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D.C.I.T., Circle-4 (2) , Kolkata Versus M/s. Adorn Investment Ltd.

2018 (1) TMI 578 - ITAT KOLKATA

Deemed dividend addition u/s 2(22)(e) - whether the lending company, being a NBFC duly registered with RBI, has its substantial part of business as lending activity, so as to be outside the ambit of provisions of section 2(22)(e) - Held that:- It is well settled that the provisions of section 2(22)(e) of the Act are deeming provisions and they need to be strictly construed. In interpreting a statutory fiction, effect needs to be given to the language used in its plain and simple form. Save and e .....

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the ld DR was not able to controvert the findings of the ld CITA. We also find that the ld CITA had granted relief to the assessee by placing reliance on the co-ordinate bench decision of this tribunal in Tanuj Holdings Pvt Ltd (2016 (2) TMI 426 - ITAT KOLKATA) and by relying on the decision of the Hon’ble Bombay High Court in the case of Parle Plastics Ltd [2010 (9) TMI 726 - BOMBAY HIGH COURT]. Hence we do not find any justifiable reason to interfere with the order of the ld CITA. Accordingly, .....

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come Tax Act, 1961 (hereinafter referred to as the Act ). 2. The only issue to be decided in this appeal of the revenue is as to whether the ld CITA was justified in deleting the addition made in the sum of ₹ 59,50,000/- u/s 2(22)(e) of the Act in the facts and circumstances of the case. 3. The brief facts of this issue is that the assesse is a Non-Banking Finance Company (NBFC) engaged in the business of granting loans. The return of income for the Asst Year 2010-11 was filed by the asses .....

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,50,000/- from M/s Off Shore India Ltd (PAN AAACO 6223E) during the year under consideration. On the basis of submissions made by the assessee and the details collected from M/s Off Shore India Ltd, the ld AO observed that M/s Adorn Investments Ltd (assessee herein) was a major shareholder of M/s Off Shore India Ltd holding 16.34% of the total shares and holding voting power as well as the beneficial interest in the lending company during the relevant year. The ld AO observed that M/s Off Shore .....

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NBFC duly registered with Reserve Bank of India (RBI) and granting of loans and advances is substantial part of the business of Off Shore India Ltd and accordingly the said transaction would be outside the ambit of provisions of section 2(22)(e) of the Act. The ld AO on analysis of the balance sheet of Off Shore India Ltd (lending company) as at 31.3.2010 and 31.3.2009, observed the following :- a) During the financial year 2009-10, the total funds available was ₹ 131,50,88,238/- and out .....

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8377; 4,42,83,442/- . 4.1. Based on these facts, he concluded that the principal or main source of income of M/s Off Shore India Ltd is only deriving income from profit on sale of investments and from funds deployed as at 31.3.2010 in investment in shares, he concluded that the substantial part of the business is only making investment in shares and not granting of loans and advances. Hence the assessee s case does not fall under the exception provided in section 2(22)(e) of the Act. Accordingly .....

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ad followed prudential norms for income recognition prescribed by RBI in relation to the business of granting loans and advances. Moreover, the lending company had charged interest from the assessee on the loan of ₹ 59,50,000/- granted to it. It was pleaded that in the impugned order, the ld AO had misread and misunderstood the true purport of the language used in clause (ii) of section 2(22) of the Act. The words used in said clause (ii) are where the lending of money is substantial part .....

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ly held that the legislature in its consciousness had used the words substantial part of the business in section 2(22) of the Act in contradistinction to the words main business or principal business . It was argued that the tribunal in this case had held that threshold of 20% could be safely applied to ascertain whether a particular business activity could be considered to be forming substantial part of the business for the purposes of clause (ii) of section 2(22) of the Act. It was further ple .....

