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TMI Blog2014 (8) TMI 866X X X X Extracts X X X X X X X X Extracts X X X X ..... d from accumulated profit as it was merely a book entry. 5. Because the learned 1st appellate authority erred in confirming the addition of Rs. 11,245/- being interest paid by the Appellant on loan obtained Sarnath Finance Limited for business purposes. Moreover this amount has already been subjected to tax in the hands of Sarnath Finance Limited and hence the amount has been subjected to double taxation. 6. Because the learned 1st appellate authority erred in confirming the addition of Rs. 68,879/- being interest paid by the Appellant on loan obtained from persons covered u/s 40A(2)(b) of the I.T. Act, 1961 as the rate of interest was neither excessive nor unreasonable having regard to market rate of interest prevailing at the relevant time. Moreover this amount has already been subjected to tax in the hands of various depositors and hence the amount has been subjected to double taxation. 7. Because the learned lower authority ought not to have confirmed the addition of Rs. 42,000/- under the heading "Unexplained House Hold Expenses." 8. Because the learned 1st Appellate Authority erred in upholding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of sub clause (ii). Since the loans & advances were given to the assessee in the ordinary course of business of the company i.e. SFL, as they are engaged in the finance business, the loans & advances taken by the assessee cannot be treated to be deemed dividend in view of sub clause (ii) of section 2(22)(e) of the Act as the company was engaged in the money lending business. Moreover, the accumulated profits are not sufficient to meet the quantum of loans & advances. The explanations furnished by the assessee were duly examined by the Assessing Officer but he was not convinced with it and treated the loan received from SFL as deemed dividend and made an addition of Rs. 21,20,000/- under the head 'income from other sources'. The relevant observations of the Assessing Officer are extracted hereunder for the sake of reference: "3.3 The provisions of sec 2(22(e) say that 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 the May, 1997 by way of advance or loan to a share holder, being a person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more co-operative societies; (b) if it is a company which is not a "private company as defined in the Companies Act, 1956 (1 of 1956,) and the conditions specified either in item (A) or in item (B) are fulfilled, namely: (A) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act,1956 (42 of 1956), and any rules made there under; (B) Shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participants in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as only at Rs. 56,64,659/-which is only 10.79% of total investment of Rs. 5,24,76,926/. Since the company is mainly engaged in advancing of hire purchase of Transport vehicles, only 10.79% investment in loans and advances cannot be termed as substantial part of business of the company. During hearing, the counsel orally argued that giving loan and advances together with stock on hire Constitute the main business of the assessee in terms of purpose for which company was formed. This contention of the assessee is not tenable in view of the facts and figures mentioned above. It would be relevant to refer the meaning of 'substantial' envisaged by the statute in clause (b) of explanation 3 to sec. 2(22)(e) reproduced as under :- "a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern." Since the investment made by the company in loan and advances is less than 20% of total business investment, hence the lending of money is not a substantial part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the dates of advances calculated as under Date Amt of loan Accumulated profit Deemed dividend Closing Balance of Accumulated Profit 28.05.02 12,50,000 Op. balance 16,09,227 On pro rata basis out of new accumulated profit of Rs.l4,45,970/-F.Y.02-03 2,29,771 Total 18,38,998 12,50,000 5,88,998 04.06.2002 70,000 Op balance 5,88,998 On pro rata basis out of new accumulated profit of Rs. 14,45,970/-F.Y.02-03 27,731 Total 6,16,729 70,000 5,46,729 31.07.02 3,00,000 Op. balance 5,46,729 On pro rata basis out of new accumulated profit of Rs. 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 Rs. 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 reite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that while submitting in appeal No.-81, 82 and 83/DC Raqnge-II, Bly/02-03 for the assessment years 1996-97 to 1999-2000 in the case of appeal u/s 8(2)/10 of the Interest Tax Act, 1974 in the case of Sarnath Finance Ltd. the same AR is on record stating that the hire charges cannot be termed as 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: - &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main thrust of arguments of the appellant is that he has received the sums in question from SFL as a loan in the ordinary course of business as the lending of money is substantial part of business of the said company. It was also contended on behalf of the assessee that the CIT(A) has placed reliance upon the orders of CIT(A) pertaining to assessment 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey. In case of hire purchase, the company gets all sort of security of the advanced amount as the vehicle was registered in the name of the company and the option was given to the hirer only to get the vehicle registered in his own name on payment of last installment but in the case of ordinary lending of money to the borrower, 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 Rs. 21,20,000/- from SFL. Though the loan has been squared up during the year along with the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. 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 ultimately decides to purchase them, and of sale, because of the right given to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment. These paras are para No.23, 24 and 28 which are reproduced by the Hon'ble Allahabad High Court in para 10 of its judgment and hence, we reproduce para 10 of the judgment of the Hon'ble Allahabad High Court:- "10. In the case of Sundaram Finance Ltd. (supra) the Hon'ble Supreme Court considered the distinction between the hire purchase transaction and financing transaction and held in paragraphs 23, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire arises when the instalments 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 lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the audited balance sheet of SFL for the present assessment year is appearing at pages 9 to 28 of the paper book and on page No.16 of the paper book is Schedule III of the balance sheet. As per this Schedule, SFL has obtained secured loan from Bank of Baroda against hypothecation of stock on hire. On page 14 of the paper book is a balance sheet of SFL where stock on hire is shown separately and loan and advances are shown separately, which means stock on hire is not loans and advances. In fact, stock on hire is owned by SFL and only then, 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. Moreo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has obtained the loan @15% without furnishing any security. Therefore, the same should be allowed keeping in view the commercial expediencies. We find force in the contention of the assessee. We accordingly allow the interest paid at 15% to the persons covered u/s 40A(2)(b) of the Act. In the case of Anand Lok Finance Ltd., the interest was paid @18% does not appear to be reasonable and we restrict the payment of interest @15%. Whatever excess amount paid to Anand Lok Finance Limited deserves to be added. Accordingly, the issue is disposed of. 13. The other ground relates to the addition on account of house hold expenses. In this regard, it is noticed that the assessee family comprised of himself, wife and two sons studying in good school of Bareilly. The Assessing Officer has estimated the house hold expenses at Rs. 10,000/- per month and made the addition of Rs. 42,000/- as the assessee has declared house hold expenses at Rs. 78,000/-. Keeping in view the standard of living of the assessee, Rs. 78,000/- cannot be sufficient to meet the house hold expenses. Therefore, we find no infirmity in the estimation of Rs. 10,000/- per month by the Assessing Officer. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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