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TMI Blog2015 (3) TMI 1154X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee Disallowance u/s. 14A - Held that:- We find that no satisfaction was recorded by the ld.AO in terms of Rule 8D(1) of the IT Rules, 1962, which is mandatory as in the instant case, the assessee had disallowed a sum of ₹ 15,451/- voluntarily in the return of income u/s. 14A and without giving a categorical finding how the said figure is incorrect having regard to the accounts of the assessee, the ld.AO cannot resort to directly adopt the Rule 8D(2) and make disallowance thereon. We find that both the ld. AO as well as the ld. CIT(A) had not addressed this aspect, which is crucial and it goes to the root of the matter. We hold that without recording satisfaction in terms of rule 8D(1), the ld.AO cannot directly apply the Rule 8D(2) of the I.T Rules 1962. Thus we have no hesitation in directing the ld. AO to delete the addition made on this count u/s. 14A of the Act - Decided in favour of assessee - ITA No. 21/Kol/2013, C.O No. 28/Kol/2013 - - - Dated:- 9-3-2015 - Shri N.V.Vasudevan, Judicial Member, and Shri M. Balaganesh, Accountant Member For The Appellant/Department : Shri Pinaki Mukherjee, JCIT, ld.Sr.DR For the Cross Objector/Assessee : Shri Mano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been derived as interest income by M/s. JAFPL. M/s. JAFPL had deployed ₹ 18,82,80,249/- in its money lending business out of total liquid funds available at ₹ 31,24,44, 463/-. It was argued that where lending is made in the ordinary course of business to the shareholder and where lending is also substantial part of the business of the lending company, then it would fall under the exception clause of section 2(22)(e) of the I.T Act. The ld.AO observed the following from the income criteria of the assessee , which is tabulated as below :- Particulars of Income As on 31/03/2009 As on 31/03/2008 1) Sale of shares Rs.8,84,01,687 NIL 2)Interest Income Rs.66,21,789 Rs.79,95,548 3)Profit on sale of investments Rs.2,26,59,650 Rs.2,77,05,361 4) Other income Rs.1,33,05,036 (Rs.94,60,872) 5.2 According to the ld.AO, the total income of the assessee is ₹ 3.59 crores and out of which interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 subclause (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 subclause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [ and before the 1st day of April, 1965] ;] (ii) any advance or loan made to a shareholder [ or the said concern] by a company in the ordinary course of its business , where the lending of money is a substantial part of the business of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3CD) of M/s. JAFPL, wherein the tax auditor has stated that M/s. JAFPL has started trading in shares in assessment year 2009-10 as a new business activity. 8. We find that the expression substantial part of business has been considered by the Hon ble Bombay High Court regarding applicability of provisions of section 2(22)(e) in the case of CIT Vs. Parle Plastics Limited Anr reported in (2011) 332 ITR 63 (Bom). The Hon ble Bombay High Court has held as under:- 11. The expression used under cl. (ii) of s. 2(22) is substantial part of the business . We would, therefore, have to ascertain the meaning of the word substantial , appearing in the expression substantial part of the business . Stroud's Judicial Dictionary, Fifth Edition, gives the first meaning of word substantial as A word of no fixed meaning, it is an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole . The decision of Terry's Motors Lt. vs. Rinder (1948) S.A.S.R. 167 is given in support of this meaning. In the meaning No. 8, while considering substantial amount , it is stated that out of a rent of 80 per annum, 13 per annum attributable to the amount pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of second division is 30 per cent and the turnover and profit of the third line of business is 30 per cent. In the case of this company no part of the business has turnover exceeding 50 per cent and no part of the business company generates profit of more than 50 per cent of the total. In such a case can it be said that none of the business of the said company is a substantial business of the company. In our view now. The first business which constitutes 40 per cent of the turnover and contributes 40 per cent to the profit would be the single largest part of the business of the company, the second and third divisions of the business, each of which contributes 30 per cent of the turnover as well as profit of the company, though not the major and not even single largest part of the business of the company, would still be a substantial part of the business of the company, because if any part of the three divisions of the business of the company was to be closed down, that would result in loss of turnover and/or business of 30 per cent, ordinarily no company would regard such part of the business as insignificant. As rightly observed in Stroud s Judicial dictionary, it is not possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the business of the lending company is of money lending. He further argued that it does not matter whether the advances have been refunded during the year and balance of loans and advances at the end of the year had got reduced. We find lot of force in the arguments of the ld.AR. We hold that what has to be seen is the nature of the lending company s business and analysis of deployment of funds during the year and also in previous years and intention of the party. We hold that by seeing the balance sheet at the end of the year, which only reflects the financial status of the activities carried out by the assessee all throughout the year, but what has to be seen is the actual picture and affairs of the lending company to determine the correct nature of business. We draw support from the decision of the Hon ble Allahabad High Court in the case of Ravi Agarwal Vs. ACIT reported in (2015) 64 Taxmann.com 31 (All.) vide order dated 8-10-2015, wherein it has been held as below :- 11 We are of the opinion that it is not possible to give a fixed definition of the word substantial in relation to a substantial business of a Company. We are of the opinion that any business of a C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 regard as small, trivial, or inconsequential as compared to the whole of the business is substantial business. Therefore, if particular percent 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 Explanation 3(b) below section 2(22)(e) of the Act, where 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 and the order of the Tribunal in the case of Mrs Rekha Modi vs. Income Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (22)(e) of the Act cannot be made applicable in the facts of the case. He also argued that M/s. JAFPL had shown interest income as interest received on inter corporate deposits in its books. He stated that terms loan , advance and deposit are distinct and separate, In support of this proposition, he placed his reliance on the following decisions:- 1) ITAT Mumbai in the case of Oil Industries Vs. DCIT reported in 28 SOT 383(Mum.Trib) 2) ITAT Kolkata in the case of IFB Agro Industries Vs.DCIT reported in 63 SOT 207 (Kol.Trib). 3) ITAT Kolkata in the case of DCIT Vs. P.C Chandra Holdings P.Ltd In 38 CCH 115(Kol.Trib) 8.5 He argued that in all these aforesaid decisions the expression loans , advances and deposits have been distinguished. It has also been held that the provisions of section 2(22)(e) of the Act cannot be made applicable for inter corporate deposits as received by the assessee. He also argued that M/s. JAFPL in the instant case has got no borrowings and has got own funds of ₹ 10.45 crores. Accordingly, it had chosen to place deposits with the assesseee. 8.6 In view of above, we further find lot of force in the alternative argument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of ₹ 15,451/- voluntarily in the return of income u/s. 14A and without giving a categorical finding how the said figure is incorrect having regard to the accounts of the assessee, the ld.AO cannot resort to directly adopt the Rule 8D(2) and make disallowance thereon. We find that both the ld. AO as well as the ld. CIT(A) had not addressed this aspect, which is crucial and it goes to the root of the matter. We hold that without recording satisfaction in terms of rule 8D(1), the ld.AO cannot directly apply the Rule 8D(2) of the I.T Rules 1962. We draw support from the following decision of the Hon ble Jurisdictional Calcutta High Court in the case of CIT, Central II Vs. REI Agro Ltd in GA No.3022 of 2013 ITAT 161 of 2013 dated 23.12.2013, wherein it has been held as under:- The Court : The Assessing Officer disallowed the contribution made by the assessee towards provident fund to the extent off a sum of ₹ 1,92,913/- on the ground that the deposit was made beyond the stipulated time. The Assessing Officer also disallowed the expenditure under section l4A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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