TMI Blog2005 (11) TMI 373X X X X Extracts X X X X X X X X Extracts X X X X ..... by making rather cryptic observation as follows : "The assessee has paid Rs. 45,32,422 as interest to HDFC. Out of this, Rs. 71,939 is penal interest. Penal interest is not allowable expenditure, and, hence, I disallow Rs. 71,939 out of interest paid and add back the same to total income." In appeal, the CIT(A) deleted the disallowance so made by the Assessing Officer by taking note of assessee s contention that "there is no infraction of law involved and it is a case of additional tax levied by HDFC for some contractual delays" and observing that "since there is no infraction of law, the additional interest, though termed as penal interest, is clearly a normal incidence of business". Revenue is aggrieved and in appeal before us. 3. Having heard the rival contentions and having perused the material on record, we see no reasons to disturb the well reasoned stand of the CIT(A). As there is nothing on record to suggest that the interest paid as penal interest in on account of infraction of law, and as the penal interest is on account of contractual delays, the disallowance has rightly been deleted by the CIT(A). We confirm and approve his action in doing so. The grievance rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,436 which was added back to assessee s income under section 2(22)( e ) as deemed dividend . Aggrieved by the addition so made by the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). The CIT(A) was of the view that the Assessing Officer was not justified in comparing gross interest receipts with gross amount of other receipts; what is to be really seen is the income from the respective heads, and, if that is the criterion, the interest income of the assessee is more than other profits of the assessee. It was also observed that more than 60% of the assets of the assessee are deployed in money lending. The CIT(A) also held that even a single transaction constitutes business, that this has to be viewed in the context of outstanding loan position and the organized manner in which this activity has been carried out over the years, that non-disclosure of such business in the income-tax return and default in payment of interest tax cannot have any bearing on the merits of this case and that it is sufficient, for coverage by the exclusion clause in section 2(22)( e ), that money lending business of the lender should be one of significant , sizeable or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the company lending money should have substantial business activity of money lending but also the loan or advance in question should be given in the ordinary course of business . It is only when these twin conditions are satisfied that the case can be said to be covered by the aforesaid exception. In the statement of facts before the CIT(A), the assessee has narrated the relevant facts as follows : "During the year ended 31-3-1997, the appellant company had received loan of Rs. 140 lakhs from Phoenix Distributors Private Limited. Phoenix Distributors Private Limited is a company carrying on the trading and money lending business. This is evident from the continuity, regularity and volume of money lending transactions. Interest earned forms a sizeable portion of PDPL s taxable income. PDPL has given loans to various associate companies and is earning substantial interest on these loans and advances. It was therefore contended before the learned A.C. that section 2(22)( e ) does not apply in respect of loans/advances given by the said PDPL." It is thus clear that, even by assessee s own admission, the said business of the PDPL extended only to giving loans to "various associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets of Rs. 4.15 crores, the sum employed in giving loans and advances to group concerns is Rs. 2.63 crores which constitutes 63% of the total assets, and, for this reason, it should be considered as substantial business of PDPL. This plea is also devoid of any substance. If that be any criterion, in a case where cash and bank balances of a business constitute say 50% of the assets side total, the main business of the company can be claimed to be keeping cash in hand and bank. At the cost of repetition, we may mention that for the purpose of deciding what is main business of an assessee, we have to see which are the major organized activities of the assessee for earning profits. It is also noteworthy that PDPL was not assessed to interest tax and rightly so because, on the facts of the case, it could not have been said to have been engaged in the business of money lending. The assessment records of PDPL, which are essentially based on the information supplied by PDPL, also do not show that PDPL was engaged in the business of money lending. The assessee s case fails on these tests learned counsel has referred to the benchmark of 20% income, to decide whether or not it is covered by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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