2012 (12) TMI 571 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - assessee (director) has taken unsecured loan from Krishna Beads Industries Private Limited - held that - the assessee has failed to establish that the substantial part of business of the company is money lending and the loans and advances received to the assessee is the in the ordinary course of money lending business. Unless the assessee establishes that money lending business was the substantial part of the business of the company and the loans and advances received during the course of money lending business, the assessee will not fall under the exceptional circumstances provided in section 2(22)(e)(ii) for the purpose not to include the calculation of deemed dividend. Further, merely stating in the object clause that the business of the assessee company was money lending cannot be held that the case of assessee falls under exceptional circumstances not to treat the deemed dividend. - Decided against the assessee.

Issues Involved:
1. Addition of Rs. 37,28,059/- under section 2(22)(e) of the Income Tax Act.
2. Determination of whether money lending was a substantial part of the business of the lending company.

Issue-wise Detailed Analysis:

1. Addition of Rs. 37,28,059/- under section 2(22)(e) of the Income Tax Act:
The assessee, a director with substantial interest in Krishna Beads Industries Private Limited, received an unsecured loan of Rs. 37,28,059/- from the company. The Assessing Officer (A.O.) treated this amount as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961, as the assessee held not less than 10% of the voting power in the company. The A.O. found that the company's main business was not money lending, as evidenced by the balance sheet and profit & loss account, and added the loan amount to the assessee's income.

2. Determination of whether money lending was a substantial part of the business of the lending company:
The assessee argued that the loan should be excluded from deemed dividend under clause (ii) of section 2(22)(e), which excludes loans made in the ordinary course of business where money lending is a substantial part of the company's business. The A.O. and CIT(A) found that the company's balance sheet and profit & loss account did not support the claim that money lending was a substantial part of its business. The company's income from interest was minimal and classified as indirect income, and the company did not hold a money lending license.

The CIT(A) upheld the A.O.'s decision, emphasizing that the company's financial statements did not reflect substantial money lending activities. The CIT(A) noted discrepancies in the figures presented by the assessee and concluded that the company's main business was not money lending.

The assessee's appeal argued that the true nature of the transaction should be considered, not just the financial statements. However, the Tribunal found that the financial statements, certified by auditors, are reliable unless contrary evidence is provided. The Tribunal noted that the assessee failed to provide evidence that the company followed procedures for money lending business or obtained necessary permissions.

The Tribunal concluded that the assessee did not establish that money lending was a substantial part of the company's business or that the loan was received in the ordinary course of such business. The Tribunal upheld the addition of Rs. 37,28,059/- as deemed dividend under section 2(22)(e).

Judgment:
The appeal filed by the assessee was dismissed, and the order of the CIT(A) was confirmed. The Tribunal found no infirmity in the CIT(A)'s decision that the loan amount was correctly treated as deemed dividend under section 2(22)(e) of the Income Tax Act.

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