This appeal by the assessee arises from a decision of the Income Tax Appellate Tribunal dated 29 November 2013. The assessment year to which the appeal relates is Assessment Year 2007-08. The assessee has raised several questions of law of which the following would cover the controversy which is raised in the appeal:-
"(1) Whether the Income Tax Appellate Tribunal was justified in holding that the two lending companies who have advanced interest bearing loan to the appellant have done so not in the ordinary course of its business, by completely overlooking that the lending of money has been specifically mentioned in the Memorandum of Association of both the companies in the objects which are ancillary to carry out the main objects of the company."
The assessee had taken an interest bearing loan from two companies in which the assessee holds more than 10% of the shares. The assessee received a loan of Rs.95,225/- from a company by the name of Kukki Color Photos Pvt. Ltd. and Rs.11,55,230/- from Kukki Color Prints Pvt. Ltd. The Assessing Officer made an addition of Rs.12,50,445/- under section 2(22)(e) of Income Tax Act, 1961 on the ground that the assessee holds more than 10% of the shares in both the companies and since the companies had sufficient accumulated profits, the loans and advances should be assessed as deemed dividends in the hands of the assessee. The Commissioner of Income Tax (Appeals) deleted the addition with the following findings:-
"It is noticed from the respective Memorandums of the lending companies that one of the objects of this Companies is to lend money. On perusal of the balance sheet & P&L account of these lending companies, I find that Kukki Color Photos Pvt. Ltd. (one of the lender companies) had advanced interest bearing loans to the extent of 69.87% of its total assets. Likewise M/s. Kukki Colour Prints Pvt. Ltd. had deployed 38.67% of its total assets towards interest bearing loans. These facts clearly show that the advance or loans have been made by these 2 companies in the ordinary course of their businesses and lending of money constitutes substantial part of the businesses of these companies. In view of the above facts & decisions cited (Mrs. Rekha Modi vs. ITO and CIT V/s Parle Plastics Ltd.) the transaction between the appellant and the impugned companies would fall within the exception Clause (ii) of the section 2(22)(e) of the Act. Thus, there would be no occasion to term these transactions as falling within the meaning of "deemed dividend". Accordingly, the addition made is deleted."
The Tribunal has set aside the finding of the CIT(A) and has restored the addition which was made by the Assessing Officer.
Section 2(22)(e) of the Income Tax Act, 1961 defines the expression "dividend" as follows:-
"2(22)(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 the company in either case possesses accumulated profits;
but "dividend" does not include--
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(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;"
In the present case, it is not in dispute that the assessee is a beneficial owner of shares held in a company in which the public is not substantially interested holding not less than 10% of the voting power. The amount was received by the assessee by way of a loan or advance. The assessee, being a share holder with a beneficial ownership of shares with not less than 10% of the voting power, the substantive part of the definition was attracted but the issue which fell for consideration before the Tribunal was whether the exclusionary clause (clause ii) was attracted.
Under the exclusionary clause, the expression "dividend" does not include any advance or loan made to a shareholder 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. Hence, for the exclusion to apply, two conditions must be fulfilled. Firstly, the advance or loan must be made to a shareholder by a company in the ordinary course of its business. Secondly, the lending of money must be a substantial part of the business of a company. The Tribunal has held that the first ingredient of clause (ii) was not fulfilled because the advance or loan was made to the assessee, who was a shareholder, not in the ordinary course of business. In holding that the advance was not in the ordinary course of business, the sole consideration which weighed with the Tribunal was that the main object of the two companies was not to engage in money lending business, though the ancillary object was to invest and deal with the funds of the company not immediately required, in such investments or securities and in such manner as shall from time to time be considered necessary for the benefit of the company. The Tribunal was of the view that the two companies were not involved in the business of money lending. Consequently, the Tribunal came to the conclusion that since the main object of the two companies was not money lending but the companies were permitted to invest their surplus funds for the time being, this could not be regarded as being in the ordinary course of the business.
