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TMI Blog2014 (3) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order passed by the lower authorities who have rightly observed that the amount is to be included in the income of assessee as deemed dividend under Section 2(22)(e) of the Act – Decided against Assessee. - Income Tax Appeal No. - 23 of 2013 - - - Dated:- 10-3-2014 - Hon'ble Ashok Bhushan And Hon'ble Dr. Satish Chandra,JJ. For the Appellant : Rishabh Agarwal,Ravi Kant For the Respondent : C. S. C. ,Shambhoo Chopra ORDER (Delivered by Dr. Satish Chandra, J.) 1. The present appeal is filed by the assessee against the judgment and order dated 23.10.2012, passed by the Income Tax Appellate Tribunal, Agra in ITA NO.82/Agra/2012, for the assessment year 2008-09. 2. On 12.2.2013, a coordinate Bench has admitted the appeal on the following substantial questions of law:- (i) Whether on the facts and circumstances of the case the findings of the Income Tax Appellate Tribunal that money lending does not constitute 'substantial business' of the lending company, is correct ? (ii) Whether the Tribunal had erred in law in plainly drawing negative inferences on the basis of manner of recording entries in the books of accounts without ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial interest would not be regarded as a dividend if the advance or loan was made by the lending company, if two conditions are satisfied namely, (i) that the loan or advance was made by the lending company in the ordinary course of its business and (ii) lending of money was a substantial part of the business of the lending company. The expression used under clause (ii) of section 2(22)(e) is substantial part of the business . The expression substantial part does not connote an idea of being the major part or the part that constitutes majority of the whole. If the Legislature intended that a particular minimum percentage of the business of a lending company should come from the business of lending, the Legislature could have specifically provided for that percentage while drafting clause (ii) of section 2(22)(e) of the Act. The Legislature had deliberately used the word substantial instead of using the word major and/or specifying any percentage of the business or profit to be coming from the lending business of the lending company for the purpose of clause (ii) of Section 2(22)(e). Any business of a company which the company does not regard as small, trivial, or inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand Sri Shambhoo Chopra, learned counsel for the department has justified the impugned order. He submits that the assessee has miserably failed to establish that the substantial part of the business of the company is money lending and the loan and advances received by the assessee is in the ordinary course of money lending business. He further submits that unless the assessee establishes that money lending was the substantial part of the business of the company and the loans and advances received during the course of money lending business, the assessee will not fall under the exceptional circumstances provided in Section 2(22)(e)(ii) for the purpose not to include the calculation of deemed dividend. More over, by merely stating the financial activities in the object clause, the assessee company will not fall under the exceptional circumstances, not to treat the deemed dividend. He relied on the ratio laid down in the case of CIT Vs. S.R. Talwar, (2008) 305 ITR 286 (All), where it was held that loans and advances received from a company in which the assessee is a director and the company is having accumulated profits, the loan received is definitely to be treated as deemed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble and covered by the definition of Section 2(24) of the Act, where the income is defined as including dividend . What is taxable as dividend need not necessarily be paid in money; it may be paid in money's worth by the delivery, say, of goods or securities or shares in another company and the amount of the dividend should be taken to be the market value of the money's worth on the date the dividend is declared as per the ratio laid down in the case of CIT vs. Central India Industries Ltd., (1971) 82 ITR 555 (SC). 14. Under the Companies Act, 1956, a company cannot pay dividend otherwise than out of the profits of the year or any other undistributed profits. But there is nothing in law to prevent a company using an income receipt as cash in its hands to discharge a capital liability or to purchase a capital asset, and then, after the close of its financial year, paying a dividend out of other cash, or borrowing for the purpose, to the extent of the credit balance standing on profit and loss account . In any event, dividend does not lost its taxable character as dividend merely because it is paid out of capital in violation of the law. Similarly, non-observance b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT vs. Alga Sundaram Chettiar, (1977) 109 ITR 508 (Mad), held that the term payment must not be given a literal interpretation but it must be seen whether a jural relationship of debtor and creditor was created between the parties and it was not necessary that payment should have been made in cash or in kind to the assessee. 20. As per provision of sub section (e) of Section 2(22) of the Act, by way of loan to a share-holder amounts to dividend. Section 2(22)(e) of the Act defines as under: Section 2(22)-dividend includes- (a) * * * (b) * * * (c) * * * (d) * * * (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made on behalf of or for the individual benefit of such shareholder so as to attract the second part of the sub-clause is discussed by the author in (2013) 359 ITR 13 (Journal). 23. In the case of CIT vs. Alagusundaram Chettiar, (supra) it was observed that the provisions of this clause are attracted to any payment by a company, of any sum (whether as representing a part of the assets of the company or otherwise) by way of (1) advance; or (2) loan; (3) any payment on behalf of any shareholder; or (4) any payment for the individual benefit of any shareholder. The first two cases deal with a payment to the shareholder directly. The last two cases contemplate payment by a company not to the shareholder but to a third party on behalf of or for the individual benefit of the shareholder. On the date when the loan is advanced, the recipient should be a shareholder. If it is not so established, the provisions of section 2(22)(e) will not apply as observed in the case of CIT vs. H.K. Mittal, (1996) 219 ITR 420 (All.) 24. Thus, any payment by any company of any sum representing a part of the assets by way of advance would come within the mischief of deemed dividend. It would se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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