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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Sri A.T.Varkey, JM & Shri M.Balaganesh, AM ]
This appeal of the revenue arises out of the order of the Learned CIT(A)-16, Kolkata in Appeal No. 491/CIT(A)-16/Kol/2014-15/C-4(2) dated 29.03.2016 against the order of assessment framed for the Asst Year 2010-11 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
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 Rs 59,50,000/- u/s 2(22)(e) of the Act in the facts and circumstances of the case.
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 assessee electronically on 27.9.2010 declaring total income of Rs Nil due to unabsorbed business losses brought forward from earlier years. The authorized representative of the assessee appeared before the ld AO from time to time and produced the details and documents called for by the ld AO apart from 2 M/s. Adorn Investment Ltd. A.Yr.2010-11 producing the relevant books of accounts and bank statements. The books of accounts were also test checked by the ld AO . The ld AO observed that assessee company had taken loan amounting to Rs 59,50,000/- 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 India Ltd (lending company) had accumulated profits in excess of Rs 59,50,000/- as on the date of transactions. Accordingly he concluded that the said transactions would be hit by the provisions of section 2(22)(e) of the Act in the hands of the assessee shareholder and accordingly the assessee was show caused to this effect.
The assessee replied that it had received interest bearing loan of RS 59,50,000/- from Off Shore India Ltd and it was pleaded that M/s Off Shore India Ltd is a 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 Rs 131,50,88,238/- and out of that , a sum of Rs 84,32,03,302/- was invested in shares and only Rs 48,83,38,316/- was utilized for giving loans and advances. Moreover the income from interest on loans was Rs 1,66,21,291/- whereas the income from profit on sale of investments was Rs 2,87,74,981/- . b) Similarly he observed from the balance sheet as at 31.3.2009 of Offshore India Ltd that the income from interest on loans was Rs 60,21,372/- whereas the income from profit on sale of investments was Rs 4,42,83,442/- . 2 3 M/s. Adorn Investment Ltd. A.Yr.2010-11 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, he made an addition of Rs 59,50,000/- towards deemed dividend in the assessment.
Before the ld CITA, the assessee pleaded that the ld AO erred in holding that the substantial part of business of the lending company was not granting of loans and advances. As per the audited accounts of lending company as on 31.3.2010, the net owned funds were Rs 77.18 crores. The loans and advances granted were Rs 48.83 crores which works out to 63.27% of net owned funds. The lending company had 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 Rs 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 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 3
4 M/s. Adorn Investment Ltd. A.Yr.2010-11 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 63% of the net owned funds of the lender and more than 37% of total available funds 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 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 4
5 M/s. Adorn Investment Ltd. A.Yr.2010-11 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]
The ld CITA deleted the addition made in the sum of Rs 59,50,000/- towards deemed dividend by making the following observations :- “5 I have carefully considered the impugned order and submissions made on behalf of the appellant. I have also carefully gone through the decision of Hon'ble Bombay High Court as well as the decisions of the co-ordinate Benches of the Kolkata Tribunal on which the reliance was placed. The moot question in the present case to be decided is whether on the 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 Rs. 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 applicable because granting of loans was substantial part of OSIL's business. In order to resolve the controversy involved in 6 M/s. Adorn Investment Ltd. A.Yr.2010-11 the present appeal it is therefore material to refer to clause (ii) of Sec 2(22) which reads as follows: "but "dividend" does not include (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." 6 In view of language 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 Rs.48.83 crores whereas its net owned funds (NOF) in the form of share capital and reserves were Rs.77.18 crores. In percentage terms more than 63% of the NOF were deployed in granting of loans. I also find that OSIL was registered with Reserve Bank of India as Non Banking Financial company (NBFC) which also indicated that granting of loans and financing was regular business of the said company. I further find that OSIL had charged interest on the loan granted to the appellant. Clause' (ii) of Sec 2(22) of the Act clarifies that the term "dividend" will not include loans granted by the company in the ordinary course of business where granting of loans is substantial part of the 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 business. Rather it should form significant or material part of the business of the money lending company. In the case of CIT vs. Parle Plastic Ltd (Supra), the assessee had received loan from AMPL; a company in which public were not substantially interested and the assessee had held more than 10% of the shares therein. The assessee claimed exemption from application of Sec 2(22)(e) of the Act on the ground that granting of loans was substantial part of AMPL's business. The Revenue rejected the 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 that 42% and 39% of the total assets of the company were invested in two years; in money lending activities by way of loans and advances. In the opinion of the High Court deployment of approximately 40% of the total assets in money lending business could not be regarded as insignificant part but the same had to be regarded as substantial part of assessee's business. The High court therefore held that substantial part of AMPL's business was granting of 6
7 M/s. Adorn Investment Ltd. A.Yr.2010-11 loans and advances and therefore Section 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'. The ITAT observed that the words 'substantial part of the business' is not specifically defined in the Act which has led to judicial interpretations by various judicial forums. The Tribunal 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 ITAT 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' 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 its net owned funds were utilized in granting of loans and therefore it is evident that granting of loans was substantial part of OSIL's business. On these facts therefore I have no hesitation in holding that Clause (ii) of Sec 2(22) was applicable in the appellant's case and therefore loan of Rs.59.50 la cs received by the assessee from OSIL did not fall within the deeming provisions of Sec 2(22)(e) of the Act. I therefore direct the AO to delete the addition of Rs. 59.50 lacs. 7 In the result the appeal is allowed. “
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 Rs.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 submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute that the assessee company is a shareholder having more than 10% voting rights in the lending company. It is not in dispute that the lending company has accumulated profits in excess of Rs 59,50,000/- drawn by the 7
8 M/s. Adorn Investment Ltd. A.Yr.2010-11 assessee company. The only short point that arises for our consideration is as to 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) of the Act. 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 except the words and expressions used in the statute , nothing more is to be inferred. Clause (ii) of section 2(22) provides that the term dividend shall not include any advance or loan made to a shareholder by a company in the ordinary course of business where the lending of money is substantial part of the business of the company. We find that this issue has been dealt at length on facts and figures by the ld CITA and we are not inclined to interfere with the said findings , more so, when 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 supra (authored by the 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. Accordingly, the grounds raised by the revenue are dismissed.
9. In the result, the appeal of the revenue is dismissed. Order pronounced in the Court on 07.07.2017.