2014 (3) TMI 397 - HC - Income Tax

Deemed dividend u/s 2(22)(e) of the Act - Substantial business - Whether the findings of the ITAT that money lending does not constitute substantial business of the lending company is correct Held that - Neither the company nor the assessee having the license of money lending business - Any payment by any company of any sum representing a part of the assets by way of advance would come within the mischief of deemed dividend - deposits made by a closely-held company would also be covered by the expressions advance or loan - Advances given by a company to its shareholders should be treated as payment out of accumulated profits of the company, whether capitalised or not, and must be treated as dividend and would go to reduce the tax liability. Whenever such tax liability is required to be determined as observed in the case of CIT vs. Narasimhan G. 1998 (12) TMI 5 - SUPREME Court - the assessee has failed to establish that substantial part of the business of the company is money lending - When it is so then we finds no reason to interfere with the impugned order passed by the lower authorities who have rightly observed that the amount is to be included in the income of assessee as deemed dividend under Section 2(22)(e) of the Act Decided against Assessee.

Issues Involved:
1. Whether money lending constitutes 'substantial business' of the lending company.
2. Whether the Tribunal erred in drawing negative inferences based on the manner of recording entries in the books of accounts.
3. Whether the Tribunal was correct in drawing unconstructive suppositions against the financing business of the company.
4. Whether the impugned transaction could be treated as a deemed dividend in the absence of a finding that the company had accumulated profits.

Issue-wise Detailed Analysis:

Issue 1: Substantial Business of Money Lending
The primary issue was whether money lending constitutes a 'substantial business' of the lending company. The court referred to the case of CIT Vs. Parle Plastics Ltd., which clarified that the term 'substantial part of the business' does not necessarily mean the majority or major part. Various factors such as turnover, profit percentage, and manpower used must be considered. In this case, the assessee failed to establish that money lending was a substantial part of the company's business. The company did not have a money lending license, and the balance sheet did not reflect significant income from money lending activities. The court concluded that the company's money lending activities were neither substantial nor in the ordinary course of its business.

Issue 2: Negative Inferences from Book Entries
The Tribunal had drawn negative inferences based on the manner of recording entries in the books of accounts. The court found that the explanation offered by the assessee was contrary to the facts on record. The assessee had not shown any income from money lending activities, and the interest claimed was minimal compared to the loan amount. The court upheld the Tribunal's findings, stating that the entries in the books of accounts did not reflect genuine money lending activities.

Issue 3: Unconstructive Suppositions Against Financing Business
The court examined whether it was correct for the Tribunal to draw unconstructive suppositions against the financing business of the company. The Tribunal had observed that the assessee did not provide sufficient evidence to prove that the loans and advances were part of the company's ordinary course of business. The court agreed with the Tribunal, noting that the assessee had failed to establish that money lending was a substantial part of the company's business. The court emphasized that merely stating financial activities in the object clause does not exempt the transactions from being treated as deemed dividends.

Issue 4: Deemed Dividend and Accumulated Profits
The court addressed whether the transaction could be treated as a deemed dividend in the absence of a finding that the company had accumulated profits. The court noted that the term 'dividend' includes any payment by a company to a shareholder by way of advance or loan to the extent of accumulated profits. The court referred to various precedents, including CIT vs. Central India Industries Ltd., and clarified that 'deemed dividend' is an artificial liability to tax that should be strictly construed. The court found that the company had accumulated profits and the loan to the director, who held substantial interest, qualified as deemed dividend under Section 2(22)(e) of the Income Tax Act.

Conclusion:
The court concluded that the assessee failed to establish that money lending was a substantial part of the company's business. The Tribunal's findings were upheld, and the amount of Rs. 37,28,059/- was rightly included in the assessee's income as deemed dividend. The appeal filed by the assessee was dismissed, and the substantial questions of law were answered in favor of the revenue and against the assessee.

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