Ravi Agarwal v. Assistant Commissioner of Income Tax, Circle-II, Bareilly
[Citation -2015-LL-1008-3]

Citation 2015-LL-1008-3
Appellant Name Ravi Agarwal
Respondent Name Assistant Commissioner of Income Tax, Circle-II, Bareilly
Court HIGH COURT OF ALLAHABAD
Relevant Act Income-tax
Date of Order 08/10/2015
Judgment View Judgment
Keyword Tags deemed dividend • business of lending money • exclusionary clause • lending of money constitutes a substantial part of the business
Bot Summary: The provision of Section 2(22)(e) of the Act states, 5 that any payment by a Company not being a Company in which the public are substantially interested of any sum by way of advance or loan to a shareholder, who has a holding of not less than 10 of the voting powers, such advance or loan made to a shareholder in the ordinary course of its business will not be treated as a dividend where the lending of money by the Company is a substantial part of the business of the Company. 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. 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. 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. Employees of a company are now called its human resources and 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. We are of the opinion that any business of a Company which is not trivial or inconsequential as compared to the whole of the business would be termed as substantial part of the business.


1 AFR RESERVED Income Tax Appeal No.224 of 2015 Ravi Agarwal Vs. Assistant Commissioner of Income Tax, Circle-II, Bareilly *** Hon'ble Tarun Agarwala,J. Hon'ble Surya Prakash Kesarwani,J. (Per: Tarun Agarwala,J.) 1. present appeal relates to assessment year 2003-04. appellant took loan of Rs.21.20 lacs from Company known as Sarnath Finance Limited, in which appellant is share holder to extent of 15%. In assessment proceedings appellant was required to explain as to why loans and advances taken from Sarnath Finance Ltd. should not be treated as deemed dividend in view of provision of Section 2(22)(e) of Income Tax Act (hereinafter referred to as Act ). assessing authority, after considering explanation held, that alleged loan taken by appellant was deemed dividend and, therefore income from other sources. assessing authority held that Finance Company, namely, Sarnath Finance Limited was mainly engaged in advancing hire purchase of transport vehicle and that said Finance Company had only made 10.79% investment in loans and advances which cannot be termed as substantial part of business of Company. assessee, being aggrieved, filed appeal which was dismissed and thereafter filed 2 appeal before Tribunal. 2. During pendency of appeal appellant filled application seeking permission to add additional ground, which was rejected. Thereafter application under Section 254 of Act was filed which was also rejected. appellant thereafter preferred appeal before High Court under Section 260A of Act, being Income Tax Appeal No.190 of 2014, in which it was held that Tribunal had not considered nature of transaction of Company before determining as to whether exclusionary clause (ii) of Section 2(22)(e) of Act was attracted or not and, accordingly, remanded matter to Tribunal for decision afresh. Tribunal thereafter decided matter and again rejected appeal of assessee holding that alleged loan given by Sarnath Finance Ltd. to assessee was in ordinary course of business and was not covered by exclusionary Class (ii) of Section 2(22)(e) of Act. 3. Tribunal found that object as per memorandum of association of Finance Company is business of lending money, but, contended that as per balance sheet, loans and advances shown by Finance Company had been grouped under different heads, namely, loans and advances and stock on hire including hire purchase . Tribunal further found that balance sheet showed Rs.426.32 lacs under heading stocks on hire and Rs.56.23 lacs under heading loans and advances and, therefore, concluded that substantial business of 3 Finance Company was for hire purchase transactions and not for loans and advances and, therefore, loan taken by appellant was not covered under exclusionary clause (ii) of Section 2(22)(e) of Act. 4. In this back drop, we have heard Sri Abhinav Mehrotra, learned counsel for assessee and Sri Krishna Agarwal, learned counsel for Department. 5. We find that following question of law arises for consideration, namely:- Whether loan/advance given by Finance Company to assessee, who is share holder in Finance Company was made in ordinary course of its business, hence outside scope of Section 2(22) (e) of Act. 6. In order to appreciate submission of learned counsel for parties, it would be appropriate to consider provision of Section 2(22)(e) of Act. 2(22) dividend includes (a) ....... (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 4 (i) ........ (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 ; 7. necessary ingredients as contemplated under Section 2(22)(e) of Act are not disputed by Department and admitted fact is, that appellant is share holder of 15% in Sarnath Finance Ltd. who gave loan. This Finance Company as per memorandum and articles of association is engaged in business of loans and advances. It has also come on record that nature of transaction given by Finance Company to appellant is simpliciter loan which was subsequently returned by appellant to Finance Company. According to appellant he had received loan as share holder from Finance Company in its ordinary course of business and that lending of money constitutes substantial part of business of Finance Company and, therefore, said loan could not be treated as deemed dividend in view of provision of sub Section (ii) of Section 2(22)(e) of Act. On other hand, Department has urged that lending of money was not substantial part of business of Company and that substantial part was hire purchase transaction, hence lending of money was not in its ordinary course of business and same was, therefore, not covered by exclusionary clause (ii) of Section 2(22)(e) of Act. 8. provision of Section 2(22)(e) of Act states, 5 that any payment by Company not being Company in which public are substantially interested of any sum by way of advance or loan to shareholder, who has holding of not less than 10% of voting powers, such advance or loan made to shareholder in ordinary course of its business will not be treated as dividend where lending of money by Company is substantial part of business of Company. words substantial part of business has not been defined under Act. 9. Bombay High Court in Commissioner of Income Tax, Panaji, Goa vs. Parle Plastics Ltd., 2011 (196) Taxman 62 explained as to what would constitute substantial part of business . Bombay High Court after considering meaning of word substantial in various dictionaries concluded:- 11. expression used under clause (ii) of Section 2(22) is `substantial part of business'. We would, therefore, have to ascertain meaning of word substantial , appearing in expression substantial part of business . Stroud's Judicial Dictionary, Fifth Edition, gives first meaning of word substantial as word of no fixed meaning, it is unsatisfactory medium for carrying idea of some ascertainable proportion of whole . 