2018 (1) TMI 578 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - 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) - Held that - 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 be given to the language used in its plain and simple form. Save and except the words and expressions used in the statute, nothing more is to be inferred. Clause (ii) of section 2(22) provides that the term dividend shall not include any advance or loan made to a shareholder by a company in the ordinary course of business where the lending of money is substantial part of the business of the company. We find that this issue has been dealt at length on facts and figures by the ld CITA and we are not inclined to interfere with the said findings, more so, when the ld DR was not able to controvert the findings of the ld CITA. We also find that the ld CITA had granted relief to the assessee by placing reliance on the co-ordinate bench decision of this tribunal in Tanuj Holdings Pvt Ltd (2016 (2) TMI 426 - ITAT KOLKATA) and by relying on the decision of the Hon ble Bombay High Court in the case of Parle Plastics Ltd 2010 (9) TMI 726 - BOMBAY HIGH COURT . Hence we do not find any justifiable reason to interfere with the order of the ld CITA. Accordingly, the grounds raised by the revenue are dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition of ?59,50,000/- treated as deemed dividend under Section 2(22)(e) of the Income Tax Act.

Detailed Analysis:

Issue 1: Applicability of Section 2(22)(e) of the Income Tax Act

Facts:
The assessee, a Non-Banking Finance Company (NBFC), filed a return for the Assessment Year 2010-11 declaring a total income of ? Nil due to unabsorbed business losses. The Assessing Officer (AO) observed that the assessee company had taken a loan of ?59,50,000/- from M/s Off Shore India Ltd, where the assessee held 16.34% of the shares. The AO noted that M/s Off Shore India Ltd had accumulated profits exceeding ?59,50,000/- and concluded that the transaction fell under the provisions of Section 2(22)(e) of the Act, treating it as deemed dividend.

Assessee's Argument:
The assessee contended that the loan was interest-bearing and that M/s Off Shore India Ltd, being a registered NBFC, had lending of money as a substantial part of its business. The assessee argued that the AO misinterpreted the term "substantial part of the business" by equating it with "principal business." The assessee relied on the ITAT decision in Tanuj Holdings Pvt Ltd vs DCIT and the Bombay High Court decision in CIT vs Parle Plastics Ltd, which clarified that "substantial part" does not mean "major" or "principal."

CIT(A)'s Findings:
The CIT(A) observed that more than 63% of the net owned funds of M/s Off Shore India Ltd were deployed in granting loans and advances, indicating that lending was a substantial part of its business. The CIT(A) relied on the Bombay High Court decision in Parle Plastics Ltd, which held that "substantial part of the business" does not necessarily mean "major part" and can be determined by various factors such as the percentage of turnover, profit, and capital employed. The CIT(A) concluded that the loan of ?59,50,000/- did not fall under the deeming provisions of Section 2(22)(e) and directed the AO to delete the addition.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, agreeing that the provisions of Section 2(22)(e) need to be strictly construed. The Tribunal noted that the CIT(A) had thoroughly examined the facts and figures and correctly applied the law. The Tribunal also acknowledged the reliance on the co-ordinate bench decision in Tanuj Holdings Pvt Ltd and the Bombay High Court decision in Parle Plastics Ltd. The Tribunal dismissed the revenue's appeal, affirming that the loan granted by M/s Off Shore India Ltd to the assessee did not constitute deemed dividend under Section 2(22)(e).

Conclusion:
The Tribunal concluded that the CIT(A) was justified in deleting the addition of ?59,50,000/- as deemed dividend, as the lending of money was a substantial part of the business of M/s Off Shore India Ltd, thereby falling outside the ambit of Section 2(22)(e) of the Income Tax Act. The appeal of the revenue was dismissed.