2014 (5) TMI 234 - HC - Income Tax

Deemed dividend u/s 2(22)(e) of the Act Advance interest on loan Held that - The Tribunal was clearly in error in allowing the appeal on the ground that the first part of the ingredient of the exclusionary provision of section 2(22)(e) namely clause (ii) was not fulfilled - The basis of the reasoning of the Tribunal is clearly erroneous - The Tribunal has misapplied the legal test in holding that since the companies did not carry on money lending business, the advances which were made to the assessee would not be in the ordinary course of its business - the Tribunal has not considered the issue as to whether the second ingredient of clause (ii) was duly fulfilled, thus, the matter is required to be remitted back to the Tribunal for fresh evaluation Decided in favour of Assessee.

Summary

Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividends for interest bearing loans from companies where the shareholder holds more than 10% of shares.

Analysis:
The judgment of the Allahabad High Court dealt with the interpretation of Section 2(22)(e) of the Income Tax Act, 1961 regarding deemed dividends for interest bearing loans received by the assessee from two companies in which the assessee held more than 10% of the shares. The Assessing Officer added the loan amounts as deemed dividends under Section 2(22)(e), but the Commissioner of Income Tax (Appeals) deleted the addition, emphasizing that the lending companies had lending money as one of their objects and had significant portions of their assets deployed in interest bearing loans. The CIT(A) concluded that the loans were made in the ordinary course of business, falling within the exception clause (ii) of Section 2(22)(e). However, the Tribunal set aside the CIT(A)'s decision and reinstated the addition made by the Assessing Officer.

The Court analyzed the exclusionary clause (ii) of Section 2(22)(e), which states that loans made to a shareholder in the ordinary course of business where lending money is a substantial part of the company's business are not deemed dividends. The Court noted that the Tribunal erred in its interpretation by focusing solely on whether the main object of the companies was money lending, rather than considering if the loans were made in the ordinary course of business. The Court clarified that the first condition of the exclusionary clause does not require the company to be engaged in money lending business, but that the loan should be made in the ordinary course of its business. The Court also highlighted the necessity for the lending of money to be a substantial part of the company's business.

Moreover, the Court found that the Tribunal failed to properly evaluate whether the second condition of the exclusionary clause was met. The CIT(A) had considered the percentage of total assets deployed in interest bearing loans by the companies, but the Tribunal did not address this aspect. Therefore, the Court concluded that the Tribunal's decision was erroneous and remanded the case back for a fresh evaluation on whether the second condition of the exclusionary clause was satisfied.

In conclusion, the Court disposed of the appeal by restoring it to the Tribunal for further consideration on the applicability of the second condition of the exclusion contained in Section 2(22)(e). The Court also rejected the revenue's argument that the appeal did not raise a substantial question of law, emphasizing that the appeal indeed involved a substantial legal issue.