TaxTMI 
TaxTMI 
2011 (12) TMI 657
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....see has received loan from M/s. Sun 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 Rs. 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 Rs. 55.00 lacs from M/s. Sun Polytex (P) Ltd. as Inter Corporate Loans instead of Rs. 75.00 lacs and paid interest Rs. 1,05,534/- @ 12% p.a, and also deducted at source Rs. 23m682/-. Balance of loan as on 31-03-2006 in Rs. 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. Rs. 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 @ prevai....
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....ms and companies. The loan of Rs. 45.00 lacs was received from M/s. Sun Polytex (P) Ltd. on 30-01-2006 and further a sum of Rs. 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 Rs. 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 ha....
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....(A) observed that net current assets after excluding the current liabilities comes to Rs. 3,60,27,689/-. The amount of inter corporate deposits, loans and advances given to various companies amounted to Rs. 2,02,09,379/- which shows that 56.11% of the net current assets was employed by M/s. Sun Polytex (P) Ltd. in their business of money lending. It was therefore, 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.C....
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.... These provisions had lost much of their relevance with the reduction of the maximum marginal rate of personal tax to 50 per cent which is lower than the rate of corporation tax on closely held companies Section. 104 to 109 have therefore, been omitted by the Finance Act, 1987 10.2 With the deletion of ss 104 to 109 there was likehood 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 s....
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....r the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; but "dividend" does not include- (i) ........; [(ia)a .... (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business 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....
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....to enhance the value of any of the company's property or right. Thus clauses 7 and 18 have been included in the ancillary objects. There may be an object clause in the Memorandum of Association of a company to do business of dealing in shares but in case the assessee has shown the shares as investment and has not dealt with the shares regularly then the profit from sale of shares cannot be considered as business 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, giv....
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....eaning of the expression "substantial business" or "substantial income" of a company. In the modern days, a large number of companies do not restrict to one or two businesses. They carry on numerous activities and carry on numerous businesses and have numerous business divisions. Let us take a case of a first company which has 3 divisions of works consisting of three different types of business. The turnover as well 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....
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....isputed that the turnover of the assessee is to the extent of Rs. 12.18 crores. The profit before tax is to the extent of Rs. 1.31 cores. The balance sheet of M/s. Sun Polytex (P) Ltd. in the normal form is as under:- Shareholders funds Share capital 15,000,000 Fixed Assets 17,137,424 Reserve & Surplus 17,227,025 Investments 10,730,000 Loans secured & unsecured 31,668,088 Current assets, loans & advances 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 Rs. 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 Rs. 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 mentio....
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....nd therefore, advance received cannot be considered as deemed dividend. In the case of CIT vs P.V. John (supra), the Hon'ble Kerala High Court had an occasion to consider as to whether gift to shareholder son can be considered as deemed dividend. The Hon'ble Kerala High Court noticed that there has been no evidence that gifts were for the benefit of the shareholders. This decision is of no help to the assessee. If the assessee is to be covered in non-inclusive Section 2(22)(e) then the onus is on 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 Rs. 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 Rs. 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....