AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (7) TMI 818
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....The return of income for the Asst Year 2011-12 was filed by the assessee electronically on 24.9.2011 declaring total income of Rs Nil. 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. 1,51,00,000/- 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 30.95% 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. 1,51,00,000/- as on the date of transactions. Accordingly he concluded that the said transactions would be hit by the provisions of s....
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....ted were Rs. 52.29 crores which works out to 69.16% of net owned funds. The lending company had followed prudential norms for income recognition prescribed by RBI in relation to the business of granting loans and advances. Moreover, the lending company had charged interest from the assessee on the loan amounts 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(....
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....ub-clause (ii) of section 2(22). 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. Various 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 c....
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....s parties. On that date the Net Owned Funds (NOF) of OSIL by way of share capital and Reserves were Rs. 75.61 crores. In percentage terms the loans and advances granted by OSIL constituted 69.16% of its NOF. The AO has taken into account loan funds of Rs. 39.49 crores and has come to conclusion that the Long term Funds available with OSIL were Rs. 115.10 crores. The AO further found that as on 31.03.2011 OSIL held two major class of assets viz. Investments in Shares having cost of Rs. 94.15 crores and Loans & Advances of Rs. 52.29 corres. In percentage terms the AO found that Investments in Shares constituted 81.79% of OSIL's Long Term Funds whereas loans and advances constituted 45.42% of OSIL's Long Term Funds. The AO thus found that the deployment of Long Term Funds in acquiring investments was more than the deployment funds in granting Loans & Advances. The AO therefore held that OSIL's "Principal Business" was making Investments and not the business of banking or granting of loans & advances. In AO's opinion benefit of clause - (ii) of Explanation to Sec. 2(22) of the Act was available only if the assessee could demonstrate that the "principal business" of OSIL was grantin....
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....39;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 really intended that more than 50 per cent of the business of the lending company must come from the business of lending, nothing prevented the Legislature from using the expression 'majority of business '. If the Legislature at all intended that a particular minimum percentage of the business of a lending company should come from the business of lending, the Legislature could have specifically provided for that percentage while drafting sub-clause (ii) of section 2(22). The Legislature had deliberately used the word 'substantial' instead of using the word 'major' and/or specifying any percentage of the business or profit to be coming from the lending business of the lending company for the purpose of sub-clause (ii) of section 2(22). 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". In the course of appellate proceedings AIR....
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....he purview of Sec. 2(22)(e) as granting of loans constituted "substantial Part" of OSIL's business. Therefore, the AO was not correct in adding Rs. 151 Lacs as income of the appellant u/s 2(22)(e). The said addition is accordingly deleted." 7. Aggrieved, the revenue is in appeal before us. 8. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute that the assessee company is a shareholder having more than 10% voting rights in the lending company. It is not in dispute that the lending company has accumulated profits in excess of Rs. 1,51,00,000/- drawn by the assessee company. The only short point that arises for our consideration is as to whether the lending company, being a NBFC duly registered with RBI, has its substantial part of business as lending activity, so as to be outside the ambit of provisions of section 2(22)(e) of the Act. It is well settled that the provisions of section 2(22)(e) of the Act are deeming provisions and they need to be strictly construed. In interpreting a statutory fiction, effect needs to ....