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2018 (7) TMI 818 - AT - Income TaxDeemed dividend addition u/s 2(22)(e)- assessee company is a shareholder having more than 10% voting rights in the lending company - lending company has accumulated profits in excess of ₹ 1,51,00,000/- drawn by the assessee company - 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 - 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 supra (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 - Decided against revenue
Issues Involved:
1. Justification of the deletion of the addition made under section 2(22)(e) of the Income Tax Act, 1961. 2. Determination of whether the lending of money constitutes a substantial part of the business of the lending company. Issue-Wise Detailed Analysis: 1. Justification of the deletion of the addition made under section 2(22)(e) of the Income Tax Act, 1961: The Revenue's appeal arose from the order of the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted an addition of ?1,51,00,000/- made by the Assessing Officer (AO) under section 2(22)(e) of the Income Tax Act, 1961. The AO had observed that the assessee company, a major shareholder of M/s Off Shore India Ltd, had taken a loan of ?1,51,00,000/- from the said company, which had accumulated profits exceeding the loan amount. The AO concluded that this transaction was hit by the provisions of section 2(22)(e) and added the amount as deemed dividend. The assessee contended that the loan was interest-bearing and that M/s Off Shore India Ltd, being a Non-Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI), had lending of money as a substantial part of its business. The CIT(A) found that the AO had misinterpreted the term "substantial" by substituting it with "principal" and concluded that the lending activity constituted a substantial part of the business of M/s Off Shore India Ltd. Consequently, the CIT(A) deleted the addition made by the AO. 2. Determination of whether the lending of money constitutes a substantial part of the business of the lending company: The AO's analysis of the balance sheet of M/s Off Shore India Ltd revealed that a significant portion of its funds was invested in shares rather than loans and advances. The AO concluded that the principal business of the company was investment in shares, not lending, and thus the transaction did not fall under the exception provided in section 2(22)(e). However, the CIT(A) observed that as of 31.03.2011, M/s Off Shore India Ltd had granted loans and advances amounting to ?52.29 crores, constituting 69.16% of its Net Owned Funds (NOF). Even considering long-term funds, 45.42% were deployed in granting loans. The CIT(A) referenced the decision of the Hon'ble Bombay High Court in CIT vs Parle Plastics Ltd, which clarified that "substantial" does not mean "major" or "principal" but rather a significant part of the business. The CIT(A) also relied on the ITAT Kolkata's decision in Tanuj Holdings Pvt Ltd, which held that a threshold of 20% could be applied to determine whether an activity formed a substantial part of the business. The Tribunal upheld the CIT(A)'s findings, agreeing that the lending of money was a substantial part of M/s Off Shore India Ltd's business. The Tribunal noted that the provisions of section 2(22)(e) are deeming provisions and must be strictly construed. The Tribunal found no reason to interfere with the CIT(A)'s order, which was based on factual analysis and supported by judicial precedents. Conclusion: The Tribunal dismissed the Revenue's appeal, confirming that the lending of money constituted a substantial part of the business of M/s Off Shore India Ltd, and thus, the transaction was outside the ambit of section 2(22)(e) of the Income Tax Act. The appeal of the revenue was dismissed, and the deletion of the addition of ?1,51,00,000/- was upheld.
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