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TMI Blog2014 (10) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... Parle Plastics Ltd. and Another [2010 (9) TMI 726 - BOMBAY HIGH COURT] - expression substantial part does not connote an idea of being the “major part” or the part that constitutes majority of the whole - the capital employed by a company for carrying on a particular division of its business as compared to the total capital employed by it, would also be relevant while considering whether the part of the business of the company constitutes “substantial part of the business” of the company. There should not be any controversy that “substantial part of business” is not equivalent to the word “major part of business”, as the Legislature has not used the words “major part of business” in place of “substantial part of business” - But the Legislature has consciously used the words “substantial part of business” which means that any business of a company which the company does not regard as small, trivial, or inconsequential as compared to the whole of the business is substantial business - if particular per cent of capital of the company is employed in the money lending business, the company can be called to have substantial part of business in money lending - In the light of Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal was disposed by the Tribunal vide its order dated 29.11.2013, against which an appeal under section 260A of the Act was filed by the assessee before the Hon'ble High Court of Allahabad raising a question of law i.e. Whether the Income Tax Appellate Tribunal was justified in holding that the two lending companies who have advanced interest bearing loan to the appellant have done so not in the ordinary course of business, by completely overlooking that the lending of money has been specifically mentioned in the Memorandum of Association of both the companies in the objects which are ancillary to carry out the main objects of the company . Vide judgment dated 17.4.2014, the Hon'ble High Court of Allahabad has disposed of the appeal bearing Income Tax Appeal Defective No.35 of 2014 and has restored the appeal to the Tribunal with a direction to consider the applicability of the second ingredient of clause (ii) of the exclusion contained in section 2(22)(e) of the Act. The relevant observation of the Hon'ble High Court is extracted hereunder for the sake of reference:- We find merit in the contention of the assessee that the Tribunal has manifestly misapplied its m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the companies did not carry on money lending business, the advances which were made to the assessee would not be in the ordinary course of its business. This, as we have noted earlier, is not the test which is to be fulfilled in respect of the first ingredient of clause (ii). However, since the Tribunal has not considered the issue as to whether the second ingredient of clause (ii) was duly fulfilled, we are of the view that it would be proper to restore the proceedings before the Tribunal for fresh evaluation on the aforesaid aspect. Accordingly, we restore the appeal to the Tribunal for considering the applicability of the second ingredient of clause (ii) of the exclusion contained in section 2(22)(e). In this view of the matter, it is not necessary for the Court to finally decide the substantial question of law as framed. We, however, find no merit in the contention of learned counsel appearing on behalf of the revenue that the appeal by the assessee does not give rise to any substantial question of law. Undoubtedly, an appeal under section 260-A must raise a substantial question of law and not an issue pertaining merely to appreciation of facts (Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e). The ld. counsel for the assessee has further contended that if any business of a company, which the company does not regard as small, trivial or inconsequential as compared to the whole of the business, is substantial business. 6. The ld. counsel for the assessee has further invited our attention to clause (b) of Explanation 3 below section 2(22) of the Act with the submission that substantial interest has been defined in this clause, according to which 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 per cent of the income of that concern. Therefore, in the same manner, the definition of substantial business should be examined and if the company s capital employed in the money lending business is more than 20%, then it should be held that substantial part of business of the company is money lending business. In the instant case, more than 38% in the case of Kukki Color Prints Pvt. Ltd. and more than 69% in the case of Kukki Color Photos Pvt. Ltd. of the capital was employed in the money lending business. Therefore, it cannot be held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the memorandum of association, but the second ingredient that money lending business is substantial part of business of the company was not established by the assessee. Therefore, loans and advances given to the assessee are deemed dividend in the light of provisions of section 2(22)(e) of the Act. 9. Having heard the rival submissions and from a careful perusal of the orders of the authorities below, judgments referred to by the parties and the material available on record, we find that if the assessee receives loans or advances from a company, in which it has substantial interest, the same loan and advances would be treated as deemed dividend in the light of provisions of section 2(2)(e) of the Act. But there are exceptions in this provision and as per exclusory clause (ii), if the assessee establish that advance or loan made to shareholders/assessee by a company in the ordinary course of its business and the lending of money is substantial part of business of the company. Loan and advances by the company would not be deemed dividend. Thus, in order to get out of the clutches of section 2(22)(e) of the Act, the assessee is required to establish two ingredients i.e. (1) lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money lending. Their Lordships have also examined as to what is substantial part of business. The relevant observations of the Hon'ble High Court of Allahabad is extracted hereunder for the sake of reference:- 9. We heard both the parties at length and gone through the material available on record. 