We find merit in the contention of the assessee that the Tribunal has manifestly misapplied its mind to the ingredients set out in section 2(22)(e). The first ingredient of exclusionary clause (ii) of section 2(22)(e) is that the advance or loan must be made to the shareholder by a company in the ordinary course of its business. The first ingredient does not require that the company must be engaged in money lending business. Moreover, where the advance or loan was made in the ordinary course of the business of the company, the fact that the lending of surplus funds is not part of the main object but is at the same time permissible as an ancillary object, would not detract from the loan or advance being made in the ordinary course of its business. The second ingredient, undoubtedly, requires that the lending of money should be a substantial part of the business of the company. What is a substantial part of the business of the company has to be determined as a matter of fact. The CIT(A) had adverted to the position of total assets of the companies and observed that the position was as follows:-
Name of the Company Total Assets As on 31/03/07 Loans & Adv. As on 31/07/07 %age of Total Business Kukki Color Photos Pvt. Ltd.
1468596/-
1026110/-
69.87 Kukki Color Prints Pvt. Ltd.
5072899/-
1961593/-
38.67 Both the ingredients were considered by the CIT(A). On the first ingredient, the CIT(A) held that the lending of money was in the ordinary course of business having due regard to the objects contained in the Memorandum of Association. On the second ingredient, the CIT(A) held that one of the lending companies had advanced interest bearing loans to the extent of 69.87% of the total assets while the second company had deployed 38.67% of its total assets towards interest bearing loans. The Tribunal has not considered whether the second ingredient was duly fulfilled.
In view of the aforesaid position, we are of the view that the Tribunal was clearly in error in allowing the appeal on the ground that the first part of the ingredient of the exclusionary provision of section 2(22)(e) namely clause (ii) was not fulfilled. The basis of the reasoning of the Tribunal is clearly erroneous. The Tribunal, in our view, has misapplied the legal test in holding that since the companies did not carry on money lending business, the advances which were made to the assessee would not be in the ordinary course of its business. This, as we have noted earlier, is not the test which is to be fulfilled in respect of the first ingredient of clause (ii). However, since the Tribunal has not considered the issue as to whether the second ingredient of clause (ii) was duly fulfilled, we are of the view that it would be proper to restore the proceedings before the Tribunal for fresh evaluation on the aforesaid aspect.
Accordingly, we restore the appeal to the Tribunal for considering the applicability of the second ingredient of clause (ii) of the exclusion contained in section 2(22)(e). In this view of the matter, it is not necessary for the Court to finally decide the substantial question of law as framed.
We, however, find no merit in the contention of learned counsel appearing on behalf of the revenue that the appeal by the assessee does not give rise to any substantial question of law. Undoubtedly, an appeal under section 260-A must raise a substantial question of law and not an issue pertaining merely to appreciation of facts (Commissioner of Income Tax Vs. P. Mohanakala)1. The test is fulfilled.
The appeal is, accordingly, disposed of.
Order Date :- 17.4.2014 GS (Dr. D.Y. Chandrachud, C.J.) (Dilip Gupta, J.) Chief Justice's Court Civil Misc. Delay Condonation Application No.140459 of 2014.
Inre:
Case :- INCOME TAX APPEAL DEFECTIVE No. - 35 of 2014 Appellant :- Kishori Lal Agrawal Respondent :- Commissioner Of Income Tax Counsel for Appellant :- Shubham Agrawal Counsel for Respondent :- C.S.C, It Hon'ble Dr. Dhananjaya Yeshwant Chandrachud,Chief Justice Hon'ble Dilip Gupta,J.
There is a delay of four days in filing the appeal. Learned counsel appearing on behalf of the revenue has extraneously opposed the the explanation offered in support of the delay. The objections raised by the learned counsel are thoroughly frivolous and requires to be rejected.
The delay has sufficiently been explained in paragraph 2 of the affidavit filed in support of the Delay Condonation Application and, hence, it is, accordingly, condoned.
Order Date :- 17.4.2014 GS (Dr. D.Y. Chandrachud, C.J.) (Dilip Gupta, J.)