2007 (12) TMI 406 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - advance money - investment in shares - money lending business - CIT(A) deleted the addition of expenditure under head of foreign travelling expenditure - HELD THAT - We after having gone through the memorandum and articles of association placed at assessee s paper book and its balance-sheet noticed that money lending was not only one of six main objects of the payer company but the assessee was carrying on this business in preference to other business and at the same time had deployed funds to the extent of Rs. 37, 77, 475 by way of loan to the assessee and to the tune of Rs. 1, 08, 099 to Goyal Metalic P. Ltd. out of total funds available at Rs. 44, 56, 304 as against the deployment of amount of Rs. 4, 14, 300 as investment in shares earning dividend. We are of the opinion that substantial part of the business carried on by M/s. Indulal Dahyabhai Investment P. Ltd. was that of money lending and consequential loan given to the assessee (on interest) was loan having been given during the course of money lending business. We therefore are of the opinion that the assessee s case was not covered by the provisions of section 2(22)(e) and the CIT(A) was quite justified in deleting the addition. The order of the CIT(A) on this point is therefore confirmed. Expenditure on account of foreign travelling of its managing director - HELD THAT - Assessee was able to make export to Taiwan which was claimed to be as a result of the managing director s visit to that place and the fact that the Revenue had not disputed the genuineness of the export sales we are of the opinion that the assessee s explanation that the visit by the managing director to the places in question was in connection with the business is quite plausible one and supported by evidence. Consequently we do not find any reason to interfere with the decision of the CIT (A) wherein the assessee s claim was allowed and the addition was deleted. We uphold the order of the CIT (A) on this point also. In the result the Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Deletion of addition under section 2(22)(e) concerning deemed dividend.
2. Deletion of addition concerning foreign tour expenses of the company's director.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e) Concerning Deemed Dividend:
The Revenue objected to the deletion of an addition of Rs. 8,51,935 made under section 2(22)(e) of the Income-tax Act, 1961. The assessee, engaged in the manufacturing of plastic film capacitors and electrolytic capacitors, had taken a loan of Rs. 37,77,474 from M/s. Indulal Dahyabhai Investment P. Ltd. The Assessing Officer (AO) noted that one of the directors, Shri Shashank I. Shah, held significant shares in both the assessee company and the lender company, invoking section 2(22)(e) for deemed dividend. The AO rejected the assessee's explanation that the loan was part of the lender's ordinary business of money lending, citing that the lender's income from dividends was higher than from interest, and money lending was only one of its six main objects.

The Commissioner of Income-tax (Appeals) (CIT(A)) deleted the addition, stating that the lender's main business included money lending, supported by its memorandum and articles of association, and the funds deployed in money lending were substantial compared to those invested in shares. The Tribunal upheld the CIT(A)'s decision, emphasizing that section 2(22)(e)(ii) refers to "substantial part of the business" and not "substantial income." The Tribunal concluded that the lender's substantial deployment of funds in money lending indicated that it was a significant part of its business, thus the loan did not attract deemed dividend provisions under section 2(22)(e).

2. Deletion of Addition Concerning Foreign Tour Expenses of the Company's Director:
The Revenue contested the deletion of an addition of Rs. 1,74,656 related to foreign tour expenses of the managing director, Shri Shashank I. Shah. The AO disallowed the expenses, doubting their connection to the assessee's business, despite the assessee's justification that the tour aimed to explore export opportunities, acquaint with automation machinery, and optimize costs. The AO felt the assessee failed to substantiate the business purpose of the tour.

The CIT(A) allowed the claim, criticizing the AO for a predetermined disallowance mindset and noting that the assessee provided relevant details and evidence of the tour's business purpose. The Tribunal upheld the CIT(A)'s decision, recognizing the managing director's solo visit to countries relevant to the assessee's business operations and subsequent export activities to Taiwan as credible evidence of the tour's business purpose.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s deletion of additions under both section 2(22)(e) for deemed dividend and foreign tour expenses, based on substantial evidence and appropriate interpretation of the Income-tax Act provisions.