Shashi Pal Agarwal v. Commissioner of Income-tax
[Citation -2014-LL-1209-1]

Citation 2014-LL-1209-1
Appellant Name Shashi Pal Agarwal
Respondent Name Commissioner of Income-tax
Court HC
Date of Order 09/12/2014
Judgment View Judgment
Keyword Tags lending of money • profit motive • voting power
Bot Summary: 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. Of the shareholding of two private limited companies, namely, Kukki Color Photos Pvt. Ltd. and Kukki Color Prints Pvt. Ltd. The assessee had received loans and advances from the aforesaid two companies during the assessment year in question. Section 2(22)(e) of the Act, in so far as is material, 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 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 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 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. Within the purview of the exclusionary provision, the advance or loan must be, firstly, to a shareholder; secondly, the payment must be in the ordinary course of business; and, thirdly, the lending of money must constitute a substantial part of the business of the company. The Legislature has not used the expression major part of the business but has designedly used the expression substantial part of the business of the company. The lending of money was not a part of the business of the company, nor for that matter, could it constitute a substantial part of the business.


JUDGMENT This appeal under section 260A of Income-tax Act, 1961, by assessee has arisen from judgment of Income-tax Appellate Tribunal dated July 25, 2014. assessment year to which appeal relates is assessment year 2007-08. Assessing Officer made assessment under section 143(3) of Act on December 24, 2009. Assessing Officer made addition of Rs. 12,50,455.00 to total income of assessee treating it to be deemed dividend within meaning of section 2(22)(e) of Act. In appeal, Commissioner (Appeals), by order dated March 29, 2011, deleted addition. appeal was filed by Revenue before Tribunal. Tribunal allowed appeal by its judgment dated November 29, 2013. assessee, thereafter, moved this court under section 260A of Act. By judgment dated April 17, 2014, in Kishori Lal Agrawal v. CIT [2014] 364 ITR 158 (All), Division Bench of this court restored proceedings back to Tribunal with following observations (page 162): "The first ingredient of exclusionary clause (ii) of section 2(22)(e) is that advance or loan must be made to shareholder by company in ordinary course of its business. first ingredient does not require that company must be engaged in moneylending business. Moreover, where advance or loan was made in ordinary course of business of company, fact that lending of surplus funds is not part of main object but is at same time permissible as ancillary object, would not detract from loan or advance being made in ordinary course of its business. second ingredient, undoubtedly, requires that lending of money should be substantial part of business of company. What is substantial part of business of company has to be determined as matter of fact." On remand, Tribunal has rendered its impugned decision on July 25, 2014, holding that Assessing Officer had correctly treated advance or loan given to assessee by two private limited companies as deemed dividend. order passed by Commissioner of Income-tax (Appeals) was set aside and order of Assessing Officer was restored. following question of law, of questions formulated in appeal, has been pressed at hearing: "Whether Tribunal was not justified in drawing adverse conclusion against appellant by overlooking specific finding of Commissioner of Income-tax (Appeals) that both lending companies have advanced 69 per cent. and 38 per cent. of their total capital/assets to appellant as interest bearing loan, which forms substantial part of business of lending company and, hence, leading to conclusion that case is covered under exception clause (ii) to section 2(22)(e) of Act?" assessee, in present case, held more than 10 per cent. of shareholding of two private limited companies, namely, Kukki Color Photos Pvt. Ltd. and Kukki Color Prints Pvt. Ltd. assessee had received loans and advances from aforesaid two companies during assessment year in question. issue was whether exclusionary provision contained in section 2(22)(e) of Act was attracted. Section 2(22)(e) of Act, in so far as is material, defines expression "dividend" as follows: "2.(22)(e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing part of assets of company or otherwise) made after 31st day of May, 1987, by way of advance or loan to shareholder, being person who is beneficial owner of shares (not being shares entitled to fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent. of voting power, or to any concern in which such shareholder is member or partner and in which he has substantial interest (hereafter in this clause referred to as said concern) or any payment by any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits; but'dividend' does not include-... (ii) any advance or loan made to shareholder or said concern by company in ordinary course of its business, where lending of money is substantial part of business of company;" expression "dividend" is defined in section 2(22)(e) of Act to comprise following ingredients: (i) there must be payment by company in which public is not substantially interested by way of advance or loan to shareholder; (ii) payment must be to person, who is beneficial owner of shares, not being shares entitled to fixed rate of dividend, holding not less than ten per cent. of voting power, or to any concern in which such shareholder is member or partner and in which he has substantial interest or any payment by any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits. However, exclusionary clause (ii), operates to exclude any advance or loan made to shareholder or to said concern by company in certain cases. Within purview of exclusionary provision, advance or loan must be, firstly, to shareholder; secondly, payment must be in ordinary course of business; and, thirdly, lending of money must constitute substantial part of business of company. What constitutes substantial part of business is question of fact. Legislature has not used expression "major part of business" but has designedly used expression "substantial part of business of company". expression "business" contemplates organised course of activity which is actually continued or contemplated to be continued with profit motive and not for sport or pleasure. In each case, true test is whether lending of money constituted substantial part of business of company. Therefore, two requirements must be attracted. Firstly, business of company must consist of lending of money in ordinary course of its business during which advance or loan was made to shareholder. Secondly, lending of money must constitute substantial part of business of company. In present case, admitted facts, which were brought on record and which are not disputed even during course of hearing of appeal, are that assessee held more than 10 per cent. of equity capital of two private limited companies. Neither of companies, admittedly, lent any money to any entity, save and except to assessee. lending of money was not part of business of company, nor for that matter, could it constitute substantial part of business. There was no organised course of activity involving dealings with any one else, save and except for assessee. assessee was, therefore, unable to establish that exclusion was attracted. In that view of matter, we see no reason to entertain appeal, which does not give rise to any substantial question of law. appeal is, accordingly, dismissed. There shall be no order as to costs. *** Shashi Pal Agarwal v. Commissioner of Income-tax
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