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2015 (6) TMI 450 - ITAT MUMBAI

2015 (6) TMI 450 - ITAT MUMBAI - TMI - Deemed dividend u/s 2(22)(e) - whether on the basis of deployment of funds, can it be held that money lending was substantial part of business of Silgo? - CIT(A) deleted the addition - Held that:- In the present case, it has already been mentioned that more than 75% of the funds available have been deployed by Silgo, therefore, money lending constituted substantial part of the business of Silgo and the fact that no interest income was shown by Silgo in Prof .....

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ders cannot be considered to be deemed dividend under the provisions of section 2(22)(e) as the same fall under the exception mentioned in section 2(22)(e)(ii). - Decided in favour of assessee - ITA No.3418/Mum/2012,CO No.117/Mum/2013 - Dated:- 1-6-2015 - Shri I P Bansal & Shri Rajendra,JJ. For the Petitioner: Shri Asghar Zain For the Respondent: Shri K Shivaram ORDER Per I P Bansal, Judicial Member The appeal is filed by the Revenue and the cross-objection by the assessee. Both are directed .....

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act that the M/s. Silgo Finance Pvt. Ltd. (the lender company was not engaged in the business of money lending as it has not shown any interest income, as observed by the Assessing Officer in his order and hence the assessee s case is not covered within the exception in clause (ii) of section 2(22)(e) of the Act. 3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored. The grounds of appeal raised by the assessee in the cross- .....

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ng the fat that the M/s. Silgo Finance Pvt. Ltd. had advanced only rs.79,00,000/- during the year, in the course of its regular business. Hence, addition u/s. 2(22)(e) may be deleted. 3. During the course of assessment proceedings, from the details filed by the assessee, the AO came to know that M/s. Silgo Finance Pvt. Ltd. (referred to as Silgo) had advanced loan amount of ₹ 1,09,23,897/- as on 31.03.2006 to the assessee. It was further noticed that Silgo was having reserves and surplus o .....

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but loan advanced during the course of normal business activity and it was submitted that it falls in the exempted category. It was further submitted that the main object of Silgo is to render financial services as per the copy of Memorandum of Association. Therefore, it was claimed that section 2(22)(e) was not applicable. However, the AO did not accept such submission of the assessee and added the same to the income of the assessee. Aggrieved, the assessee filed appeal before the CIT(A). The m .....

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72% were deployed in the loans given by it. Reliance was placed on the decision of Hon ble Bombay High Court in the case of CIT vs. Parle Plastics Ltd. [332 ITR 63] to contend that if the lending of money constitutes substantial part of business of the company, then the loan given by the company to its share holders cannot be considered to be deemed dividend under the provisions of section 2(22)(e) as the same fall under the exception mentioned in section 2(22)(e)(ii). The learned CIT(A) based o .....

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the assessee, it is the case of the assessee to the extent of opening balance, the amount could not be assessed u/s. 2(22)(e) as per the aforementioned decision of Hon ble Bombay High Court in the case of CIT vs. Parle Plastics Ltd. (supra). It is also the case of the assessee that the expenditure of ₹ 6,03,797/- which is on account of provision of interest, the amount could not be considered as deemed dividend. 5. After narrating the facts, it was submitted by the learned DR that the AO a .....

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; 3,19,46,629/- which comprises of the following income :- i) Profit on sale of shares Rs.3,16,11,530/- ii) Dividend income ₹ 3,35,099/- Rs.3,19,46,629/- Thus, it was pleaded by the learned DR that the CIT(A) has committed an error in holding that the substantial part of business of the lending company was money lending. Ld. DR further pleaded that the order of the CIT(A) should be set aside and that of the AO should be restored. 6. On the other hand, it was submitted by the learned AR tha .....

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s been drawn by the CIT(A) on the basis of the decision of Hon ble Bombay High Court in the case of CIT vs. Parle Plastics Ltd. (supra) and thus, the order of the CIT(A) is in accordance with the decision of the jurisdictional High Court. It was pleaded by the learned AR that order passed by the CIT(A) should be upheld. Ld. AR further submitted that the cross-objection of the assessee is regarding the exclusion of the opening balance as well as the interest portion and the same is also in accord .....

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y been considered. On pages 2 & 3 of paper-book the assessee has filed Memorandum of Association of Silgo, wherein the main object of the company has been stated at Sr. No.1, which reads as under: 1. To carry on the business of rendering of financial services & other related activities. The funds available with the assessee company in the balance sheet are described as under: Sources of Funds Sch Share capital A 500,000 Reserves and Surplus Profit and Loss Account 28,343,780 Secured Loan .....

