TMI Blog2021 (7) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh consolidated negotiation. It is also demonstrated by the assessee that similar advance was obtained in the earlier years right from AY 2010- 11 where assessee was not a shareholder in the lender company at all. It is also simultaneously the case of the assessee that the lender company was substantially engaged in money lending activity. CIT(A) has acted on sound legal principles in the light of the facts broadly noticed above. On facts, it has emerged that the lender company has charged interest on the advances made to the assessee company. Also in the case of Pradip Kumar Malhotra [ 2011 (8) TMI 16 - CALCUTTA HIGH COURT ] has observed that advances given by the lender was not for the individual benefit of the shareholder but for business purposes and therefore such transactions would not fall within the sweep of deeming fiction created under s.2(22)(e) of the Act. This reason on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee. We also simultaneously find merit in the other line of argument advanced on behalf of the assessee - money lent to the assessee was received in the ordinary course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat money lending was a substantial part of assessee s business without appreciating the fact that the assesses had resorted to colourable device to escape the provisions of section 2(22)(e) of the Act. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that loan given to M/ s. Krishna Coil Cutters Pvt. Ltd. by M/ s. Krishna Sheet- Processors Pvt. Ltd.(KSPPL), was in the ordinary course of its money lending business without appreciating the fact that KSPPL had not obtained requisite permission to carry on money lending business, which gets support from the decision of the Hon'ble Allahabad High Court in the case of Shri Krishna Gopal Maheshwari, reported in 44 taxmann.com 127 [ 2014] the decision of ITAT Lucknow in the case of Kishori Lal Agarwal reported in [ 2014] 42 taxmann.com 37. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing the alternate claim of the assesses that the loan, was in the nature of inter corporate deposit and therefore not In the nature of loans and advances without appreciating the fact that in the balance sheet of the lender company M/ s. Kr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived by the appellant in the ordinary course of business from the company which is having substantial investment in the appellant company. 5.3.1. 1. So far as the first argument of the appellant is concerned, the AO in his order has discussed the issue in paragraphs 6. 2 to 6, 8 and has also relied upon the direction issued by the Jt. CIT Kheda Range, Nadiad which has been reproduced in his order. On the basis of such discussions and direction, the AO has stated that the gross turnover of the lending company is ' 2, 68, 37, 87, 457 /-. As against this, the deployment of funds in loans and advance on which interest earned is of ' 27, 51, 65, 572/- which is only 10. 25 % of gross turnover. Hence, even comparing the deployment of funds towards gross turnover, the ratio is 10, 25 % which is less than 50 % which proves that the principal activities of the lending company are not money lending activities. The Jt. CIT in his order u/ s 144A of the IT Act has discussed the claim of the appellant in Para 3. 12, 3. 8 of his order which has been reproduced in the assessment order. He has stated that as per the decision in the case of Rekha Modi (supra), if more than 20 % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra has held that not every advance or loan to a shareholder is liable to be taxed as deemed dividend u/ s 2(22)(e) of the Act, but, only gratuitous loans advanced by the company to shareholders can be treated as deemed dividend. In this case the court had held as follows: The phrase ' by way of advance or loan' appearing to sub- clause (e) of section 2(22) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of 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 10 per cent of the voting power; but if such loan or advance is given to such share holder as a consequence of any further consideration which Is beneficial to the company received from such s shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant as well as the AO have relied upon the decision of Rekha Modi (supra) of Delhi Bench of ITAT. Both the appellant and the AO are in agreement that in order to ascertain as to whether money lending was a substantial part of total business of lender company, the facts has to be considered in respect of the previous year relevant to the assessment year under consideration and not in relation to earlier years since each assessment year is a separate and independent assessment year and the assessment of total income is made with reference to the previous year relating to the relevant assessment year as held in the case of Mrs. Rekha Modi (supra). Further the tribunal had held as follows in this order: The expression ' substantial part of the business' used in item (ii) of section 2(22)(e) has not been defined in the statute. However, a similar expression ' substantial interest' is used in sub- clause (e) of section 2(22) and the same has been defined in Explanation 3 (b) to section 2(22)(e). Although the term ' substantial interest' as defined in Explanation 3(b) to section 2(22)(e) is different than the expression ' a substantial part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already been reproduced above. iii) i) The appellant has further relied upon the decision in the case of ITO Vs. Krishnomics Ltd.