TMI Blog2011 (12) TMI 657X X X X Extracts X X X X X X X X Extracts X X X X ..... est. The percentage share holding of the assessee in M/s. Sun Polytex (P) Ltd. was 23.67%. The AO therefore, issued show cause notice and asked as to why a sum of ₹ 75.00 lacs received from M/s. Sun Polytex (P) Ltd. as loan/ advance be not treated as deemed dividend u/s 2(22) (e) of the Act. 2.3. Before the AO, the assessee filed the following submissions. The assessee company has taken loan ₹ 55.00 lacs from M/s. Sun Polytex (P) Ltd. as Inter Corporate Loans instead of ₹ 75.00 lacs and paid interest ₹ 1,05,534/- @ 12% p.a, and also deducted at source ₹ 23m682/-. Balance of loan as on 31-03-2006 in ₹ 57,27,988/-. We are enclosing herewith both revised a/c of M/s. Sun Polytex (P) Ltd. (Trader a/c loan a/c). Further loan received from Sisarama Plastic (P) Ltd. ₹ 80,000/- was advance against job work done by the assessee . The assessee has taken loan from M/s. Sun Polytex (P) Ltd. in ordinary course of its business. Since M/s. Sun Polytex (P) Ltd. is engaged in the business of manufacturing of PP/HDPE fabric, as well as financing to companies/ firm as inter corporate loan on interest @ prevailing in the market and also allowable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 45.00 lacs was received from M/s. Sun Polytex (P) Ltd. on 30-01-2006 and further a sum of ₹ 10.00 lacs was received on 11-03-06. The loan has been taken in ordinary course of business. 2. The object clause No. 18 (B) of the Memorandum of Association of M/s. Sun Polytex (P) Ltd. empowered that the company to carry on the business of financing. 3. The ld. AR submitted that balance of unsecured loans including the loan taken during the year to the extent of ₹ 1,12,31,579/- were of s 1,68,92,348/-. The position of loan given during the year by M/s. Sun Polytex (P) Ltd. is as under:- Name Op. Bal Loan given Received back Cl. Balane Harmoneh Plastics (P) Ltd. 900,000 Nil 900,000 Nil Mewar Polytex Ltd. Nil 5,500,000 Nil Nil Sisarama Plastics (P) Ltd.* Nil 9,249,038 9,249,038 Nil Maple Industries * Nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. LJ 13 4. Utkarsh Fincap (P) Ltd. vs ITO (2006) 99 ITD 259 5. DCIT vs Maipo India Ltd. 9 DTR 55 (ITAT Del) 6. In one of the case cited by the ld. AR , it was held that share premium reserve cannot be utilized for distribution of the dividend and hence the provisions of Section 2(22)(e) will not be applicable. 7. It was stated that the advance made during ordinary course of business expediency did not constitute loans for the purpose of Section 2(22)(e) of the Act. 8. It was submitted that the amount of the ICD/ loan given by M/s. SPL as compared to their capital and reserves is quite substantial and interest income has been assessed in the hands of M/s. Sun Polytex (P) Ltd. as income from business. . The burden of proof lies on the department to prove that pre-conditions for invoking the provisions of Section 2(22)(3) are fulfilled. The Revenue has not discharged such burden. 2.6. The ld.CIT(A) observed that inter corporate loan is out of unsecured loan taken by M/s. Sun Polytex (P) Ltd. The loan was given in accordance with the Memorandum of Association passed by the Board of Directors. The ld.CIT(A) observed that net current assets after excluding the current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the quantum of the income shown as interest, the ld. DR submitted that lending of money is not substantial part of the business of the company. It was therefore, submitted that the AO was justified in holding that the advance received by the assessee is to be taxed as deemed dividend. It was further submitted that it is mentioned in Section 2(22)(e) of the Act that loan and advance is to be treated as deemed dividend and it will not be treated as deemed dividend in case such loans and advances are covered by non-inclusion part of Section 2(22)(e) of the Act . Thus the onus was on the assessee to show that it is covered from the non-inclusion portion of Section 2(22)(e) of the Act. The ld. DR has referred to Circular No.495 dated 22-09-1987. The circular was issued to explain the notes on the provisions of Finance Act, 1987. Our attention was drawn to the following clauses from that circular. 10.1 Section 104 to Section 109 relates to levy of additional tax on certain closely held companies (other than those in which the public are substantially interested) if they fall to distribute a specified percentage of their distributable profits as dividends. These provisions had lost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1988- 89 and subsequent years. 2.8. On the other hand, the ld. AR relied on the submissions filed before the ld.CIT(A). The ld. AR has also relied upon the following decisions. 