltd. was having money lending business as substantial part of the business. We therefore, hold that the AO was justified in holding the sum of ₹ 55.00 lacs as deemed dividend in the hands of the assessee. 3.0 Now we take up the appeal for the assessment year 2007-08 of the Revenue. 3.1 The first ground of Revenue is that the ld. CIT(A) has erred in deleting the addition of ₹ 18.40 lacs made on account of deemed dividend u/s 2(22)(e) of the Act. 3.2 We have heard both the parties. The ld.CIT(A) has decided the issue in favour of the assessee by following the decision of his predecessor for the earlier assessment years. We are not having benefit of the copy of the account of M/s. Sun Polytex (P) Ltd. in the books of the assessee or ledger account of the assessee in the books of M/s. Sun Polytex (P) Ltd.. The AO in his order has mentioned that advance is to the extent of ₹ 18.40 lacs. In the preceding year, the advance was more than ₹ 18.50 lacs. Since we had held that loan and advance in the immediately preceding year is to be considered as deemed dividend and in case the amount o....