DCIT, CIR-4(2), KOLKATA, KOLKATA vs. M/S. ADORN INVESTMENTS LIMITED, KOLKATA

4 M/s Adorn Investments Ltd. A.Yr. 2011-12 substantial part of the business of the company’. It was argued that the ld AO by design or choice has chosen to substitute the word ‘substantial’ with the word ‘principal’, which no person properly instructed in law can do while interpreting a deeming provision of a taxing statute. The assessee also placed reliance on the decision of this tribunal in Tanuj Holdings Pvt Ltd vs DCIT in ITA No. 360 to 363/Kol/2015 dated 20.1.2016 , wherein the tribunal while examining clause(ii) of section 2(22) of the Act categorically 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 pleaded that M/s Off Shore India Ltd was a registered NBFC which fact proves that lending of money constituted ordinary business of the said company. It was pleaded that more than 45.42% of the long term funds of the lender were deployed in granting of loans and advances and as such it is proved beyond doubt that granting of loans / lending of money constituted substantial part of lender’s business and thereby the lending to assessee company would be outside 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 discussed as to what constituted ‘substantial part of the business’ and held that: The expression used under sub-clause (ii ) of section 2(22) is ‘substantial part of the business’. 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 4

5 M/s Adorn Investments Ltd. A.Yr. 2011-12 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 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 company for the purpose of sub-clause (ii) of section 2(22). 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 turnover, though it contributes a relatively small 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 manpower 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. [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 cent of the total assets of AMPL as on 31-3-1997 were deployed by it by way of total loans and advances. By no means, the deployment of about 40 per cent of the total assets into the business of lending could be regarded as an insignificant part of the business of AMPL. The Tribunal had also held that the income that AMPL had received by way of interest was Rs. 1,08,18,036, while its total profit was Rs. 67,56,335. Excluding the income earned by AMPL by way of interest, the other business had 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 12]

6 M/s Adorn Investments Ltd. A.Yr. 2011-12 6. The ld CITA deleted the addition made in the sum of Rs 1.51.00.000/- towards deemed dividend by making the following observations :- “Decision: I have carefully considered the submissions of the assessee and have gone through the findings of the AO. I find there is not much dispute with regard to the facts. The only question which needs to be adjudicated is whether on facts on record it can be said that granting of loans constituted “substantial part of business” of Offshore India Ltd. It is observed that as on 31.03.2011 OSIL had granted loans & advances amounting to Rs. 52.29 crores to various parties. On that date the Net Owned Funds (NOF) of OSIL by way of share capital and Reserves were Rs. 75.61 crores. In percentage terms the loans and advances granted by OSIL constituted 69.16% of its NOF. The AO has taken into account loan funds of Rs. 39.49 crores and has come to conclusion that the Long term Funds available with OSIL were Rs. 115.10 crores. The AO further found that as on 31.03.2011 OSIL held two major class of assets viz. Investments in Shares having cost of Rs. 94.15 crores and Loans & Advances of Rs. 52.29 corres. In percentage terms the AO found that Investments in Shares constituted 81.79% of OSIL’s Long Term Funds whereas loans and advances constituted 45.42% of OSIL’s Long Term Funds. The AO thus found that the deployment of Long Term Funds in acquiring investments was more than the deployment funds in granting Loans & Advances. The AO therefore held that OSIL’s “Principal Business” was making Investments and not the business of banking or granting of loans & advances. In AO's opinion benefit of clause - (ii) of Explanation to Sec. 2(22) of the Act was available only if the assessee could demonstrate that the “principal business" of OSIL was granting of loans & advances. However since only 45.42% of long term funds were found invested in granting of loans the AO concluded that OSIL's "principal business" was not granting of loans and therefore, clause (ii) of the Explanation u/s 2(22) was not applicable in the case of the assessee.

