9911796707
TMI Blog2014 (8) TMI 866X X X X Extracts X X X X X X X X Extracts X X X X ..... re of loan, but SFL is owning assets given on hire by it and therefore, as per the judgment of the Hon'ble Apex Court rendered in the case of Sundaram Finance Ltd. vs. State of Kerala and Other (1965 (11) TMI 123 - SUPREME COURT OF INDIA), these hire purchase transactions cannot be regarded as loan transaction, particularly when SFL is also claiming and showing assets given on hire as its own assets and such claim of the assessee is accepted by Bank of Baroda. When SFL is not engaged in the business of money lending, the transaction of the assessee by way of receiving loan of ₹ 21.02 lakhs from SFL has to be treated as deemed dividend in the hands of the present assessee – Decided against Assessee. Interest paid on loan obtained from persons u/s 40A(2)(b) – Held that:- The AO has allowed rate of interest @14% and the balance interest was disallowed - even the bank interest rate was more than 14% and the assessee has obtained the loan @15% without furnishing any security – it should be allowed keeping in view the commercial expediencies - the interest paid at 15% is allowed to the persons covered u/s 40A(2)(b) of the Act – Decided in favour of assessee. House hold exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 7. Because the learned lower authority ought not to have confirmed the addition of ₹ 42,000/- under the heading Unexplained House Hold Expenses. 8. Because the learned 1st Appellate Authority erred in upholding the assessment order. 9. Because the order appealed against is contrary to law, facts and principles of natural justice. 10. Any other grounds that may be taken at the time of hearing. 2. During the pendency of the appeal, the assessee has moved an application for the admission of additional ground with regard to the validity of the assessee for the reason that the notice u/s 143(2) was not served upon the assessee. This application was dismissed by the Tribunal through a separate order dated 25/07/2012, therefore, we are left with the original grounds of appeal raised by the assessee. Though the assessee has raised various grounds of appeal but they relate mainly on three issues. One is with regard to the addition of ₹ 21,20,000/- having invoked the provisions of section 2(22(e) of the I.T. Act (hereinafter referred to as the Act ), the second is with regard to the addition of ₹ 68,879/- being interest paid by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 the May, 1997 by way of advance or loan to a share holder, 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 10% of the voting power. The assessee is having share holding of ₹ 30,00,000/- out of total paid up capital of ₹ 2 Crores as on 31.03.2002 as well on 31.03.2003 which is 15% of paid up capital and hence he was beneficial owner of shares during the relevant period. The definition of company in which public are substantially interested has been given in sec. 2(18) of the Act as under:-. company in which the public substantial are interested - a company is said to be a company in which the public are substantially interested - (a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty percent of the shares are held (whether single or taken together) by the Government or the Reserve Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause appttes or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation -In its application to an Indian Company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words not less than fifty per cent , the words not less than forty per cent had been substituted; The assessee could not explain as to how M/s. Samath Finance Ltd. is a company wherein public are substantially interested. In fact looking to the statements of Final Accounts of the company, filed by the assessee on records, the company is not a company in which the public are substantially interested. It is closely held company. Thus this argument of the assessee does not support the claim. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable to the case of assessee in respect of total loan and advances amounting to ₹ 21,20,000/- taken from M/s SFL even if the loan taken was squared up, it will make no difference in treating the loan amount as deemed dividend. The following case laws support this view:- (i) In the case of Smt. Tarulata Shyam Other vs CIT, West Bengal, 108 ITR 345, Hon'ble Supreme Court held that even though the loan was not outstanding as of the year end, it would be treated as deemed dividend. (ii) In the case of Miss. P. Sarada vs CIT, 229 ITR 444, Hon'ble Supreme Court again held that the legal fiction came into play as soon as the monies were paid by the company to the share holder. The share holder must be deemed to have received dividend on the dates on which withdrawals of amounts where made from the company. The loan/advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the share holder in the eye of law had received dividend from the company. Thus all the amount of loan / advances amounting to ₹ 21,31,242/- taken by the assessee from SFL qualifies to be considered in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mulated profit of ₹ 14,45,970/- F.Y.02-03 2,25,809 Total 7,72,538 3,00,000 4,72,538 31.08.2002 5,00,000 Op. balance 4,72,538 On pro rata basis out of new accumulated profit of ₹ 14,45,970/- F.Y.02-03 1,22,808 Total 5,95,346 5.00.000 95,346 Total 21,20,000 4. An appeal was preferred before the CIT(A) and the assessee reiterated its contentions as raised before the Assessing Officer. It was also contended that as on 31/03/2003, SFL has made advances of ₹ 4,82,96,926/- out of which ₹ 4,26,32,267/- was against the hire purchase and ₹ 56,64,659 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s interest. That statement of his has been accepted by my predecessor in office vide his order dated 09-09-2002. In the above appeals after accepting the said submission my predecessor in office has held that SFL was not liable for payment of interest tax. Thus interest would be interest wherever it is sought to be taxed. It cannot be interest in one place and something else in the other. If it is being shown as interest, here to substantiate that the assessee is in the money lending business then it was interest, which was taxable under the Interest Tax Act. By conveniently stating there that it was not interest and having his argument accepted the AR cannot be turn around here and say that it is interest and that the SFL is in the business of money lending. In fact in his submission before my predecessor in office to describe the nature of hirecharges he submitted as under: - Next a Hire purchase contract is a hybrid form of contract - a hire purchase