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TMI Blog2012 (12) TMI 571X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of presentation of accounts in the Balance Sheet and Profit & Loss account of the company without appreciating the true nature and character of such accounts. 4. That under the facts and in law ld. CIT(A) ought to have deleted the addition made by the AO u/s 2(22)(e)." 3. The brief facts of the case are that the assessee enjoys income from house property, share from firm and trading of shares of companies. During the assessment proceedings, the A.O. noticed that the assessee has taken unsecured loan from Krishna Beads Industries Private Limited of Rs. 37,28,059/-. The assessee is a Director and having substantial interest in the company Krishna Beads Industries Private Limited. The assessee was holding not less than 10% of the voting power in the said Company. The A.O. asked the assessee why the amount of Rs. 37,28,659/- be not treated as deemed dividend as per the provisions of section 2(22)(e) of the Income Tax Act, 1961 ('the Act' hereinafter). Before the A.O. it was submitted by the assessee that clause (3) of object clause of the Company was to carry on the business of financing enterprises and to finance whether by way of making loans or advances to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the lending of money is a substantial part of the business of the company will not attract the provisions of sec.2(22)(e) - This exception shall apply only when two cumulative conditions are fulfilled - first, the loan should have been made by the company in the ordinary course of business and secondly, money lending should be substantial part of the company's business. Thus, the effect of sub-clause (e) of sub section (22) of sec. 2 is to create a fiction and treat the loans or advances to a shareholder who is the beneficial owner of shares holding 10% or more of voting power of the company as dividend. It also includes payments made by the company on behalf or for the individual benefit of such share holder. It further includes advances or loans made to any concern in which such shareholder is a member or partner and in which he has a substantial interest. Now, coming to the facts of the case in hand it is seen that the total income as per P&L account as on 31.3.08 shown by M/s Krishna Beads (P) Ltd. on account of sales and other income is Rs. 2657609/-. The breakup of which as per Schedule 9 is as under :- Sales (Net) 46465 118143939 Exchange diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Rs. 4790339/- out of which Rs. 3728029/- has been given to the appellant, that also interest free in view of the discussion above that sum of Rs. 62280/- has been shown as indirect income in the audited accounts. On these facts it is oxymoron to claim that major part of the activity of the company M/s Krishna Beads Ind. (P) Ltd. was money lending. Thus, I am of the considered opinion that the case of the appellant is far removed from the exception as provided in sub clause (ii) of clause (e) sub section (22) of sec. 2 (i.e. 2(22)(e)(ii). The AO has rightly made the addition and the same is upheld. Grounds raised are dismissed." 5. The ld. Authorised Representative reiterated the submissions made before the A.O. and submitted that the dispute is only whether loan and advance received by the assessee is covered under the exceptional circumstances provided in section 2(22)(e) of the Act, as provided under clause (ii) of section 2(22)(e) of the Act that any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is substantial part of the company. The ld. Authorised Representative submitted that the assessee received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; but "dividend" does not include- (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; [(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not declare dividends or adequate dividends and may merely give loans to shareholders and such loans, not being dividends under the general law, would not be taxable as income in the hands of shareholders. As the public would not have substantial interest in such company, those substantially interested in the company may not recover the loans or allow them to be that barred by time. The result would be that the amounts which were ostensibly received as loans or advances become the income of shareholders and yet they would not be required to pay any tax on said income under the general law. It is to avoid the evil of this nature that sub-clause (e) of section 2(22) has been enacted. 9. On a plain reading of section 2(22)(e), we find that the section is applicable for any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares holding not less than the 10% of the voting power ................. but this deemed dividend does not include any advance or loan made to shareholder by a company in the ordinary course of its business, where the lend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermining the issue under the Income Tax Act. The issue whether the business of the company was a business of money lending or not, to examine this aspect one has to see various aspect of evidences including procedural aspect which are required to be taken under Company's Act and report to controlling Officers including Registrar of Companies, SEBI and others. For doing money lending business one has to obtain necessary permission from competent authority. We may state here that the assessee has failed to furnish any single evidence to support that the company has followed such procedure based on which it can be said that the substantial part of the business of the company was money lending. If we examine this aspect from business activities, we noticed that there are accepted principles that the business activities and transaction are recorded in the books of account. In the case under consideration, the total loan and advances as on 31.03.2008 are only in respect of three parties, Krishna Gopal Maheswary i.e. the assessee and other two parties Abhishek Enterprises & Gaurav Luminaries Pvt. Ltd. The details of loans and advances are reproduced from page no.22 of the Paper Book as un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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