1. CIT vs V.S. Sivasubramaniam 231 ITR 656 (Mad.) 2. CIT vs P.V. Joh,181 ITR 1 (Kerl.) 2.9. We have heard both the parties. Before proceeding further, it will be useful to reproduce Section 2(22)(e) of the Act (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 participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal rubber products, transmission belts and conveyers, plastic containers, bottles and closures and rubber lined vessel toys and other allied goods, leather cloth, dress, dress linings, umbrellas and waterproof goods 2.12. Part B of the Memorandum of Association contains the objects incidental or ancillary to the attainment of the main objects. Such ancillary objects are more than 24 objects and clause 18 is considered in part B of the Memorandum of Association. It will be useful to reproduce the head note of Part B as under:- The objects incidental or ancillary to the attainment of the main objects are:-. 2.13. The object clause no 7 contains in part B of Memorandum of Association states that M/s. Sun Polytex (P) Ltd. to carry on or assist or participate in any other trade or business whether financial commercial, mercantile manufacturing or otherwise which may seem capable of being conveniently carried on in connection with any of the above specified businesses or calculated directly or profitable to the company s business or to enhance the value of any of the company s property or right. Thus clauses 7 and 18 have been included in the ancillary objects. There may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or the part that constitutes majority of the whole. If the Legislature really intended that more than 50 per cent. of the business of the lending company must come from the business of lending, nothing prevented the Legislature from using the expression majority 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 lending business of the lending company for the purpose of clause (ii) of section 2(22)(e) 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, a large number of companies do not restrict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 forms a 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 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. 2.14 Now we have to apply the tests as laid down by the Hon'ble Bombay High Court. It is not disputed that the turnover of the assessee is to the extent of ₹ 12.18 crores. The profit before tax is to the extent of ₹ 1.31 cores. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as advance for the purpose of money lending. The interest received is only to the extent of ₹ 2,97,552/-. Thus the income received in the form of interest cannot be considered as substantial part of the income of the assessee. The perusal of the balance sheet and profit and loss account of M/s. Sun Polytex (P) Ltd. did not inspire any confidence that M/s. Sun Polytex (P) Ltd. was having money lending as substantial part of the business. The advances have also not been for the purpose of the business of M/s. Sun Polytex (P) Ltd. but it was a loan as mentioned in the balance sheet. The audit report of M/s. Sun Polytex (P) Ltd. is available at pages 46 to 62 of the paper book filed by the assessee. The auditor has mentioned that company has given short term loan to four concerns aggregating to ₹ 2.27 crores during the year . It is nowhere mentioned that these were Inter Corporate Deposits (ICDs). It is also mentioned that the company has taken short term loan from 31 parties aggregating to ₹ 3.29 crores during the year . The auditors in clause 12 of their reports has mentioned that company has not granted any loans and advances on the basis of security by way of pled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deemed dividend. We therefore, restore the issue on the file of the AO to ascertain as to whether the advance during the year exceeds the closing balance of earlier year. In case it exceeds then the amount should be treated as deemed dividend in view of our findings for the assessment year 2006-07. If the amount is less then no addition will be made because the advance in immediately preceding year has already been treated as deemed dividend. 4.1 The second ground of Revenue is that the ld. CIT(A) has erred in deleting the addition of ₹ 5,710/- made u/s 36(1)(va) r.w.s. 2(24)(x) of the Income Tax Act. 4.2 We have heard both the parties. The employees contribution before due date of return is allowable u/s 43B of the Act .Reliance is placed on the following decisions:- 1. CIT vs AIMIL Ltd. Others,312 ITR 508 (Del) 2. CIT vs Vinay Cement Ltd. 213 CTR 268 (SC) 4.3 In view of the above facts and circumstances of the case, we hold that the ld.CIT(A) was justified in deleting the addition of ₹ 5,710/- 5.0 In the result, the appeals of the Revenue for the assessment year 2006-07 is allowed and that of assessment year 2007-08 is partly allowed. The or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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