Case Law Details
Brief of the Case
ITAT Kolkata has held in the case ITO Vs. Piyush Jalan that where lending of money is substantial part of the business of the concerned company and any advance or loan is made by it to a shareholder in the ordinary course of its business, the amount so advanced cannot be treated as deemed dividend under clause (e) of section 2(22). Substantial part of the business is lending of money is to be ascertained from the income of the lending company and also from the amount of loan given by the lending company during the relevant previous year.
But in the present case in both the years (AY under consideration and immediate preceding AY) the facts are clear that the substantial part of the business of the assessee company is of money lending. Thus, the Hon’ble ITAT finally concluded that the facts and figures of the year under consideration as well as in the immediate preceding assessment years are to be taken into consideration for deciding the issue of ‘substantial interest in a concern’. Actually and factually during AY 2005-06 the assessee had income from interest and even during AY 2006-07 interest income from loans and investment. There is no manufacturing activity or trading activity except the business of money lending. Therefore, the assessee’s case falls under exception to sec. 73 of the Act.
Facts of the Case
The assessee has taken a loan of Rs.22,00,000/- from Jeekay Rolling Mills Pvt. Ltd. on 07.12.2005. In this Pvt. Ltd. Co. the assessee was holding more than 10% equity shares. The AO required the assessee to explain as to why this amount of loan of Rs.22,00,000/- be not treated as deemed dividend under the provision of section 2(22)(e) of the act. The assessee claimed before the AO that it has taken loan in the ordinary course of money lending business by the company and consequently earned interest of Rs.8,15,774/- on this loan and short term capital gain of Rs.2352/- in the FY 2004-05 relevant to AY 2005-06. According to assessee, there is no other business during the relevant AY 2006-07 relevant to FY 2005-06 except earning of interest income and income from short term capital gains. But the AO has not considered the explanation of the assessee and noted that the assessee company was engaged in the business of rolling mill and company did not changed this objective in the Memorandum before ROC. According to him, the assets in the Balance Sheet i.e. audited accounts also substantiated that this loan was not related to NBFC and the main objective of the company was manufacturing irrespective of the fact of production and not of money lending. Accordingly, the made the addition of R. 22,00,000/- treating it as Deemed Dividend u/s 2(22)(e) of the Income Tax Act, 1961.
Contention of the Assessee
AR of the assesse submitted that as per Provision of section 2(22)(e) of the Act, any advance or loan made to a shareholder by a company in the ordinary course of business where the lending of money is substantial part of the business of the company, loan amount cannot be treated as deemed dividend. Substantial part of the business is lending of money is to be ascertained from the income of the lending company and also from the amount of loan given by the lending company.
Jeekay Rolling Mills (P) Ltd. had only income of Rs. 8,18,126/- during the FY 2004-05, out of which the sum of Rs.8,15,774/- was from interest income & Rs.2352/- was the short term capital gain. There was no business income. The said company had advanced loan of Rs. 96,14,003/- as on 31/03/2005 out of total capital & reserve of Rs.1,35,33,573/-. So, the substantial part of the business of the company was lending of money. The loan was advanced on 07/12/2005, so the activities of the company for the year ended 31/03/2005 is to be considered because profit & loss account & Balance sheet cannot be prepared on the date of transaction.
Moreover, nature of income & investment of the lending company did not change in the FY 2005-06. In the FY 2005-06, the company had income of Rs. 6,87,190/- from interest and the balance was only short term capital gain which was earned after the date of advancing loan. Short term capital gain was earned on 18/01/2006 i.e. after the date of loan advanced. There was no business income. The entire amount of the company except fixed assets was invested on loan. So the substantial business of the company was lending of money. As such loan amount cannot be treated as deemed dividend income u/s/. 2(22)(e) of the Act.
Contention of the Revenue
The ld. DR for the Revenue supported the order of the lower authorities.
Held by CIT(A)
The Ld. CIT(A) considering the explanation of the assessee of clause (2) of section 2(22)(e) of the Act and noted that this loan was in the ordinary course of money lending, which is substantial part of business income of the assessee company and accordingly, the provisions of section 2(22)(e) of the Act will not apply to the case of the assessee.
Held by ITAT
The Hon’ble ITAT held it has to be ascertained as to whether case of the assessee was covered by the exception provided in sub-clause (ii) of clause (e) of section 2(22) (reproduced below)
“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 company.”
The Hon’ble ITAT held that as is evident from the aforesaid provisions, where the lending of money is substantial part of the business of the concerned company and any advance or loan is made by it to a shareholder in the ordinary course of its business, the amount so advanced cannot be treated as deemed dividend under clause (e) of section 2(22).
There is no dispute about the fact that the expression “substantial part of the business” used in sub clause (ii) has not been defined in the statute. In this regard, the learned counsel for the assessee has pointed out that a similar expression “substantial interest” is used in clause (e) of section 2(22) and the same has been defined in Explanation 3(b) below section 2( 22)(e) as follows :-
“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 20 per cent of the income of such concern.”
Although the term “substantial interest” as defined in Explanation 3(b) above is different than the expression “a substantial part of the business” used in sub-clause (ii), one thing that is clearly evident from the said definition is that the factual position as it stands during the relevant previous year only is supposed to be taken into consideration to decide the issue about the substantial interest in the context of deemed dividend under section 2(22)(e). This aspect which is clearly evident from the definition of “substantial interest in a concern” given in Explanation 3(b) to section 2(22)(e) itself means that the money in question having been advanced in the year under consideration, the facts and figures of the said year alone need to be taken into account to find out as to whether the lending of money is a substantial part of the business of the said company but in the present case in both the years the facts are clear that the substantial part of the business of the assessee company is of money lending.
Thus, the Hon’ble ITAT finally concluded that the facts and figures of the year under consideration as well as in the immediate preceding assessment years are to be taken into consideration for deciding the issue of ‘substantial interest in a concern’. Actually and factually during AY 2005-06 the assessee had income from interest and even during AY 2006-07 interest income from loans and investment. There is no manufacturing activity or trading activity except the business of money lending. Therefore, the assessee’s case falls under exception to sec. 73 of the Act and the CIT(A) has rightly deleted the addition of deemed dividend made by AO.
