2014 (4) TMI 780 - AT - Income Tax

Applicability of section 2(22)(e) of the Act Deemed dividend - Transaction with subsidiary company Held that - Relying upon Commissioner of Income-tax Versus Parle Plastics Ltd. 2010 (9) TMI 726 - BOMBAY HIGH COURT - various factors and circumstances need to be looked into while considering whether a part of the business of the company is its substantial business - CIT(A) appears to have not properly appreciated the submissions made before him in the form of written submissions - the AO as well as the CIT(A) considered the expression substantial part only with reference to the amount of income, i.e. whether major part of the income is from inter corporate deposit or not and did not appreciate the other factors but the fact remains that even to consider an activity as substantial part of its business activity various other factors are to be looked thus, the matter is remitted back to the CIT(A) to obtain the details of BSPL and analyse as to whether the loan was given in the ordinary course of its business and whether it was a substantial activity or not Decided in favour of Assessee.

Summary

Issues:
Applicability of section 2(22)(e) of the Act in transactions with subsidiary company.

Analysis:
The judgment pertains to an appeal by an assessee company against the order passed by the CIT(A)-8, Mumbai regarding the applicability of section 2(22)(e) of the Act in transactions with its subsidiary company, M/s. Bankers Shares and Stock Brokers Pvt. Ltd. The AO issued a show cause notice questioning the treatment of accumulated profits as deemed dividend under section 2(22)(e) due to an unsecured loan received by the assessee from its subsidiary. The assessee contended that the loan was given as an inter corporate loan in the ordinary course of business, falling under exception (ii) of section 2(22)(e). The AO argued that the loan was not given in the ordinary course of business, as the lending company was primarily engaged in share trading and lacked a license for financing activities. The CIT(A) upheld the AO's order, emphasizing that the main business of the lending company was share trading, not money lending.

The assessee appealed to the Tribunal, presenting additional evidence to support its claim that the loan was given in the ordinary course of business. The Tribunal considered the submissions and the judgment of the Hon'ble Bombay High Court, which highlighted the need to assess various factors to determine if a part of a company's business is substantial. The Tribunal found that the CIT(A) did not adequately consider the evidence provided by the assessee, such as the Balance Sheet of the subsidiary company. The Tribunal emphasized that to establish the loan as a substantial business activity, the nature of the lending company's business must be assessed, including its Memorandum and Articles of Association.

The Tribunal set aside the matter to the file of the CIT(A) for a detailed analysis of whether the loan was given in the ordinary course of business and constituted a substantial activity for the lending company. The Tribunal directed the CIT(A) to obtain and review the details of the subsidiary company to make a more informed decision. The assessee was granted a reasonable opportunity for a hearing in this regard. The appeal filed by the assessee was treated as allowed for statistical purposes, emphasizing the need for a thorough assessment of the business activities involved in such transactions.