2007 (1) TMI 286 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - advance or loan - money-lending business - discrepancies in the figures of ten years - whether the lending of money is a substantial part of the business of the said company or not ? - HELD THAT - Although the net income of the assessee from money-lending or finance business is not separately given even if the said income is taken at a gross figure of Rs. 12, 21, 956 for comparison with the total net profit of the assessee-company amounting to Rs. 75, 15, 165 it constitutes only 16.25 per cent of such net profit. Similarly even if the figures reflected in the balance sheet of the assessee-company as on 31-3-1998 as given on the paper book are taken for comparison it shows that the total funds available with the assessee-company as on 31-3-1998 were to the tune of Rs. 2, 61, 99, 934 out of which an amount of Rs. 42, 68, 640 only was given as loans as reflected on the paper book. Thus out of the total funds of Rs. 2.62 crores available with the said company only an amount to the extent of Rs. 42.68 lakhs i.e. 16.29 per cent was used for money-lending business. It is thus clear that looking into the facts and figures of the said company for the year under consideration from any angle and even going by the definition given in Explanation 3( b ) relied upon by the learned counsel for the assessee the money-lending business constituted less than 20 per cent of the total business of the said company and it therefore cannot be said that the lending of money was a substantial part of the business of the said company. The condition stipulated in sub-clause ( ii ) of clause ( e ) of section 2( 22 ) thus was not satisfied and the amount in question advanced by the said company to the assessee was not covered by the exception provided in the said sub-clause as claimed by the learned counsel for the assessee. Thus we are of the view that the amount in question was rightly treated by the Assessing Officer as dividend in the hands of the assessee by applying the deeming provisions of section 2( 22 )( e ) and the learned CIT(A) was fully justified in sustaining the addition made by the Assessing Officer on this count. In that view of the matter we uphold the impugned order of the learned CIT(A) on this issue and dismiss the appeal filed by the assessee. In the result the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Addition of Rs. 6 lakhs as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Determination of whether the lending of money was a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd.

Detailed Analysis:

1. Addition of Rs. 6 lakhs as deemed dividend under section 2(22)(e):

The assessee, holding more than 10% shares in M/s. Avanti Overseas Pvt. Ltd., received a loan of Rs. 6 lakhs from the company. The Assessing Officer (AO) treated this loan as deemed dividend under section 2(22)(e) of the Income Tax Act, as the company had adequate accumulated profits. The AO determined that the main business of the company was not money-lending, thus the loan could not be excluded from being deemed dividend under the exception provided in sub-clause (ii) of section 2(22)(e).

The CIT(A) upheld the AO's decision, confirming the addition of Rs. 6 lakhs to the total income of the assessee. The CIT(A) reasoned that the company's primary business was export, and the income from money-lending was minimal compared to the total income, thus not constituting a substantial part of the business.

2. Determination of whether the lending of money was a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd.:

The assessee argued that the lending of money was a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd., and hence, the loan should not be treated as deemed dividend. The assessee provided figures showing that income from lease rent and interest was a significant portion of the company's total profits over the last ten years.

However, the CIT(A) and the Tribunal found that only the figures for the relevant year should be considered. The Tribunal noted that the gross receipts from interest and lease rental were only 2.26% of the total turnover for the year under consideration, and the net income from these activities was only 16.25% of the total net profit. Thus, the money-lending business did not constitute a substantial part of the business of M/s. Avanti Overseas Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decision, stating that the condition stipulated in sub-clause (ii) of section 2(22)(e) was not satisfied, and the loan was rightly treated as deemed dividend. The appeal by the assessee was dismissed.