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2015 (3) TMI 1154 - ITAT KOLKATA

2015 (3) TMI 1154 - ITAT KOLKATA - TMI - Deemed dividend u/s. 2(22)(e) - Held that:- we find that the liquid funds available with the assessee were ₹ 31,24,44,463/- and assessee had granted loans during the year amounting to ₹ 11,26,65,003/-, which works out to 36.06% of total liquid funds available. Hence, it can be safely concluded that the lending activity is substantial part of the business of M/s. JAFPL from the factual position as stated herein above from the angle of funds dep .....

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e case, we hold that no addition could be made in the hands of the assessee u/s. 2(22)(e) of the Act. - Decided in favour of assessee

Disallowance u/s. 14A - Held that:- We find that no satisfaction was recorded by the ld.AO in terms of Rule 8D(1) of the IT Rules, 1962, which is mandatory as in the instant case, the assessee had disallowed a sum of ₹ 15,451/- voluntarily in the return of income u/s. 14A and without giving a categorical finding how the said figure is incorrect ha .....

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count u/s. 14A of the Act - Decided in favour of assessee - ITA No. 21/Kol/2013, C.O No. 28/Kol/2013 - Dated:- 9-3-2015 - Shri N.V.Vasudevan, Judicial Member, and Shri M. Balaganesh, Accountant Member For The Appellant/Department : Shri Pinaki Mukherjee, JCIT, ld.Sr.DR For the Cross Objector/Assessee : Shri Manoj Kataruka, Advocate, ld.AR ORDER SHRI M.BALAGANESH, AM Both the appeal of the revenue and cross objection of the assessee are arising out of the order of the Learned CIT(A)-VIII, Kolkata .....

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days in filing the appeal by the revenue and cross objection by the assessee before us. With the consent of both the parties, both the delay in filing the appeal by the revenue and cross objection by the assessee are condoned, and the same are admitted and disposed off after perusing the material available on record on merits. 4. The first issue to be decided in this appeal is as to whether a sum of ₹ 1,09,15,000/- would be brought to tax as deemed dividend u/s. 2(22)(e) of the I.T Act in .....

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. Ltd ( In short M/s. JAFPL). The following facts are undisputed:- a. The assessee is holding @11.81% shares of M/s. JAFPL . b. The accumulated profits of M/s. JAFPL as on 31-03-2008 was ₹ 28,72,80,404/- and as on 31-03-2009 was ₹ 31,66,33,101/-. 5.1 The assessee took this loan for very short period of time from M/s. JAFPL and repaid the same before the end of the previous year. Before the ld.AO, the assessee argued that M/s. JAFPL is a non banking financial company [ In short NBFC] .....

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of the business of the lending company, then it would fall under the exception clause of section 2(22)(e) of the I.T Act. The ld.AO observed the following from the income criteria of the assessee , which is tabulated as below :- Particulars of Income As on 31/03/2009 As on 31/03/2008 1) Sale of shares Rs.8,84,01,687 NIL 2)Interest Income Rs.66,21,789 Rs.79,95,548 3)Profit on sale of investments Rs.2,26,59,650 Rs.2,77,05,361 4) Other income Rs.1,33,05,036 (Rs.94,60,872) 5.2 According to the ld.AO .....

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ments ₹ 33,40,66,614 Rs.25,28,44,997 3) % age of total capital 91.5% 74.58% 4) Loan & Advance Rs.1,83,47,769 ₹ 74,578 5) % age of total capital 5% 22% 5.4 The ld.AO observed that M/s. JAFPL despite making good profits has not chosen to declare dividend for so many years. The ld.AO observed that in this scenario granting of loans to the assessee being shareholder without declaring dividends need to be construed as deemed dividend u/s. 2(22)(e) of the Act going by the real intentio .....

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ion 2(22)(e) of the Act:- (22) dividend includes- ( a) to (d) *** *** *** *** (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 entitled to a fixed rate of dividend whether with or without a right to parti .....

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ade in accordance with sub-clause (c) or subclause (d) in respect of any share issued for full cash consideration , where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; "[(ia) a distribution made in accordance with sub-clause (c) or subclause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [ a .....

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he word substantial means of solid material or structure, stout, heavy, ample and nourishing; large, heavy; of ample or considerable amount or size; sizeable, fairly large; having force or effect. We find that M/s. JAFPL i.e the lending company was incorporated on 18-02-1994 and the Reserve Bank of India [RBI] granted certificate of registration as a Non- banking Financial company [ In short NBFC ] on 7-3-1998. It is not in dispute that M/s. JAFPL, being a NBFC, is engaged in the business of gra .....

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in shares and other from giving loans and advances. It is to be seen now that whether the loans and advances have been given to the assessee by M/s. JAFPL in the ordinary course of its business and whether the lending of money is a substantial part of its business in view of the fact that substantial part of the business is not defined in the I.T Act, dictionary meaning and factors such as the capital employed, income criterion, past history, have to be taken into consideration for determining t .....

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ly operated on current account basis. We also find from page 38 of the paper book containing the tax audit report ( in Form No. 3CD) of M/s. JAFPL, wherein the tax auditor has stated that M/s. JAFPL has started trading in shares in assessment year 2009-10 as a new business activity. 8. We find that the expression substantial part of business has been considered by the Hon ble Bombay High Court regarding applicability of provisions of section 2(22)(e) in the case of CIT Vs. Parle Plastics Limited .....

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, it is an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole". The decision of Terry's Motors Lt. vs. Rinder (1948) S.A.S.R. 167 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 per annum, £ 13 per annum attributable to the amount paid for furniture, was a substantial amount, on the basis of the decision in Maclay vs. Dixon 170 L.T. 49. .....

