TMI Blog2005 (5) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... . ( ii )On the facts and circumstances of the case and in law the ld. CIT(A) has erred in admitting the new evidence in contravention of Rule 46A of the IT Rules. ( iii )While doing so the CIT(A) has erred further in holding the view that lending and investment activity was substantial part of the business of the lender company M/s. Oscar Laboratories P. Ltd." 3.1 As all the above three grounds are inter-related and constitute single issue, so we are taking them up together for our consideration. 4. The relevant facts, briefly stated, are that the assessee is an investment company and listed on stock exchange. The assessee was having financial transactions with M/s. Oscar Laboratories (P.) Ltd. (hereinafter referred to as "OLPL"), a closely held company within the same group. The Assessing Officer made an addition of Rs. 3,39,37,000, being amount of loan, raised by the assessee-company from OLPL treating such loan as deemed dividend under the provisions of section 2(22)( e ) of the Income-tax Act, 1961 (for short Act ) because one common shareholder, namely, M/s. Jupiter Investments (P.) Ltd. holding 21.36 per cent shares of assessee- company, was also holding 20 per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative of the assessee, on the other hand, argued as under : ( i )The assessee-company is a public limited company listed in Stock Exchange in which public are substantially interested and, therefore, provisions of section 2(22)( e ) of the Act are not applicable. ( ii )M/s. Jupiter Investments (P.) Ltd. became a common shareholder in both the companies, i.e., borrower company (the assessee) and the lender company (OLPL) on 9th January, 1996. Hence, amount of loan outstanding in books of the assessee before that date could not be treated as deemed dividend. In support of his contention he relied on the decisions in the cases of Rajagiri Rubber Produce Co. Ltd. v. CIT [1996] 219 ITR 611 (Ker.) and CIT v. H.K. Mittal [1996] 219 ITR 420 (All.). ( iii )Since OLPL, the lender company, gave advances/loans in its ordinary course of business activities, hence such loans/advances were not to be treated as deemed dividend being specifically excluded from the deemed dividend as per the provisions of sub-clause ( ii ) of section 2(22)( e ) of the Act. With reference to this contention, he drew our attention to the assessment order of OLPL for the relevant assessment year, fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )( e ) of the Act to the assessee is not tenable in law because the provisions of section 2(22)( e ) are attracted when any payment is made by a company, not being a company in which the public are substantially interested, by way of advance or loan to any concern in which a shareholder, who holds not less than 10 per cent of voting power of such company, is a member and has a substantial interest in the said concern. In clause ( a ) of Explanation 3 to section 2(22)( e ), we find that the "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company. Since OLPL is closely-held company which has advanced loan to a concern, i.e., assessee-company and the common shareholder M/s. Jupiter Investments (P.) Ltd. holds specified percentage of shares of both companies, therefore, the transaction of loan/advance in the present case can be treated as deemed dividend to the extent of accumulated profits in the books of account of the OLPL. 10. M/s. Jupiter Investments (P.) Ltd. became a shareholder of both companies on 9-1-1996 as evidenced by records of Registrar of Companies and, therefore, amount of loans taken by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Personal - 25,51,266 25,51,266 Interest 17,84,11,836 - 17,84,11,836 Preliminary Exp.Written-off - 1,852 1,852 Depreciation - 14,11,000 14,11,000 Share of loss from partnership 31,818 - 31,818 Total 17,84,43,654 13,51,95,303 31,36,38,957 Profit before Tax 8,30,77,769 (5,17,625) 8,25,60,144 Pages 13 to 16 of the Paper Book contain details of interest received by the lender company and pages 17 to 19 contain details shareholders of OLPL. These details indicate that OLPL received major portion of interest from companies which are shareholders of OLPL and further such companies appear to be interlinked because of common addresses, common name etc. From the details of investment at pages 30 to 33 it is observed that OLPL has made investment in the shares of the listed companies of the pharma sector and in particular of Ranbaxy Laboratories Ltd. whose associated companies have also paid interest to OLPL (Serial Nos. 14 to 15 of page No. 14 of the Paper Book). The investment in unquo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of financing, investment and lending which are as under : "Additional Reporting requirements under MAOCARO, 1988 for Companies being, Investment Companies/Loan companies. Clause 4(D)( ii ) - Whether adequate documents and records are maintained in a case where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. Clause 4(D)( iv ) - If the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been made therein, and also whether the shares, securities, debentures and other investments have been held by the company in its own name except to the extent of exemption, if any, granted under section 49 of the Companies Act, 1956." Further the Assessing Officer of OLPL has, in the