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the ambit of provisions of section 2(22)(e) of the Act in the hands of the assessee company. It also placed further reliance on the decision of the Hon ble Bombay High Court in the case of CIT vs Parle Plastics Ltd reported in 196 Taxman 62 (Bom). In the said case, it was the contention of the revenue, that to constitute as a substantial part of the business of the lending company, the business of money lending must constitute more than 50% of the business. The Hon ble Bombay High Court discusse .....

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sion 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 sub-clause (ii) of section 2(22). 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 .....

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portion of the profit, would be substantial part of the business. Similarly, a portion which relatively is 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 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 .....

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ts 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. [Para 11] Applying these tests to the instant case, the Tribunal had not committed any error in coming to the conclusion that lending of money was a substantial part of the business of AMPL. The Tribunal had noted that 42 per cent of the total assets of AMPL as on 31-3- 1996 and 39 per cen .....

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ad resulted in net loss. The Tribunal had taken into consideration the relevant factors and had applied the correct tests to come to the conclusion that lending of money was substantial part of the business of AMPL. Since lending of money was a substantial part of the business of AMPL, the money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it had to be excluded from the definition of dividend by virtue of sub-clause (ii ) of section 2(22). [Para 1 .....

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facts of the case Sec 2(22)(e) of the Act was applicable. It is not in dispute that during the relevant year assessee received loan of ₹ 59,50,000/- from M/s Off Shore India Ltd (OSIL) which was a company in which public were not substantially interested and the assessee held more than 10% shares therein. Prima facie therefore conditions prescribed in Sec 2(22)(e) were attracted. It is however the appellant's case that in terms of clause (ii) of Sec 2(22), Sec 2(22)(e) was not applica .....

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uage employed in clause (ii) of section 2(22) it is therefore necessary to ascertain whether lending of money formed substantial part of the business of OSIL. From the audited accounts of OSIL for the year ended 31/03/2010, I note that as on 31/03/2010 OSIL had granted loans and advances of ₹ 48.83 crores whereas its net owned funds (NOF) in the form of share capital and reserves were ₹ 77.18 crores. In percentage terms more than 63% of the NOF were deployed in granting of loans. I a .....

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he business of such company. The Legislature has consciously used the expression "substantial" in contradistinction to the words "main" or "principal". The use of the word "substantial" does not mean that assessee should prove that granting of loans and advances is the "principal" or "main" or "predominant" business. The use of the word "substantial" means granting of loans should not be peripheral or insignificant b .....

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he assessee's plea on the ground that granting of loans did not form major or principal business activity of AMPL . In this context the High Court interpreted clause (ii) of Sec 2(22) of the Act so as to ascertain whether granting of loans formed substantial part of AMPL's business. The High Court held that any business of a company which cannot be regarded as small, trivial or inconsequential as compared to the whole of the business constituted substantial business. The High Court found .....

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ction 2(22)(e) was not applicable. Similar view has been adopted by IT 1\ T Kolkata I3enches in the decisions relied upon by the appellant. In particular in the case of Tanuj Holdings Pvt Ltd Vs Dy. CIT (Supra), the Tribunal while examining Clause (ii) of Section 2(22) categorically held that the Legislature in its consciousness had used the words 'substantial part of the business' in Section 2(22), in contradistinction to the words 'main business' or 'principal business' .....

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old of 20% can be safely applied to ascertain whether a particular business activity can be considered to be forming 'substantial part of the business' for the purposes of clause (ii) of Section 2(22) of the Act. Applying the ratio laid down in these decisions I find that OSIL was a registered BFC and therefore granting of loans was an ordinary business of the said BFC On the loan granted to the appellant, OSIL has charged interest. The Balance Sheet of OSIL shows that more than 63% of i .....

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7 In the result the appeal is allowed. 7. Aggrieved, the revenue is in appeal before us on the following grounds:- 1. Whether on the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of ₹ 59,50,000/- which was treated as deemed dividend within the meaning of Section 2(22)(e) of the Income Tax Act. 2. That the appellant craves for leave to add, or modify any of the grounds of appeal before or at the time of hearing. 8. We have heard the rival submissi .....

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