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Income Tax Appellate Tribunal, KOLKATA ‘SMC’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy]
Date of concluding the hearing : January 7th, 2019 Date of pronouncing the order : February 20th, 2019 O R D E R Per J. Sudhakar Reddy :-
This appeal filed by the assesse is directed against the order of the ld. Commissioner of Income Tax (Appeals) - 14, Kolkata, (hereinafter the ‘ld. CIT (A)’), passed u/s 250 of the Income Tax Act, 1961 (the ‘Act’), dt. 21/05/2018, for the Assessment Year 2013-14, on the following grounds:- “
1. For that the order of lower authorities is opposed to requirement of law and bad in law.
2. For that the order of the CIT (A) in confirming the Rs.4,37,288/- as dividend income u/s 2(22) (e) of the Act is not tenable in law and facts as well as bad in law.
3. For that the order of lower authorities in disallowance of Rs.52,474/- under the head interest paid treating is not used wholly and exclusively for the purpose of business is not tenable in law and facts.
4. For that the CIT (A) is erred in confirming the addition made under the head interest of Rs.3,893/- and Rs.40/- treating in penal in nature.
5. For that the appellant craves leave to amend, alter, add, delete or substitute any other grounds of appeal before or at the time of hearing of the appeal.”
Assessment Year: 2013-14 Ashoka Exports 2. The facts leading to the addition u/s 2(22)(e) of the Act are that one M/s. Perview Barter Pvt. Ltd. is holding 40% of the profit sharing of the assessee partnership firm M/s. Ashoka Lifestyle Products Pvt. Ltd. The assessee M/s. Ashoka Exports, received loans of Rs. 60 Lakhs/- from M/s. Ashoka Lifestyle Products Pvt. Ltd., during the Financial Year 2012-13. The Assessing Officer held that the provisions of section 2 (22)(e) of the Act, apply to the facts of the case. He rejected the claim of the assessee that M/s. Ashoka Lifestyle Products Pvt. Ltd, had advanced this amount of Rs.60 Lakhs/-, in its regular course of business of lending of loans and advances. He took a view that the assessee was the only firm to which M/s. Ashoka Lifestyle Products Pvt. Ltd. had advanced money. The Assessing Officer also disallowed the interest claimed on the same.
Aggrieved the assessee carried the matter in appeal.
3.1. The ld. First Appellate Authority, observed that the assessee is in the business of trading in iron and steel goods and the company which advanced loans to the assessee is in the business of trading and manufacturing of jute fabrics, cane handle, PVC transparent sheets, cut and fabrics, jute bags and PP non-woven bags. He held that the assessee could not prove that the loan in question was advanced by M/s. Ashoka Lifestyle Products Pvt. Ltd., in its ordinary course of business and that lending of money constitute substantial part of that company’s business. He rejected the claim of the assessee.
Aggrieved the assessee is before us.
The ld. Counsel of the assessee submitted that substantial part of the business of the assessee is advancing loans and for this purpose he filed a paper book, wherein he filed a chart to demonstrated that out of the total capital of the company including reserves, the advances made are 90.37% for Assessment Year 2010-11, 71.12% for the Assessment Year 2011-12, 85.2% for the Assessment Year 2012-13 and 108.4% for the Assessment Year 2013-14. Similarly, he analysed the income aspect of M/s. Ashoka Lifestyle Products Pvt. Ltd., and demonstrated that for all the Assessment Years, the interest income is around Rs.7 Lakhs/- to Rs.9 Lakhs/-, per year and the net profit after taking into consideration such Assessment Year: 2013-14 Ashoka Exports interest is around Rs.1 Lakh/- to Rs.3 Lakhs/-. He further submitted a running account that the assessee company had with M/s. Ashoka Lifestyle Products Pvt. Ltd. and argued that it was temporary advances taken and given. He further submitted that the above statistics show that the substantial part of the business of the company is lending money and as this loan is given in the ordinary course of business, the same does not fall within the ken of Section 2(22)(e) of the Act. He relied on the following case-law:- Income Tax Officer vs. Smt. Gayatri Chakraborty [2016] 45 ITR (Trib) 197 (ITAT[Kolk]) Kishori Lal Agarwal v. Commissioner of Income Tax [2014] 364 ITR 158 (All) Tanuj Holdings Pvt. Ltd. vs. DCIT [2016] 46 ITR (Trib) 420 (ITAT[Kolk]) Commissioner of Income Tax vs. Parle Plastics Pvt. Ltd. & Anr. [2011] 332 ITR 63 (Bom) Bithal Das Daga vs. DCIT; & 541/Kol/2016; Assessment Year 2006-07; order dt. 11/08/2017
He further disputed the disallowance of interest of loan and also addition made under the head interest.
The ld. D/R, on the other hand, referred to the profit and loss account and balance sheet of M/s. Ashoka Lifestyle Products Pvt. Ltd. and submitted that the company has huge turnover from exports. He pointed out that the loan advanced by M/s. Ashoka Lifestyle Products Pvt. Ltd. to the assessee company and hence it cannot be considered that lending of money is substantial part of the business of the company or that the company advances loan in its ordinary course of business as required by Section 2 (22)(e) of the Act. He relied on the order of the ld. CIT(A) both on the issue of addition u/s 2(22)(e) of the Act and the disallowance of interest.
