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TMI Blog2021 (7) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... r adjudication purposes. 3. We shall take Revenue's appeal in ITA No. 1492/Ahd/ 2014 concerning AY 2011-12 as a lead case for adjudication. ITA No. 1492/Ahd/2014 - AY- 2011-12 4. The ground of appeal raised by the Revenue reads as under: "1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in deleting the addition of Rs. 19,65,00, 000/- made by A.O. u/ s 2(22)(e) of the Act in respect of loan received from M/ s. Krishna Sheet Processors Pvt. Ltd. (KSPPL) without appreciating the fact that the assessee' s share holding in the company exceeded 10% therefore loan received from KSPPL therefore the same was rightly treated as deemed dividend within the meaning of section 2(22)(e) of the Act. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that money lending was a substantial part of assessee's business without appreciating the fact that the assesses had resorted to colourable device to escape the provisions of section 2(22)(e) of the Act. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that loan given to M/ s. Krishna Coil Cutters Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion made u/ s 144A of the IT Act, the appellant had made submissions that loan taken by it from KSPPL was covered by the exceptions provided u/ s 2(22)(e) and hence, the amount received by it from the other, company cannot be taxed as deemed dividend. These submissions of the appellant are under following heads: I.. The transactions of the loan were carried out in the ordinary course of where lending of money, is substantial part of the business of the lending company i. e. M/ s. Krishna Sheet Processors Pvt. Ltd. and hence it is covered by the exception provided in clause (ii) or section 2 (22) (e) of the Act. II. The transactions were in the nature of Inter Corporate Deposit (ICD) between KSPPL and appellant company and hence, it cannot be termed as loans and advances. III. The money has been received by the appellant in the ordinary course of business from the company which is having substantial investment in the appellant company. 5.3.1. 1. So far as the first argument of the appellant is concerned, the AO in his order has discussed the issue in paragraphs 6. 2 to 6, 8 and has also relied upon the direction issued by the Jt. CIT Kheda Range, Nadiad which has been repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployment of funds to earn interest ratio is 10: 1 in favour of turnover approximately. Hence, as per the criteria laid down by the Hon'ble Bombay High Court in its decision in the case of Parle Plastics Ltd. (supra), the appellant' s case is not covered by exceptions of section 2(22)(e) relating to loans and advances as a part of money fending activity. 5.3.2. 2. The appellant has filed detailed submission in this regard before the AO as well as during the course of appellate proceedings. Since, " substantial part of the business" has not been defined in the IT Act, 1961, hence, the judicial pronouncements in this regard are required to be analyzed first. This has been done as follows: a) The Hon'ble Calcutta High Court in its decision in the case of Pradipkumar Malhotra supra has held that not every advance or loan to a shareholder is liable to be taxed as deemed dividend u/ s 2(22)(e) of the Act, but, only gratuitous loans advanced by the company to shareholders can be treated as deemed dividend. In this case the court had held as follows: " The phrase ' by way of advance or loan' appearing to sub- clause (e) of section 2(22) must be construed to mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO while computing the business income as no one makes payment of interest on the amount of income it earns or which law assumes to be belonging only to the recipient as his money. Thus, the AO had nowhere held that the amount advanced by the KSPPL to the appellant was a gratuitous payment. It has also been submitted by the appellant that KSPPL was advancing funds to the appellant on interest at market rate even when the appellant was not its shareholder at all and, therefore, routine advance of funds for earning of interest income by KSPPL in which appellant has become substantial shareholder cannot be considered to be dividend merely because recipient has subsequently acquired substantial holding in the share capital offending company. ii)) Both the appellant as well as the AO have relied upon the decision of Rekha Modi (supra) of Delhi Bench of ITAT. Both the appellant and the AO are in agreement that in order to ascertain as to whether money lending was a substantial part of total business of lender company, the facts has to be considered in respect of the previous year relevant to the assessment year under consideration and not in relation to earlier years since each as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (e) of section 2 (22) was 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. [ Para 13]" Thus, in this decision the Tribunal had examined the facts from both income criteria and the deployment of fund criteria. In this regard, the appellant has submitted computation by adopting different ratio which has already been reproduced above. iii) i) The appellant has further relied upon the decision in the case of ITO Vs. Krishnomics Ltd.