2021 (7) TMI 409 - AT - Income Tax

Deemed dividend u/s 2(22) - assessee' s share holding in the company exceeded 10% therefore loan received from KSPPL - CIT-A deleted the addition - HELD THAT - We find that the CIT(A) has acted on sound legal principles in the light of the facts broadly noticed above. On facts, it has emerged that the lender company has charged interest on the advances made to the assessee company. As in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT has observed that advances given by the lender was not for the individual benefit of the shareholder but for business purposes and therefore such transactions would not fall within the sweep of deeming fiction created under s.2(22)(e) of the Act. This reason on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee. It is case of the assessee than money lent to the assessee was received in the ordinary course of business for fulfillment of business supply through consolidated negotiation. It is also demonstrated by the assessee that similar advance was obtained in the earlier years right from AY 2010- 11 where assessee was not a shareholder in the lender company at all. It is also simultaneously the case of the assessee that the lender company was substantially engaged in money lending activity. CIT(A) has acted on sound legal principles in the light of the facts broadly noticed above. On facts, it has emerged that the lender company has charged interest on the advances made to the assessee company. Also in the case of Pradip Kumar Malhotra 2011 (8) TMI 16 - CALCUTTA HIGH COURT has observed that advances given by the lender was not for the individual benefit of the shareholder but for business purposes and therefore such transactions would not fall within the sweep of deeming fiction created under s.2(22)(e) of the Act. This reason on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee. We also simultaneously find merit in the other line of argument advanced on behalf of the assessee - money lent to the assessee was received in the ordinary course of business for fulfillment of business supply through consolidated negotiation. It is also demonstrated by the assessee that similar advance was obtained in the earlier years right from AY 2010- 11 where assessee was not a shareholder in the lender company at all. It is also simultaneously the case of the assessee that the lender company was substantially engaged in money lending activity. No addition could be made by way of deemed dividend in the case of the assessee as rightly held by the CIT(A) - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made under Section 2(22)(e) of the Income Tax Act, 1961 concerning deemed dividend.
2. Determination of whether money lending was a substantial part of the business of the lending company.
3. Classification of transactions as inter-corporate deposits versus loans and advances.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 2(22)(e) - Deemed Dividend

The Revenue's primary contention was that the unsecured loan of ?19,65,00,000 received by the assessee from M/s. Krishna Sheet Processors Pvt. Ltd. (KSPPL) should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee held 21.45% shareholding in KSPPL, thereby exceeding the 10% threshold for deemed dividend. Consequently, the AO added the loan amount to the assessee's income.

The Commissioner of Income Tax (Appeals) [CIT(A)] reversed this addition, finding merit in the assessee's argument that the loan was covered by exceptions under Section 2(22)(e). The CIT(A) concluded that the transactions were carried out in the ordinary course of business and were not gratuitous, as KSPPL charged interest on the loans.

Issue 2: Money Lending as a Substantial Part of Business

The CIT(A) analyzed whether money lending constituted a substantial part of KSPPL's business. The AO had argued that the money lending activities were not substantial, as the interest income was only 0.5% of the gross turnover and 11.22% of the gross profit, with the deployment of funds in loans and advances being 10.25% of the gross turnover.

The CIT(A) considered judicial precedents, including the Hon'ble Calcutta High Court's decision in Pradip Kumar Malhotra and ITAT decisions in Rekha Modi and Krishnomics Ltd., which emphasized the importance of the deployment of funds over income criteria. The CIT(A) found that the deployment of funds in money lending activities was more than 32.85% of the total funds available, thus constituting a substantial part of KSPPL's business.

Issue 3: Classification of Transactions

The CIT(A) also addressed the argument that the transactions were in the nature of inter-corporate deposits (ICDs) rather than loans and advances. The assessee contended that the transactions were part of routine business operations and were carried out at arm's length, with interest charged at market rates. The CIT(A) did not find it necessary to adjudicate this issue separately, as the primary issue was resolved in favor of the assessee.

Tribunal's Findings:

The Tribunal upheld the CIT(A)'s order, agreeing that the transactions were carried out in the ordinary course of business and were not gratuitous. The Tribunal noted that KSPPL charged interest on the loans, which were offered and assessed under the head 'business income.' The Tribunal also concurred with the CIT(A)'s finding that money lending constituted a substantial part of KSPPL's business, citing relevant judicial precedents.

The Tribunal dismissed the Revenue's appeals, finding no error in the CIT(A)'s order and concluding that Section 2(22)(e) was not applicable in the facts of the case.

Conclusion:

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition made under Section 2(22)(e) for deemed dividend. The Tribunal found that the loans were advanced in the ordinary course of business, with money lending being a substantial part of KSPPL's business, and the transactions were not gratuitous. The Revenue's appeals were dismissed.