assessment order, dealt with the aspect of investment in the shares by OLPL with limited objec- tives of treatment of profits on sale of shares either as capital gain or business profits, and in the process he has not given any finding regarding borrowing and lending of money by OLPL being an activity carried on by OLPL in the ordinary course of its business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form. The ld. CIT(A) has also not given any findings on this point in his order. Carrying of business involves some real, substantial and systematic or organized course of activity taking into consideration the regulatory framework applicable to those activities and the compliance therewith. Further, the company did not have any technical/managerial staff for the purposes of investment and financing activities which is clearly established from the activity-wise profit results at page 43 of Paper Book. Hence, the activities of borrowings and lending of money on interest, that too, within the group/associated companies cannot constitute an activity in the ordinary course of business and the financial results alone of such transactions cannot be a determinate factor if all other factors required to constitute a business in the real sense are absent. Earning of income from financing/investment activities in such circumstances and in particular situation where such transactions give an impression of facilitation and rotation of money within a specific group of entities would be merely an incidental and natural off shoot of deployment of borrowed funds and hence cannot be termed as a res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , "license and legal authoriza- tion" etc. are applied to determine the true nature of the activities carried on by any person. Each of these factors would be relevant factor for the determination of true nature of activities in the facts and circumstances of each case. In the present case, no doubt, income from investment/financing activities is much higher but in the light of our observations in the foregoing paragraphs, this alone is not sufficient and conclusive to treat the financial investment activities of OLPL as being carried out in the ordinary course of its business and forming a substantial part of business. 13. In view of the above facts and provisions of law we summarize our findings as under : ( i )The loans/advances raised by the assessee-company would fall within the ambit of provisions of section 2(22)( e ) as the lender company is a closely-held company in which public are not substantially interested. ( ii )The objects clause of memorandum of association of a company is not as conclusive proof for determining the nature of activity as substantial part of business as it only enables the company to carry out activities specified therein. ( iii )The patte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant situation that would emerge will remain the same because copy of the return of allotment filed by the assessee with the Registrar of Companies clearly establishes the fact that M/s. Jupiter Investment (P.) Ltd. became the shareholder in the lender company on the specified date evidenced thereby, therefore this ground of the Revenue is rejected. 14. Coming to the appeal filed by the assessee being ITA No. 1729/M/2000 for the very assessment year 1996-97, the only effective ground taken is that the ld. CIT(A) has erred in upholding the loans raised from M/s. Oscar Pharmaceuticals (P.) Ltd. (OPPL) as deemed dividend under section 2(22)( e ) of the Act and thereby confirming the addition of Rs. 23,822. The facts relating to this issue are identical with those as narrated in the Revenue s appeal No. 2703/M/2000. The Assessing Officer has treated Rs. 23,822 as deemed dividend out of the amount of loans raised by the assessee from lender company OPPL being to the extent of accumulated profits in the books of account of the lender company. The ld. CIT(A) confirmed the addition by holding that after treating the loan as deemed dividend one need not come to the last day of the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in view of subsequent decisions of Hon ble Supreme Court in the case of Anjum M.H. Ghaswala [2001] 252 ITR 1 and Hindustan Bulk Carriers [2003] 259 ITR 449 wherein it has been held that the interest under the aforesaid section is mandatory, therefore, this ground of the assessee cannot be accepted.We have heard the rival submissions and perused the aforesaid decisions and in our humble understanding the Hon ble Supreme Court in the matter of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209 decided the issue on facts and did not declare any law. Subsequently, in the matter of CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1, Larger Bench of Hon ble Supreme Court held that interest under sections 234A, 234B and 234C was mandatory in nature and this decision was affirmed by the Hon ble Supreme Court in the matter of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 and again in the matter of CIT v. Santram Mangatram Jewellers [2003] 264 ITR 564 (SC). In the matter of Vinod Khurana v. CIT [2002] 253 ITR 578 , Hon ble Punjab and Haryana High Court considered the issue of relationship between assessment order and notice of demand and after following the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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