10. In the instant case, it appears that neither the company nor the assessee having the licence of money-lending business. Further, as per the balance-sheet of the company, total loans and advances are only ₹ 47,90,339 out of which loan to the extent of ₹ 37,28,029 was given to the assessee. Hence, a substantial part of the loan has been taken by the assessee. In the circumstances, there is no chance to accumulate the profits pertaining to the available funds. Therefore, question (iv) cannot be answered. 11. It also appears from the record that not a single rupee income has been shown from the money-lending activity. The interest earned on FDRs no stretch imagination, can be said to have been earned from money-lending business. What is now being claimed, i.e., an interest of ₹ 62,280 from the appellant on the advances given. Thus, the explanation being of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss 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 by the company of the formalities required by the company law for declaration of dividend would not affect the shareholder's liability to taxation in respect of the dividend. 15. A shareholder is liable to pay tax on his dividend income without any credit for the tax paid by the company on its own profits; and further, the company must deduct, under section 194 (except as otherwise provided in that section), the shareholder's tax at source while paying the dividend. 16. For the purpose of this section, the shareholders must have 10 per cent. or more voting power in the closely-held company. Therefore, for example, if a closely held company gives a loan to its director who holds 10 per cent. of the voting power of the company, then the amount received by the director from the company will be taxed in his hands. In the present case, this condition is fulfilled. 17. A dividend is not capital but the produce of capital. Subject to well recognised limitations, dividend is a word of general an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. 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. Thus, for a dividend to arise under this sub-clause, the following conditions should be fulfilled : (i) the company must be a company shares of which are closelyheld. (ii) money (not money's worth) should be paid by the company. (iii) the money must form a part of the assets of the company. (iv) it may be paid either by way of advance or loan or it may be any payment . (v) (a) the payee must be a shareholder of the company having substantial interest in the company, or (b) the payee must be a person who is acting on behalf of or for the individual benefit of such shareholder. 21. The expression person who has a substantial interest in the company is defined in section 2(32), as meaning a person who is the beneficial owner of shares, not being shares entitled to a fixed rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 seem that deposits made by a closelyheld company would also be covered by the expressions advance or loan . Advances given by a company to its shareholders should be treated as payment out of accumulated profits of the company, whether capitalised or not, and must be treated as dividend and would go to reduce the tax liability, whenever such tax liability is required to be determined as observed in the case of CIT v. G. Narasimhan [1999] 236 ITR 327 (SC). 25. In view of the above discussion, the assessee has failed to establish that substantial part of the business of the company is money-lending. When it is so then we finds no reason to interfere with the impugned order passed by the lower authorities who have rightly observed that the amount of ₹ 37,28,059 is to be included in the income of assessee as deemed dividend under section 2(22)(e) of the Act. Hence, the impugned order is hereby sustained along with the reasons mentioned therein. 12. We have also examined the other order of the Tribunal in the case of Mrs Rekha Modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not satisfied and the amount in question advanced by the company 'A' to the assessee was not covered by the exception provided in the said sub-clause as claimed by the assessee. Therefore, the amount in question was rightly treated by the Assessing Officer as dividend in the hands of the assessee by applying the deeming provisions of section 2(22)(e) and the Commissioner (Appeals) was fully justified in sustaining the addition made by the Assessing Officer on this count. 13. We have also examined the judgment in the case of CIT vs. Parle Plastics Ltd. and Another (supra), in which it has been held that expression substantial part does not connote an idea of being the major part or the part that constitutes majority of the whole. It was also held that the capital employed by a company for carrying on a particular division of its business as compared to the total capital employed by it, would also be relevant while considering whether the part of the business of the company constitutes substantial part of the business of the company. The relevant observation of the Hon'ble Bombay High court is also extracted hereunder for the sake of reference:- A plain rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of human resources used by the company for carrying on a particular division of business may also be required to be taken into consideration while considering whether a particular business forms a substantial part of its business. Undisputedly, the capital employed by a company for carrying on a particular division of its business as compared to the total capital employed by it would also be relevant while considering whether the part of the business of the company constitutes substantial part of the business of the company. 14. In the light of aforesaid judicial pronouncement, we have examined the facts of the case in hand and we are of the view that there should not be any controversy that substantial part of business is not equivalent to the word major part of business , as the Legislature has not used the words major part of business in place of substantial part of business . Had it been used, then it would have to be examined that assessee s business should be more than 50% in that particular activity. But the Legislature has consciously used the words substantial part of business which means that any business of a company which the company does not r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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