2018 (1) TMI 578

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....ring total income of Rs Nil due to unabsorbed business losses brought forward from earlier years. The authorized representative of the assessee appeared before the ld AO from time to time and produced the details and documents called for by the ld AO apart from producing the relevant books of accounts and bank statements. The books of accounts were also test checked by the ld AO . The ld AO observed that assessee company had taken loan amounting to Rs. 59,50,000/- from M/s Off Shore India Ltd (PAN AAACO 6223E) during the year under consideration. On the basis of submissions made by the assessee and the details collected from M/s Off Shore India Ltd, the ld AO observed that M/s Adorn Investments Ltd (assessee herein) was a major shareholder of M/s Off Shore India Ltd holding 16.34% of the total shares and holding voting power as well as the beneficial interest in the lending company during the relevant year. The ld AO observed that M/s Off Shore India Ltd (lending company) had accumulated profits in excess of Rs. 59,50,000/- as on the date of transactions. Accordingly he concluded that the said transactions would be hit by the provisions of section 2(22)(e) of the Act in the hands o....

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....d charged interest from the assessee on the loan of Rs. 59,50,000/- granted to it. It was pleaded that in the impugned order, the ld AO had misread and misunderstood the true purport of the language used in clause (ii) of section 2(22) of the Act. The words used in said clause (ii) are 'where the lending of money is substantial part of the business of the company'. It was argued that the ld AO by design or choice has chosen to substitute the word 'substantial' with the word 'principal', which no person properly instructed in law can do while interpreting a deeming provision of a taxing statute. The assessee also placed reliance on the decision of this tribunal in Tanuj Holdings Pvt Ltd vs DCIT in ITA No. 360 to 363/Kol/2015 dated 20.1.2016, wherein the tribunal while examining clause(ii) of section 2(22) of the Act categorically held that the legislature in its consciousness had used the words 'substantial part of the business' in section 2(22) of the Act in contradistinction to the words 'main business' or 'principal business'. It was argued that the tribunal in this case had held that threshold of 20% could be safely applied to ascertain whether a particular business activity cou....

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....factors and circumstances would be required to be looked into while considering whether a part of the business of a company is its substantial business. Sometimes, a portion which contributes substantial part of the turnover, though it contributes a relatively small portion of the profit, would be substantial part of the business. Similarly, a portion which relatively is small as compared to the total turnover, but generates a large, say, more than 50 per cent of the total profit of the company, would also be substantial part of its business. Percentage of turnover in relation to the whole as also the percentage of the profit in relation to the whole and sometimes even percentage of a 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. Employees of a company are now called its 'human resources' and, therefore, the percentage of 'human resources' used by the company for carrying on a particular division of business may also be required to be taken into consideration while considering whether a particular business forms substantial part of its business. Undisputedly, the ca....

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....facie therefore conditions prescribed in Sec 2(22)(e) were attracted. It is however the appellant's case that in terms of clause (ii) of Sec 2(22), Sec 2(22)(e) was not applicable because granting of loans was substantial part of OSIL's business. In order to resolve the controversy involved in the present appeal it is therefore material to refer to clause (ii) of Sec 2(22) which reads as follows: "but "dividend" does not include (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." 6 In view of language employed in clause (ii) of section 2(22) it is therefore necessary to ascertain whether lending of money formed substantial part of the business of OSIL. From the audited accounts of OSIL for the year ended 31/03/2010, I note that as on 31/03/2010 OSIL had granted loans and advances of Rs. 48.83 crores whereas its net owned funds (NOF) in the form of share capital and reserves were Rs. 77.18 crores. In percentage terms more than 63% of the NOF were deployed in granting of loans. I also find that OSIL wa....

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....(e) was not applicable. Similar view has been adopted by IT 1\ T Kolkata I3enches in the decisions relied upon by the appellant. In particular in the case of Tanuj Holdings Pvt Ltd Vs Dy. CIT (Supra), the Tribunal while examining Clause (ii) of Section 2(22) categorically held that the Legislature in its consciousness had used the words 'substantial part of the business' in Section 2(22), in contradistinction to the words 'main business' or 'principal business'. The ITAT observed that the words 'substantial part of the business' is not specifically defined in the Act which has led to judicial interpretations by various judicial forums. The Tribunal held that the expression 'substantial part of the business' is different and distinct from the words 'principal business' or 'main business' used in other places in the Act. Taking cue from provisions of section 2(22)(e) and section 2(32) of the Act, the ITAT held that threshold of 20% can be safely applied to ascertain whether a particular business activity can be considered to be forming 'substantial part of the business' for the purposes of clause (ii) of Section 2(22) of....