Assessment Year: 2013-14 Ashoka Exports 7. I have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, I hold as follows:-
7.1. The chart given by the assessee to demonstrate that lending of money is substantial part of the business of the company M/s. Ashoka Lifestyle Products Pvt. Ltd., is extracted for ready reference:-
8. The decision of the Hon’ble Allahabad High Court in the case of Kishori Lal Agrawal vs. CIT (supra), relied upon by the assessee as explained the principles as follows:- “7. 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 Assessment Year: 2013-14 Ashoka Exports 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 Commissioner of Income-tax (Appeals) had adverted to the position of total assets of the companies and observed that the position was as follows : Name of the Total assets as on Loans and advances as on Percentage of company 31-3-07 31-7-07 total business Kukki Colour 14,68,596 10,26,110 69.87 Photos Pvt. Ltd. Kukki Colour 50,72,899 19,61,593 38.67 Prints Pvt. Ltd.
Both the ingredients were considered by the Commissioner of Income-tax (Appeals). On the first ingredient, the Commissioner of Income-tax (Appeals) 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 Commissioner of Income-tax (Appeals) held that one of the lending companies had advanced interest bearing loans to the extent of 69.87 per cent. of the total assets while the second company had deployed 38.67 per cent. of its total assets towards interest bearing loans. The Tribunal has not considered whether the second ingredient was duly fulfilled.
9. 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. 8.1. The Hon’ble Bombay High Court in the case of CIT vs. Parle Plastics Ltd & Anr. (Supra) held as follows:- “11. The expression used under clause (ii) of Section 2(22) is “substantial part of the business”. We would, therefore, have to ascertain the meaning of the word “substantial”, appearing in the expression “substantial part of the business”. Stroud’s Judicial Dictionary, Fifth Edition, gives the first meaning of word “substantial” as “A word of no fixed meaning, it is an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole”. The decision of Terry’s Motors Ltd. v. Rinder [1948] S.A.S.R. 167 (South Australiyan Court) 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 p.a.., £13 p.a. attributable to the amount paid for furniture, was a substantial amount, on the basis of the decision in Maclay v. Dixon 170 L.T.
In meaning No.15, relying upon the decision of Ladbrooke (Football) v. William Hill (Football) [1964] 1 W.L.R. 273, it is said that in deciding whether the reproduced part of copyright material is a “substantial” part of the whole, it is the quality rather than the quantity of the part that should be considered.Black’s Law Dictionary, Sixth Edition defines the word “substantial” as “of real worth and importance; of considerable value; valuable; belonging to substance; actually existing; real; not seeming or imaginary; not illusive; solid; true; veritable. Something worthwhile as distinguished from something without
Assessment Year: 2013-14 Ashoka Exports value or merely nominal.” No decision was cited before us wherein a view has been taken that in order to show that a part of the whole to be treated as “substantial part”, the part must exceed 50% 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% 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 ) 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) 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, large number of companies do not restrict to one or two businesses. They carry on numerous activities and carry on numerous businesses and have numerous business divisions. Let us take a case of a first company which has 3 divisions of works consisting of three different types of business. Turn over as well as the profit of the first division is 40%; turn over and profit of second division is 30% and the turn over and profit of the third line of business is 30% . In the case of this company no part of the business has turn over exceeding 50% and no part of the business company generates profit of more than 50% of the total. In such a case can it be said that none of the businesses of the said company is a substantial business of the company. In our view not. The first business which constitutes 40% of the turn over and contributes 40% to the profit would be the single largest part of the business of the company, the second and third divisions of the business, each of which contributes 30% of the turn over as well as profit of the company, though not the major and not even single largest part of the business of the company, would still be a substantial part of the business of the company, because if any part of the three divisions of the business of the company was to be closed down, that would result in loss of turn over and/or business of 30%, ordinarily no company would regard such part of the business 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 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 its substantial business. Sometimes a portion which contributes substantial part of the turn over, though it contributes a relatively small portion of the profit, would be substantial part of the business. Similarly, a portion which relatively a small as compared to the total turnover, but generates a large, say more than 50% of the total profit of the company would also be substantial part of its business. Percentage of turn over 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 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.”
Assessment Year: 2013-14 Ashoka Exports 8.2. Applying the propositions of law in these case-law to the facts of the case on hand, I have to hold that the lending of money and advancing of loans was substantial part of the business of M/s. Ashoka Lifestyle Products Pvt. Ltd.
The next issue is whether the money has been given in the ordinary course of business. The assessee produced before us a current account between the assessee and the lender M/s. Ashoka Lifestyle Products Pvt. Ltd. The Kolkata Bench of the ITAT in the case of ITO vs. Smt. Gayatri Chakraborty (supra) held that loan account is different from current account and Section 2(22)(e) of the Act, is not attracted. This case-law relied upon by the assessee is not applicable to the facts of the case. As this is a loan account carrying interest where there were both repayments and fresh issue of loans. Be it as it may, I am of the opinion that the amount was not given as a loan in the ordinary course of business by M/s. Ashoka Lifestyle Products Pvt. Ltd. 9.1. M/s. Ashoka Lifestyle Products Pvt. Ltd. is a manufacturer and the assessee company is an exporter. The advances were given in ordinary course of business between the manufacturer and the exporter and hence it falls within exclusion clause of Section 2(22)(e) of the Act. Hence, the addition cannot be sustained and is deleted.
10. Coming to the disallowance of interest, we delete the same as the assessee has substantiated its claim. Similarly, the disallowance of interest of Rs.3,893/- and Rs.40/-, are also deleted as in my view they are made without any basis.
In the result, appeal of the assessee is allowed.