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nce; 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 part or the whole to be treated as "substantial part", the part must exceed 50 per cent of the whole. In our view, the expression "substantial part" does not connote an idea of being the "major part .....

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at percentage while drafting cl.(ii) of s.2(22) 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 lending business of the lending company for the purpose of cl. (ii) of s. 2(22) of the Act. We would give a an illustration to ascertain the meaning of the expression "substantial business" or "substantial income" of a company. In the m .....

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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 that none of the business of the said company is a substantial business of the company. In our view now. The first business which constitutes 40 per cent of the turnover and contributes 40 per cent to the profit would be the single largest part of the business of the company, the second and .....

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s 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 a substantial business of a 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 it .....

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relation to the whole and sometimes even percentage of a manpower used for a particular part of business in relation to the total manpower or working force of the company would be required 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 f .....

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asis may or may not be lucrative in a particular year. Therefore, the funds are to be put under better option such as in investment, mutual funds and shares with an expectation to yield better results. He further argued that there is no doubt that during the year, M/s. JAFPL has a current advance amount of ₹ 11 crores and total deployment of fund in the loans and advances was much more than that as per the statement filed and these figures indicate that substantial part of the business of .....

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end of the year, which only reflects the financial status of the activities carried out by the assessee all throughout the year, but what has to be seen is the actual picture and affairs of the lending company to determine the correct nature of business. We draw support from the decision of the Hon ble Allahabad High Court in the case of Ravi Agarwal Vs. ACIT reported in (2015) 64 Taxmann.com 31 (All.) vide order dated 8-10-2015, wherein it has been held as below :- 11 We are of the opinion tha .....

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nd, 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 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, nam .....

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said Finance Company in its balance sheet was for its convenience. The fact remains that the Finance Company was substantially carrying on the business of lending money which was its main business. 8.1 From the aforesaid decision, we find that the Hon ble Allahabad High Court had held that the income and funds deployed even if it is less than 20% of the total investment would still be construed as substantial part of business of the company. We also draw support from the decision of the Co-ordin .....

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of aforesaid judicial pronouncement, we have examined the facts of the case in hand and we are of the view that there should not be any controversy that "substantial part of business" is not equivalent to the word "major part of business", as the Legislature has not used the words "major part of business" in place of "substantial part of business". Had it been used, then it would have to be examined that assessee's business should be more than 50% in .....

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planation 3(b) below section 2(22)(e) of the Act, where 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 twenty per cent of the income of that concern and the order of the Tribunal in the case of Mrs Rekha Modi vs. Income Officer, New Delhi (supra) and other judgment of the Hon'ble High Court, we are of the view that if 20% of the capital of the company is deploye .....

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siness of that company was indicated as finance. The company continued in the business of short term finance of idle funds. M/s. JMC Securities Pvt. Ltd. During the year under consideration, earned interest income to the tune of ₹ 9,16,088/- which constituted about 70% of its total business income amounting to ₹ 13,04,088/-. The maximum amount of loan advanced by the company during the year under consideration was to the tune of ₹ 95,45,000/-. That constituted 32% of the total .....

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s Court is not misplaced. 8.3 From the details available as per records, we find that the liquid funds available with the assessee were ₹ 31,24,44,463/- and assessee had granted loans during the year amounting to ₹ 11,26,65,003/-, which works out to 36.06% of total liquid funds available. Hence, it can be safely concluded that the lending activity is substantial part of the business of M/s. JAFPL from the factual position as stated herein above from the angle of funds deployment crit .....

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arate, In support of this proposition, he placed his reliance on the following decisions:- 1) ITAT Mumbai in the case of Oil Industries Vs. DCIT reported in 28 SOT 383(Mum.Trib) 2) ITAT Kolkata in the case of IFB Agro Industries Vs.DCIT reported in 63 SOT 207 (Kol.Trib). 3) ITAT Kolkata in the case of DCIT Vs. P.C Chandra Holdings P.Ltd In 38 CCH 115(Kol.Trib) 8.5 He argued that in all these aforesaid decisions the expression loans , advances and deposits have been distinguished. It has also bee .....

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e aforesaid findings and judicial precedents relied upon herein above in respect of expression substantial part of the business and the alternative argument of the assessee, we hold that no addition could be made in the hands of the assessee u/s. 2(22)(e) of the Act. Accordingly, the Ground Nos. 1,2 & 3 u/s. 2(22) (e) of the Act as raised by the revenue are dismissed. 9. The last ground of revenue s appeal and cross objection of the assessee to be decided is as to whether the ld.AO is justif .....

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thout recording any satisfaction and contrary to the provisions of law and therefore the action of the ld.CIT(Appeal) not to delete the entire disallowance u/s. 14A is bad in law. 2. That alternatively the disallowance u/s. 14A read with Rule 8D is to be made in respect of only those investments which does not and shall not form part of total income. 11. Thus, ground no.2 of revenue s appeal and grounds of cross objection of the assessee are taken up together for disposal as it involves regardin .....

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he Act. 13. We have heard the rival submissions and perused the material available on record. At the outset, we find that no satisfaction was recorded by the ld.AO in terms of Rule 8D(1) of the IT Rules, 1962, which is mandatory as in the instant case, the assessee had disallowed a sum of ₹ 15,451/- voluntarily in the return of income u/s. 14A and without giving a categorical finding how the said figure is incorrect having regard to the accounts of the assessee, the ld.AO cannot resort to .....

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