2015 (6) TMI 450 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - whether on the basis of deployment of funds, can it be held that money lending was substantial part of business of Silgo? - CIT(A) deleted the addition - Held that - In the present case, it has already been mentioned that more than 75% of the funds available have been deployed by Silgo, therefore, money lending constituted substantial part of the business of Silgo and the fact that no interest income was shown by Silgo in Profit & loss account cannot be said to be relevant to decide the question that whether or not money lending was substantial part of business of Silgo? . Learned CIT(A) has rightly appreciated the provisions of law, which has been explained by Hon ble Jurisdictional High Court in the case of Parle Plastics Ltd. (2010 (9) TMI 726 - BOMBAY HIGH COURT ) wherein held that if the lending of money constitutes substantial part of business of the company, then the loan given by the company to its share holders cannot be considered to be deemed dividend under the provisions of section 2(22)(e) as the same fall under the exception mentioned in section 2(22)(e)(ii). - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition under section 2(22)(e) of the Income Tax Act.
2. Determination of whether the lender company was engaged in the business of money lending.
3. Exclusion of opening balance and interest portion from deemed dividend.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 2(22)(e):
The Revenue appealed against the deletion of an addition of Rs. 1,09,38,061/- made by the Assessing Officer (AO) under section 2(22)(e) of the Income Tax Act. The AO had observed that the lender company, M/s. Silgo Finance Pvt. Ltd. (Silgo), had advanced a loan amount of Rs. 1,09,23,897/- to the assessee and had reserves and surplus of Rs. 2,83,43,780/-. The AO invoked section 2(22)(e) and added the amount to the income of the assessee, rejecting the assessee's submission that Silgo was engaged in financial services and the loan was part of normal business activity. The CIT(A) deleted the addition, concluding that Silgo's main business was financial services, and the loan fell under the exception in section 2(22)(e)(ii).

2. Determination of Whether the Lender Company Was Engaged in the Business of Money Lending:
The AO contended that Silgo was not engaged in the business of money lending as it did not show any interest income. However, the CIT(A) found that 75.72% of Silgo's available funds were deployed in loans and advances, making money lending a substantial part of its business. The CIT(A) relied on the decision of the Hon'ble Bombay High Court in CIT vs. Parle Plastics Ltd. [332 ITR 63], which held that if lending money constitutes a substantial part of a company's business, loans to shareholders are not deemed dividends under section 2(22)(e). The Tribunal upheld the CIT(A)'s decision, noting that substantial deployment of funds in loans and advances indicated that money lending was a significant part of Silgo's business, despite the absence of interest income in the profit and loss account.

3. Exclusion of Opening Balance and Interest Portion from Deemed Dividend:
The assessee's cross-objection argued that the AO erred in including the entire outstanding balance of Rs. 1,09,38,061/- as deemed dividend, asserting that only Rs. 79,00,000/- was advanced during the year. Additionally, the assessee contended that the provision for interest amounting to Rs. 6,03,797/- should not be considered as deemed dividend. The Tribunal dismissed the cross-objection as infructuous due to the dismissal of the Revenue's appeal, which upheld the CIT(A)'s decision that the entire loan amount was not deemed dividend under section 2(22)(e).

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the loan from Silgo to the assessee did not constitute deemed dividend under section 2(22)(e) due to the substantial part of Silgo's business being money lending. Consequently, the assessee's cross-objection was also dismissed as infructuous. The judgment emphasized that substantial deployment of funds in loans and advances qualifies as a substantial part of business, aligning with the interpretation provided by the Hon'ble Bombay High Court in the case of Parle Plastics Ltd.