(Supra) in which the Jurisdictional Tribunal has held that for the purpose of determining as to whether the lending company is substantially engaged in the money lending business, income criteria need not required to be followed and such aspect needs to be examined with reference to the deployment of the funds in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to the tune of Rs, 1, 08, 099 to one ' G" Ltd. out of total funds available at Rs. 44, 56, 304 as against the deployment of amount of Rs. 4, 14, 300 as an investment in shares earning dividend." As per this criteria, the appellant had submitted that the percentage of assets representing investment and financing activity of the lending company is 59. 51 % of the entire funds. In this regard, it is seen that the Jt. CIT in his order u/ s 144A had held that for this purpose the investment in FDRs should not be considered. Hence, if only the income generating loans and advances are considered as part of the money lending activity of the lending company. For this purpose, the income generating loans and advances are taken at Rs, 19, 52, 76, 906/- and total funds available with the lending company are taken at Rs. 59, 44/ 79, 8457-. Then the ratio of such funds comes to 37. 31 % of the total net current assets of the lending company. Such percentage comes to 32. 85 % if the total funds available with the lending company including share capital reserves and surplus, secured loan and advances and unsecured loans are taken into account. iv) The Hon'ble Bombay High Court in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard, on being asked during the course of appellate proceedings, the appellant submitted a copy of Memorandum of Association of lending company. One of the objects incidental or ancillary to the attainment of the main objects as per the clause 26 of the MOA is to " advance and lend money upon such security as may be thought proper or without taking any security therefore," Thus, one of the ancillary objects of the lender company is to lend money. It may be mentioned here that one of the arguments given by the revenue in the case of M/ s Parle Plastics Ltd was that objects clause of AMPL does not contain lending of money as one of the main objects. The Hon'ble court held in this case that though a copy of Memorandum of association was not filed on record, it was not the case of the Revenue that the act of the lending money was ultra vires the object clause of AMPL. The court further held that it was not the case of the Revenue that AMPL had no power under the Memorandum of Association to lend any money or that the business of advancing and lending money could not be undertaken by the AMPL. On the basis of such observations the Revenue' s objection was not accepted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... academic in nature and are accordingly not adjudicated." 8. Aggrieved by the relief granted by the CIT(A) and reversal of additions made under s.2(22)(e) of the Act, the Revenue has preferred appeal before the Tribunal. 8.1 The learned DR for the Revenue relied upon the assessment order and could not point out any specific defect in the order of the CIT(A). 8.2 The learned counsel for the assessee, on the other hand, justified the first appellate order and pointed out that Section 2(22)(e) of the Act has no applicability in the facts of the case. The case of the assessee is squarely covered by the exceptions provided in the provisions of Section 2(22)(e) of the Act itself. The learned counsel for the assessee broadly divided his contentions in three parts; (i) the unsecured loan received was in the ordinary course of business and such transactions have occurred in the earlier years also when the shareholding of the assessee company in the lending company was less than the threshold limit; (ii) the lender company was substantially engaged in money lending activity and has charged interest on the money lent to the assessee as can be seen from the notice dated 19. 02. 2016 issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.65 Crores in AY 2011- 12 whereas the assessee acquired significant shareholding in lender company during AY 2011-12 only. It is thus the case of assessee that transactions of borrowal in ordinary course of business to achieve economy of sale is outside the purview of s.2(22)(e) of the Act. It is further the case of the assessee that the lender advances funds to the assessee in the ordinary course of business and money lending is substantial part of its business. Interest income earned in money lending activity has been offered and assessed under the head 'business income' in the hands of the lending company. As further stated, the lender advanced funds to the assessee by way of intercorporate deposits (ICDs) and the lending was done on the similar rate of interest on which funds were advanced to unrelated party and hence all the transactions were at arm's length. It is further claimed that both the companies had also considered the setup of another unit in the State of Gujarat and had entered into various correspondence by entering into preliminary agreement. Funds were kept by the assessee in order to initiate the land-to- land deal which did not materialize owing to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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