IN THE ITAT AGRA BENCH
Krishna Gopal Maheswari
Versus
Additional Commissioner of Income-tax
IT APPEAL NO. 82 (AGRA) OF 2012
[ASSESSMENT YEAR 2008-09]
OCTOBER 23, 2012
ORDER
A.L. Gehlot, Accountant Member
This is an appeal filed by the assessee against the order dated 04.10.2011 passed by the ld. CIT(A)-II, Agra for the Assessment Year 2008-09.
2. The assessee has raised the following grounds of appeal:-
“1. That the Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 37,28,059/- made by the assessing officer u/s 2(22)(e) of the Act in relation to the loan taken from M/s Krishna Bead Industries Pvt. Ltd.
2. That while confirming the addition aforesaid Ld. CIT(A) has erred in law and on facts to hold that money lending was not substantial part of business of the lending company and as such the impugned loan was not covered by the exclusion as provided in Clause (ii) of Sec. 2(22)(e).
3. That the Ld. CIT(A) has erred in law while so upholding simply on the basis of presentation of accounts in the Balance Sheet and Profit & Loss account of the company without appreciating the true nature and character of such accounts.
4. That under the facts and in law ld. CIT(A) ought to have deleted the addition made by the AO u/s 2(22)(e).”
3. The brief facts of the case are that the assessee enjoys income from house property, share from firm and trading of shares of companies. During the assessment proceedings, the A.O. noticed that the assessee has taken unsecured loan from Krishna Beads Industries Private Limited of Rs. 37,28,059/-. The assessee is a Director and having substantial interest in the company Krishna Beads Industries Private Limited. The assessee was holding not less than 10% of the voting power in the said Company. The A.O. asked the assessee why the amount of Rs. 37,28,659/- be not treated as deemed dividend as per the provisions of section 2(22)(e) of the Income Tax Act, 1961 (‘the Act’ hereinafter). Before the A.O. it was submitted by the assessee that clause (3) of object clause of the Company was to carry on the business of financing enterprises and to finance whether by way of making loans or advances to or subscribing to the capital etc. The said object clause has been reproduced by the A.O. in his order at page no. 3. The A.O. after considering the assessee’s submission noticed that the object clause of the company nowhere shows that the company’s main business was of money lending. The A.O. examined the Balance Sheet of the company and noticed that the total loans and advance are only Rs. 47,90,339/-, out of which loan to the extent of Rs. 37,28,029/- was given to the assessee. The A.O. has also examined the Profit & Loss Account of the company and noticed that interest received from the assessee of Rs. 62,280/- has been shown as indirect income. The company also have no license of money lending business. The A.O. made addition of Rs. 37,28,059/- under section 2(22)(e) of the Act.
4. The Order of the A.O. has been confirmed by the CIT(A) as under :- (Page nos. 5, 6, 7 & 8)
“2.1 After going through the records and carefully considering the submission of Ld. AR, I am, of the opinion that provisions of sec. 2(22)(e) are clearly applicable in the appellant’s case. Before I discuss the facts of the case of the appellant it is considered necessary to refer provisions of sec. 2(22)(e). As per these provisions any loan or advance to a share holder or a concern is treated as dividend in certain cases to the extent of accumulated profits. The applicability of sec. 2(22)(e) depends on fulfillment of following conditions –
(i) The company should be one in which the public are not substantially interested.
(ii) The equity shareholder, who is beneficial owner of shares holding not less than ten percent of voting power, or
(iii) Any concern in which share holder (holding not less 10% voting power) is a member or partner and in which he has a substantial interest, or
(iv) Any person, on behalf, or for the individual benefit of such shareholder. Such shareholder here means a shareholder who is beneficial owner of shares holding not less than 10% voting power.
The loan and advance given to such person shall be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan etc. There are certain exceptions also provided in the subsection one of which is that any advance or loan to a share holder or specified 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 company will not attract the provisions of sec.2(22)(e) – This exception shall apply only when two cumulative conditions are fulfilled – first, the loan should have been made by the company in the ordinary course of business and secondly, money lending should be substantial part of the company’s business. Thus, the effect of sub-clause (e) of sub section (22) of sec. 2 is to create a fiction and treat the loans or advances to a shareholder who is the beneficial owner of shares holding 10% or amore of voting power of the company as dividend. It also includes payments made by the company on behalf or for the individual benefit of such share holder. It further includes advances or loans made to any concern in which such share holder is a member or partner and in which he has a substantial interest. Now, coming to the facts of the case in hand it is seen that the total income as per P&L account as on 31.3.08 shown by M/s Krishna Beads (P) Ltd. on account of sales and other income is Rs. 2657609/-. The break up of which as per Schedule 9 is as under :-
