The issue for our consideration in the present context is whether the exclusion clause (ii) of section 2(22)(e) of the Act is applicable in the facts of the present case or not. As provided in the said clause, any advance or loan made by a company to a shareholder or concern in which the shareholder has a substantial interest would not be regarded as a deemed dividend u/s 2(22)(e) if lending of money is a substantial part of the business of the lending company and the loan or advance is made by the lending company in the ordinary course of its business. The expression used in clause (ii) of section 2(22)(e) is “substantial part of the business” and the same has been interpreted by the Hon’ble Bombay High Court in the case of Parle Plastics Ltd. (supra) cited by the learned counsel for the assessee. As held by the Hon’ble Bombay High Court, the said expression does not connote an idea of being the “major part” or the part that constitute majority of the whole. Elaborating further, it was explained by the Hon’ble Bombay High Court 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 and various factors and circumstances would be required to be looked into while considering whether a part of the business of a company is its substantial business. It was held that sometimes a portion which contributes a substantial part of the turnover, though it contributes relatively small portion of the profit, would be a substantial part of the business. Similarly, a portion which is relatively small as compared to the total turnover, but generates a large portion, say more than 50% of the total profit of the company would also be a substantial part of his business.
In the present case, interest income earned by M/s JMC Securities Pvt. Ltd. during the year under consideration was to the tune of Rs.9,16,088/- which constituted about 70% of its total business income amounting to Rs.13,04,088/-. Moreover, the maximum amount of loan advanced by M/s JMC Securities Pvt. Ltd. during the year under consideration was to the tune of Rs.95,45,000/- which constituted 32% of the total funds available with the said company. If these facts and figures are considered in the light of the decision of Hon’ble Bombay High Court in the case of Parle Plastics Ltd. (supra), it becomes abundantly clear that lending of money was a substantial part of a business of M/s JMC Securities Pvt. Ltd. and the loan in question to the assessee was made by the said company in the ordinary course of its business. It, therefore, follows that the conditions stipulated in clause (ii) of section 2(22)(e) were duly satisfied and the amount of loan advanced by M/s JMC Securities Pvt. Ltd. to the assessee could not be regarded as a deemed dividend. Before us, the learned counsel for the assessee has also filed a copy of the assessment order passed u/s 143(3) of the Act in the case of M/s JMC Securities Pvt. Ltd. for the year under consideration i.e. assessment year 2006-07 wherein the nature of the business of the said company was clearly indicated as “finance” and it was further mentioned in the body of order that the said company during the year under consideration continued into business of short term finance of idle funds. As such, considering all the facts of the case and keeping in view the decision of Hon’ble Bombay High Court in the case of Parle Plastics Ltd. (supra), we are of the view that the addition made by the AO u/s 2(22)(e) on account of the loan advanced by M/s JMC Securities Pvt. Ltd. to the assessee by treating the same as deemed dividend is not sustainable and the learned CIT(Appeals) is not justified in confirming the same. Accordingly, we delete the said addition and allow ground No.2 of the assessee’s appeal.
Source- Jayant H. Modi v. Joint Commissioner of Income-tax (ITAT Mumbai), IT Appeal No. 4461 (Mum.) of 2010, Dated- 23.11.2012