After considering the argument of the AO and the submissions of the assessee the undisputed fact is that by 31.03.2011 funds invested by that Company in granting of loans were Rs.52.29 crores, According to AIR, if f fund deployment in percentage terms of NOF is considered then OSIL employed 69% of its Capital & Reserves in granting loans & advances. On the other hand however, it is AO's contention that apart from NOF; unsecured loans should also taken into account. If "long term funds" of OSIL as on 31.03.2011 are considered then OSIL's fund deployment in granting loans was Rs.52.29 crores which in percentage term works out to 45.42%. In Para-3.7 of the impugned order the AO admits that on 31.03.2011 OSIL had deployed 45.42% of the long term funds in the business of granting loans. Having regard to these facts and figures therefore it cannot be denied that more than 45% of the long term investible funds were deployed by OSIL in its business of granting loans.

In the present case by AO's own admission 45.42% of the long term funds of OSIL were employed in granting of loans. In the circumstances, can it be said that granting of loans and lending of money constituted "substantial part of assessee's business". The Bombay High Court in the case of CIT vs Parle Plastics Ltd (332 ITR 63) found that 6

7 M/s Adorn Investments Ltd. A.Yr. 2011-12 42% and 39% of the "total assets" of the loan granting company as on 31.03. 1996 and 31.03.1997 respectively were deployed by way of loans and advances. According to the AO the business of money lending should have constituted more than 50% of assessee's business, but since only 42% or 39% of the "total assets" were found to be employed in granting loans the AO did not allow the assessee benefit of Clause --(ii) of Sec. 2(22). On appeal the Tribunal held that "substantial part" of assessee's business constituted money lending. On appeal by the Revenue; High Court upheld the order of ITAT. The observations of the Hon'ble Bombay High Court on the issue are follows:

"The expression used under sub-clause (ii) of section 2(22) is 'substantial part of the business '. 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 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 company for the purpose of sub-clause (ii) of section 2(22). 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".

In the course of appellate proceedings AIR of the appellant also filed a copy of the ITAT Kolkata's decision dated 20.01.2016 in the case of Tanuj Holdings Pvt. Ltd Vs DCIT in in which it has been observed as follows:

“5.3. Whether the lending of inter corporate deposit by GGPL could be considered as substantial part of business of GGPL. We find that GGPL deployed in granting loans in excess of 20% of Net Owned Funds. It would thus be evident that granting of inter corporate deposits was ordinary business of GGPL and income derived/ram such activity was consistently assessed. However, we find in the show cause notice issued u/s 263 of the Act by the Learned CIT, it has been stated that the 'main business' of loan granting company i.e. GGPL was real estate development. In this regard, we find that the legislature in section 2(22) had consciously used the words 'substantial part of the business' in contradistinction to the words 'main business' or 'principal business '. We also find that the words 'substantial part of the business' is not defined in the Act which led to judicial interpretations by various judicial forums and it has been held that the expression 'substantial part of the business' is different and distinct from the words "principal business' or 'main business' used in other places in the Act. Taking cue from provisions of section 2(22)(e) and section 2(32) of the Act, the courts and various benches of the tribunal have held that threshold of 20% can be safely applied to ascertain whether a particular business activity can be considered to be forming 'substantial part of the business '. In the instant case, as already stated supra that GGPL had deployed more than 20% of its Net Owned funds by way of granting of inter corporate deposits to the assessee and then it could be 7

8 M/s Adorn Investments Ltd. A.Yr. 2011-12 concluded that the substantial part of company's business can be said to be granting loans, inter corporate deposits and advances and therefore clause (ii) of sec 2(22)(e) of the Act becomes applicable in case of such company. If the ratio derived from the above decisions is applied to the facts of the present case then I find that 45.42% of long term funds of OSIL were employed in the business of granting loans. In the circumstances the loan which the appellant received from OSIL did not come within the purview of Sec. 2(22)(e) as granting of loans constituted “substantial Part” of OSIL’s business. Therefore, the AO was not correct in adding Rs. 151 Lacs as income of the appellant u/s 2(22)(e). The said addition is accordingly deleted.”

9 M/s Adorn Investments Ltd. A.Yr. 2011-12 undersigned) and by relying on the decision of the Hon’ble Bombay High Court in the case of Parle Plastics Ltd supra . Hence we do not find any justifiable reason to interfere with the order of the ld CITA. We also find that this issue is already decided in favour of the assessee by this tribunal in its own case for the Asst Year 2010-11 on the very same issue in ITA No. 1149/Kol/2016 dated 7.7.2017. Accordingly, the grounds raised by the revenue are dismissed.