(Supra) in which the Jurisdictional Tribunal has held that for the purpose of determining as to whether the lending company is substantially engaged in the money lending business, income criteria need not required to be followed and such aspect needs to be examined with reference to the deployment of the funds in such activity to the total available funds. The Tribunal has held as follows in this order: The provisions of section 2(22)(e)(ii) refer to the words ' substantial part of the business' and nowhere refer to the words ' substantial income / which means that to find out as to whether a given case is covered by the provisions of section 2(22)(e) or not, income criteria from a particular source is not relevant. However, these provisions take the case out of the scope of section 2(22)(e)(ii) only if substantial part of the business carried out by the payer- company is found to be that of lending of money and, therefore, to find out substantial part of business of the payer- company, one should consider the ' objects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans and advances are taken at Rs, 19, 52, 76, 906/- and total funds available with the lending company are taken at ₹ 59, 44/ 79, 8457-. Then the ratio of such funds comes to 37. 31 % of the total net current assets of the lending company. Such percentage comes to 32. 85 % if the total funds available with the lending company including share capital reserves and surplus, secured loan and advances and unsecured loans are taken into account. iv) The Hon'ble Bombay High Court in its decision in the case of Parle Plastics Ltd. has discussed the issue as to what can be considered to be the substantial part of the business. In this decision the Court has held that the phrase substantial part appearing in section 2(22)(e) does not mean Principal Business or such activity which constitutes more than 50 % of the total activity or assets of the company. Hence, the findings given by the Jt. CIT that since, the funds deployed in loans and advances is less than 50 % of the total funds available with the lending company, hence, lending of money is not a substantial part of the business of the lending company is not correct. v) The ITAT, Mumbai Bench in its decision in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt held in this case that though a copy of Memorandum of association was not filed on record, it was not the case of the Revenue that the act of the lending money was ultra vires the object clause of AMPL. The court further held that it was not the case of the Revenue that AMPL had no power under the Memorandum of Association to lend any money or that the business of advancing and lending money could not be undertaken by the AMPL. On the basis of such observations the Revenue' s objection was not accepted by the Court. In the present case a/ so, since one of ancillary objects permits the appellant to carry on the business of lending of money, hence the objection raised by the AO in this regard is not acceptable. 5.3.4. 4. Thus it is seen that in the decision in the case of Rekha Modi (supra) it has been held that since money lending business constituted less than 20 % of the total business of the assessee and, it cannot be said that the lending of money was a substantial part of the business of the company. Further in the case of krishnonics Ltd (Supra) it has been held that only the deployment of fund is to be considered to find out whether the money lending is sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22)(e) of the Act itself. The learned counsel for the assessee broadly divided his contentions in three parts; (i) the unsecured loan received was in the ordinary course of business and such transactions have occurred in the earlier years also when the shareholding of the assessee company in the lending company was less than the threshold limit; (ii) the lender company was substantially engaged in money lending activity and has charged interest on the money lent to the assessee as can be seen from the notice dated 19. 02. 2016 issued by the AO himself under s.142(1) of the Act; (iii) the transactions carried out between the lender company and assessee are in the nature of deposit in contrast to loans or advances and therefore falls outside the sweep of Section 2(22)(e) of the Act. 8.3 The assessee referred to a certain documents to support the aforesaid contentions and relied upon various case laws in this regard. We shall deal with the same appropriately wherever consider expedient in the succeeding paragraphs. 9. We have carefully considered the rival submissions and the documents referred and relied upon under Rule 18(6) of the Income Tax (Appellate Tribunal) Rules, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated, the lender advanced funds to the assessee by way of intercorporate deposits (ICDs) and the lending was done on the similar rate of interest on which funds were advanced to unrelated party and hence all the transactions were at arm s length. It is further claimed that both the companies had also considered the setup of another unit in the State of Gujarat and had entered into various correspondence by entering into preliminary agreement. Funds were kept by the assessee in order to initiate the land-to- land deal which did not materialize owing to the fact that some of the adjoining land holders were not forthcoming and therefore required land cannot be procured. 9.2 In this factual backdrop, the CIT(A) has adjudicated the issue in favour of the assessee and held that Section 2(22)(e) of the Act is not applicable in the peculiar facts. On a perusal of the order of the CIT(A), we find that the CIT(A) has acted on sound legal principles in the light of the facts broadly noticed above. On facts, it has emerged that the lender company has charged interest on the advances made to the assessee company. In the circumstances, the Hon ble Calcutta High Court in the case of Pradip Kum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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