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2015 (10) TMI 755 - ALLAHABAD HIGH COURT

2015 (10) TMI 755 - ALLAHABAD HIGH COURT - TMI - Deemed dividend u/s 2(22)(e) - as per revenue alleged loan taken by the appellant was a deemed dividend and, therefore an income from other sources - Whether the loan/advance given by the Finance Company to the assessee, who is a share holder in the Finance Company was made in the ordinary course of its business, hence outside the scope of Section 2(22)(e)? - Held that:- It is not possible to give a fixed definition of the word "substantial" in re .....

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view, such reasoning is per se misconceived.

We find from a perusal of the order of the Tribunal that Sarnath Finance Co. is admittedly engaged in the business of loans and advances, as is clear from the memorandum of association. The Tribunal picks holes from the balance sheet of the Sarnath Finance Co. contending that under the heading "Loans and Advances" the Company had made sub groups, namely, "Loans and Advances" and "stocks on hire including hire purchase". The Tribunal, theref .....

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ing on the business of lending money which was its main business.

We are of the view that the Tribunal and the authorities below committed a manifest error in holding that the loan and advance given by the Sarnath Finance Company to the appellant was a deemed dividend. In fact, it was covered by the exclusionary clause (ii) of Section 2(22)(e) of the Act. - Decided in favour of assessee. - Income Tax Appeal No. 224 of 2015 - Dated:- 8-10-2015 - Hon'ble Tarun Agarwala And Hon'b .....

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) of the Income Tax Act (hereinafter referred to as the "Act"). The assessing authority, after considering the explanation held, that the alleged loan taken by the appellant was a deemed dividend and, therefore an income from other sources. The assessing authority held that the Finance Company, namely, Sarnath Finance Limited was mainly engaged in advancing hire purchase of transport vehicle and that the said Finance Company had only made 10.79% investment in loans and advances which c .....

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A of the Act, being Income Tax Appeal No.190 of 2014, in which it was held that the Tribunal had not considered the nature of the transaction of the Company before determining as to whether the exclusionary clause (ii) of Section 2(22)(e) of the Act was attracted or not and, accordingly, remanded the matter to the Tribunal for a decision afresh. The Tribunal thereafter decided the matter and again rejected the appeal of the assessee holding that the alleged loan given by the Sarnath Finance Ltd. .....

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he Tribunal further found that the balance sheet showed ₹ 426.32 lacs under the heading stocks on hire and ₹ 56.23 lacs under the heading "loans and advances" and, therefore, concluded that a substantial business of the Finance Company was for hire purchase transactions and not for "loans and advances" and, therefore, the loan taken by the appellant was not covered under the exclusionary clause (ii) of Section 2(22)(e) of the Act. 4. In this back drop, we have hea .....

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nsel for the parties, it would be appropriate to consider the provision of Section 2(22)(e) of the Act. "2(22) "dividend" includes- (a) ....... (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares e .....

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fits ; but "dividend" does not include- (i) ........ (ii) 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 ; 7. The necessary ingredients as contemplated under Section 2(22)(e) of the Act are not disputed by the Department and the admitted fact is, that the appellant is a share holder of 15% in Sarnath Finance Ltd. who gave a loan. This Finan .....

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of the business of the Finance Company and, therefore, the said loan could not be treated as a deemed dividend in view of the provision of sub Section (ii) of Section 2(22)(e) of the Act. On the other hand, the Department has urged that lending of money was not a substantial part of the business of the Company and that the substantial part was hire purchase transaction, hence the lending of money was not in its ordinary course of business and the same was, therefore, not covered by the exclusio .....

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of the business of the Company. The words "substantial part of the business" has not been defined under the Act. 9. The Bombay High Court in Commissioner of Income Tax, Panaji, Goa vs. Parle Plastics Ltd., 2011 (196) Taxman 62 explained as to what would constitute a "substantial part of the business". The Bombay High Court after considering the meaning of the word "substantial" in various dictionaries concluded:- "11. The expression used under clause (ii) of Se .....

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td. v. Rinder [1948] S.A.S.R. 167 (South Australiyan Court) is given in support of this meaning. In the meaning No.8, while considering 'substantial amount', it is stated that out of a rent of £80 p.a.., £13 p.a. attributable to the amount paid for furniture, was a substantial amount, on the basis of the decision in Maclay v. Dixon 170 L.T. 49. In meaning No.15, relying upon the decision of Ladbrooke (Football) v. William Hill (Football) [1964] 1 W.L.R. 273, it is said that i .....

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t value or merely nominal. No decision was cited before us wherein a view has been taken that in order to show that a part of the whole to be treated as "substantial part", the part must exceed 50% of the whole. In our view, the expression "substantial part" does not connote an idea of being the "major part" or the part that constitutes majority of the whole. If the legislature really intended that more than 50% of the business of the lending company must come from .....

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ajor" and/or specifying any percentage of the business or profit to be coming from the lending business of the lending company for the purpose of clause (ii) of Section 2(22) of the Act. We would give an illustration to ascertain the meaning of the expression "substantial business" or "substantial income" of a company. In the modern days, large number of companies do not restrict to one or two businesses. They carry on numerous activities and carry on numerous businesses .....

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such a case can it be said that none of the businesses of the said company is a substantial business of the company. In our view not. The first business which constitutes 40% of the turn over and contributes 40% to the profit would be the single largest part of the business of the company, the second and third divisions of the business, each of which contributes 30% of the turn over as well as profit of the company, though not the major and not even single largest part of the business of the com .....

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company". Any 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 into while considering whether a part of the business of a company is its substantial business. Sometimes a portion which contributes substantial part of the turn over, though it contributes a relatively small portion of the profit, would be substantial p .....

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ired to be taken 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 a particular business forms substantial part of its business. Undisputedly, the capital employed by a company for carrying on a particular division of its business as compared to the .....

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on that any business of a Company which is not trivial or inconsequential as compared to the whole of the business would be termed as substantial part of the business. In the instant case, the assessing officer has held that the business of giving loans and advances by Sarnath Finance Company constituted less than 20% of the total investment and, therefore, the same is not a substantial part of the business of the Company. In our view, such reasoning is per se misconceived. 12. We find from a pe .....

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