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2020 (1) TMI 1139 - HC - Income TaxDeemed dividend u/s 2(22)(e) - advances or loan made to a share holder by the Company in the ordinary course of business - Proof of substantial interest in other company - HELD THAT - As the assessee was holding more than 10% of the shares in both the companies, the provisions of Section 2(22)(e) of the Act would come into play. However, the section further provides that the dividend does not include any advances or loan made to a share holder by the Company in the ordinary course of business where lending of money is a substantial part of the business of the Company.. In the case on hand, it is not in dispute that both the companies were having money lending as the substantial part of their business. Therefore, the Tribunal has rightly hold that no addition can be made by way of deemed dividend in the case of the assessee. - Decided in favour of assessee.
Issues Involved:
1. Whether the Appellate Tribunal was correct to hold that the assessee received sums from M/s. Shreem Design Infrastructure Pvt. Ltd and M/s. Aatrey Infrastructure Pvt. Ltd in the ordinary course of business. 2. Whether the provisions of Section 2(22)(e) of the Income Tax Act, 1961 are attracted in this case. 3. Whether the creditor companies, M/s. Shreem Design Infrastructure Pvt. Ltd and M/s. Aatrey Infrastructure Pvt. Ltd, are into the business of money lending. Issue-Wise Detailed Analysis: 1. Ordinary Course of Business: The Tribunal examined whether the sums received by the assessee from M/s. Shreem Design Infrastructure Pvt. Ltd (SDIPL) and M/s. Aatrey Infrastructure Pvt. Ltd (AIPL) were in the ordinary course of business. The Tribunal noted that the assessee had obtained loans and advances from these companies and paid interest at a market rate of 9%. The Tribunal found that the lending activities constituted a substantial part of the business of both companies. Specifically, SDIPL had a percentage ratio of loans and advances to total funds available at 79.37%, and AIPL had a ratio of 35.66%. This indicated that the lending of money was indeed a significant part of their business operations. 2. Applicability of Section 2(22)(e): The Tribunal addressed the applicability of Section 2(22)(e) of the Income Tax Act, 1961, which pertains to deemed dividends. The Assessing Officer had made disallowances under this section, asserting that the assessee, holding significant shares in both companies, had received loans and advances that should be treated as deemed dividends. However, the Tribunal concluded that the specific exemption under sub-clause (ii) of Section 2(22)(e) applied. This sub-clause excludes loans or advances made to a shareholder by a company in the ordinary course of its business where money lending is a substantial part of the business. Given the substantial money lending activities of SDIPL and AIPL, the Tribunal ruled that these transactions did not attract the provisions of Section 2(22)(e). 3. Creditor Companies' Business of Money Lending: The Tribunal analyzed whether SDIPL and AIPL were engaged in the business of money lending. Despite the main objects of these companies being related to construction and infrastructure, their Memorandum of Association authorized money lending activities. The Tribunal observed that a significant portion of their assets and funds were deployed in lending activities. For instance, SDIPL had 69.71% of its total assets in loans and advances as of 31.3.2015, and AIPL had 32.45%. The Tribunal also noted that the companies earned substantial interest income from these lending activities, supporting the conclusion that money lending was indeed a substantial part of their business. Conclusion: The Tribunal's findings were based on a detailed examination of the business activities and financial records of SDIPL and AIPL. It concluded that the loans and advances received by the assessee from these companies were in the ordinary course of business and that money lending was a substantial part of their business. Consequently, the provisions of Section 2(22)(e) regarding deemed dividends were not applicable. The High Court upheld the Tribunal's decision, dismissing the Revenue's appeal and affirming that no substantial question of law arose for consideration. The appeal was dismissed accordingly.
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