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sets, loans and advances , is detailed as under: Schedule F Rs. Current Assets Loans & Advances : Cash & Bank balance 2,552,096 Loan & Advances 50,271,558 Deposit 4,500 Sundry Debtors 0 52,828,154 It can be seen from the above that out of total funds which are available at ₹ 6.65 crore, the amount deployed in loans and advances is ₹ 5.02 crore. Thus substantial deployment of funds by Silgo is on loans and advances. It is true that assessee company did not earn interest in .....

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ed dividend because of the exclusion by clause (ii) to section 2(22)(e). Clause (ii) to Section 2(22)(e) read as under: any advance or loan made to a shareholder 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. 8. Now the question remains that whether on the basis of deployment of funds, can it be held that money lending was substantial part of business of Silgo? This question has been answered by Hon ble Bombay .....

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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. Various factors and circumstances would be required to be looked while considering whether a part of the business of a company is its substantial business. Their Lordships further observed that sometimes a portion which contributes substantial part of the turnover, though it contributes a relatively small portion of the profit, would be .....

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en into consideration. Employees of a company are now called its human resources and, therefore, the percentage of human resources used by the company for carrying on a particular division of business may also be required to be taken into consideration while considering whether particular business forms substantial part of its business. Considering all these facts, their Lordships observed that undisputedly, the capital employed by a company for carrying on a particular division of its business .....

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xpression "substantial part of the business". Stroud's Judicial Dictionary, Fifth Edition, gives the first meaning of the word "substantial" as "A word of no fixed meaning, it is an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole". The decision of Terry's Motors Ltd. v. Rinder [1948] SASR 167 is given in support of this meaning. In the meaning No. 8, while considering "substantial amount", it is stated that .....

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the part that should be considered. Black's Law Dictionary, Sixth Edition defines the word "substantial" as "Of real worth and importance ; of considerable value ; valuable. Belonging to substance ; actually existing ; real ; not seeming or imaginary ; not illusive ; solid ; true ; veritable . . . Something worthwhile as distinguished from something without value or merely nominal." No decision was cited before us wherein a view has been taken that in order to show that a .....

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of business". If the Legislature at all intended that a particular minimum percentage of the business of a lending company should come from the business of lending, the Legislature could have specifically provided for that percentage while drafting clause (ii) of section 2(22)(e) of the Act. The Legislature had deliberately used the word "substantial" instead of using the word "major" and/or specifying any percentage of the business or profit to be coming from the lendi .....

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isions of works consisting of three different types of business. The turnover as well as the profit of the first division is 40 per cent. ; turnover and the profit of the second division is 30 per cent. and the turnover and the profit of the third division of the business is 30 per cent. In the case of this company no part of the business has turnover exceeding 50 per cent. and no part of the business company generates profit of more than 50 per cent. of the total. In such a case can it be said .....

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ompany, would still be a substantial part of the business of the company, because if any part of the three divisions of the business of the company was to be closed down, that would result in loss of turnover and/or business of 30 per cent., ordinarily no company would regard such part of the business as insignificant. As rightly observed in Stroud's Judicial Dictionary, it is not possible to give any fixed definition of the word "substantial" in relation to "a substantial bus .....

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substantial part of the business. Similarly, a portion which relatively a small as compared to the total turnover, but generates a large, say more than 50 per cent. of the total profit of the company would also be a substantial part of its business. Percentage of turnover in relation to the whole as also the percentage of the profit in relation to the whole and sometimes even percentage of a manpower used for a particular part of business in relation to the total man power or working force of th .....

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iness as compared to the total capital employed by it would also be relevant while considering whether the part of the business of the company constitutes "substantial part of the business" of the company. In the said case it was noted by the Tribunal that 42% of the total assets of the lending company as at the beginning of the year and 39% of the total asset of the lending company at the end of the year were deployed in the business of money lending and considering those facts their .....

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te Tribunal has noted that 42 per cent. of the total assets of AMPL as on March 31, 1996 and 39 per cent. of the total assets of AMPL as on March 31, 1997, were deployed by it by way of total loans and advances. By no means, the deployment of about 40 per cent. of the total assets into the business of lending could be regarded as an insignificant part of the business of AMPL. The Income-tax Appellate Tribunal has also held that the income AMPL had received by way of interest of ₹ 1,08,18,0 .....

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