is thus hybrid form of contract. It is neither a simple bailment nor a contract of sale but combines the element of both of bailment because it prescribes terms for the use of goods irrespective of whether the hirer ulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 1996-97 to 1999-2000 in the case of SFL in which the hire charges were not termed to be interest under the Interest Tax Act. But this order of CIT(A) was reversed by the Tribunal and matter was restored back to Assessing Officer to readjudicate the issue in the light of the directions in the case of Commercial Motor Finance Ltd. In the case of Commercial Motor Finance Limited, the matter has travelled upto Hon'ble High Court and the Hon'ble High Court has held that the transactions entered by the assessee with the customers/hirers were the loan transactions and the finance charges were nothing but interest. Therefore, in the light of the judgment of Hon'ble Jurisdictional High Court in the case of CIT vs. Commercial Motor Finance Limited in I.T.A. No.362/2012, the hire purchase business of the assessee should be treated as a business of money lending and the loan given to the assessee was in ordinary course of business of the assessee. Therefore, the same cannot be treated as deemed dividend in the light of the provisions of section 2(22)(e)(ii) of the Act. The copy of the judgment of Hon'ble High Court is also placed on record. 6. The learned D.R., b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no such type of arrangement was made. Therefore, the money lending business cannot be equated with the hire purchase business and the Revenue authorities have rightly held the loan received by the assessee as deemed dividend as lending of money is not substantial part of the business of SFL. 7. Having given a thoughtful consideration to the rival submissions and from a careful perusal of orders of the lower authorities and the written submissions and the other documents placed on record, we find that undisputedly the assessee was holding 15% shares in SFL besides being one of the directors of the company. Therefore, the assessee has beneficial interest in SFL as required u/s 2(22)(e) of the Act. It is also undisputed fact that the assessee has taken a loan of ₹ 21,20,000/- from SFL. Though the loan has been squared up during the year along with the interest but these facts are not relevant to decide whether the provisions of section 2(22)(e) can be invoked on a loan given by the company to the shareholder. Moreover, no argument was also raised in this regard during the course of hearing of the appeal. The main thrust of arguments of the assessee through his written submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that the assessee is in the money lending business then it was interest, which was taxable under the Interest Tax Act. By conveniently stating there that it was not interest and having his argument accepted the AR cannot be turn around here and say that it is interest and that the SFL is in the business of money lending. In fact in his submission before my predecessor in office to describe the nature of hirecharges he submitted as under: - Next a Hire purchase contract is a hybrid form of contract - a hire purchase is thus hybrid form of contract. It is neither a simple bailment nor a contract of sale but combines the element of both of bailment because it prescribes terms for the use of goods irrespective of whether the hirer ultimately decides to purchase them, and of sale, because of the right given to the hirer to acquire title. In essence, the payment made during the period the title remains with the owner; it is a payment of 'hire' for title use of the asset hired - not interest of financing charges for the use of asset. Apart from the above, article 366(29A) of the constitution recognizes a hire purchase as sale of goods. Hence, it cannot generate inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 and 28 as under: 23. A hire-purchase agreement is normally one under which an owner hires goods to another party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when the hire-rental payments have reached the hire-purchase price stipulated in the agreement. But there are variations when a financier Is interposed between the owner of the goods and the customer. The agreement, ignoring variations of detail, broadly takes one or the other of two forms: (1) when the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery. In this form, goods are purchased by the financier from the dealer, and the financier obtains a hirepurchase agreement from the customer under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court in AIR 1965 SC 1082 dealt with a transaction of this character. (2) In the other form of transactions, goods are purchased by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stalments are paid and not before. In 'such a hire-purchase agreement there is no agreement to buy goods; the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreements must be distinguished from transactions in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods. 28. In the light of these principles the true nature of the transactions of the appellants may now be stated. The, appellants are carrying on the business of financiers: they are not dealing in motor-vehicles. The motor-vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly reci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen, SFL can hypothecate the same to Bank and Bank had accepted stock on hire under hypothecation to Bank. These facts go to show that in the present case, hire purchase transaction conducted by SFL is not in the nature of loan, but SFL is owning assets given on hire by it and therefore, as per the judgment of the Hon'ble Apex Court rendered in the case of Sundaram Finance Ltd. vs. State of Kerala and Other (supra), these hire purchase transactions cannot be regarded as loan transaction, particularly when SFL is also claiming and showing assets given on hire as its own assets and such claim of the assessee is accepted by Bank of Baroda. Moreover, it was the submission of the ld. A.R. before the ld. CIT(A) where it was submitted before the ld. CIT(A) in the case of SFL in course of interest tax proceedings that the amount received by SFL was hire charges and not interest income and therefore, not liable to interest tax. Nothing has been brought on record before us to show that such submission of the ld. A.R. of SFL before the ld. CIT(A) in course of interest tax proceedings was not a correct stand. In fact the stand taken by ld. A.R. of SFL before the ld. CIT(A) in course of int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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