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 meaning No.8, while considering 'substantial amount', it is stated that out of rent of 80 p.a.., 13 p.a. attributable to amount paid for furniture, was substantial amount, on basis of decision in Maclay v. Dixon 170 L.T. 49. In meaning No.15, relying upon decision of Ladbrooke (Football) v. William Hill (Football) [1964] 1 W.L.R. 273, it is said that in deciding whether reproduced part of copyright material is substantial part of whole, it is quality rather than quantity of part that should be considered. Black's Law Dictionary, Sixth Edition defines word substantial as of real worth and importance; of considerable value; valuable; belonging to substance; actually 6 existing; real; not seeming or imaginary; not illusive; solid; true; veritable. Something worthwhile as distinguished from something without value or merely nominal. No decision was cited before us wherein view has been taken that in order to show that part of whole to be treated as substantial part , part must exceed 50% of whole. In our view, expression substantial part does not connote idea of being major part or part that constitutes majority of whole. If legislature really intended that more than 50% of business of lending company must come from business of lending, nothing prevented legislature from using expression majority of business . If legislature at all intended that particular minimum percentage of business of lending company should come from business of lending, legislature could have specifically provided for that percentage while drafting clause (ii) of Section 2(22 ) of Act. legislature had deliberately used word substantial instead of using word major and/or specifying any percentage of business or profit to be coming from lending business of lending company for purpose of clause (ii) of Section 2(22) of Act. We would give illustration to ascertain meaning of expression substantial business or substantial income of company. In 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 case of first company which has 3 divisions of works consisting of three different types of business. Turn over as well as profit of first division is 40%; turn over and profit of second division is 30% and turn over and profit of third line of business is 30%. In case of this company no part of business has turn over exceeding 50% and no part of business company generates profit of more than 50% of total. In such case can it be said that none of businesses of said company is substantial business of company. In our view not. first business which constitutes 40% of turn over and contributes 40% to profit would be single largest part of business of company, second and third divisions of business, each of which contributes 30% of turn over as well as profit of company, though not major and not even single largest part of business of company, would still be substantial part of business of company, because if any part of three divisions of business of 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 business as insignificant. As rightly observed 7 in Stroud's Judicial Dictionary, it is not possible to give any fixed definition of word substantial in relation to substantial business of company . Any business of company which company does not regard as small, trivial, or inconsequential as compared to whole of business is substantial business. Various factors and circumstances would be required to be looked into while considering whether part of business of company is its substantial business. Sometimes portion which contributes substantial part of turn over, though it contributes relatively small portion of profit, would be substantial part of business. Similarly, portion which relatively small as compared to total turnover, but generates large, say more than 50% of total profit of company would also be substantial part of its business. Percentage of turn over in relation to whole as also percentage of profit in relation to whole and sometimes even percentage of manpower used for particular part of business in relation to total man power or working force of company would be required to be taken into consideration. Employees of company are now called its human resources and, therefore, percentage of human resources used by company for carrying on particular division of business may also be required to be taken into consideration while considering whether particular business forms substantial part of its business. Undisputedly, capital employed by company for carrying on particular division of its business as compared to total capital employed by it would also be relevant while considering whether part of business of company constitutes substantial part of business of company. 10. We are in respectful agreement with said decision on question of substantial part of business . 11. We are of opinion that it is not possible to give fixed definition of word substantial in relation to substantial business of Company. We are of opinion that any business of Company which is not trivial or inconsequential as compared to whole of business would be termed as substantial part of business. In instant case, assessing officer has held that business 8 of giving loans and advances by Sarnath Finance Company constituted less than 20% of total investment and, therefore, same is not substantial part of business of Company. In our view, such reasoning is per se misconceived. 12. We find from perusal of order of Tribunal that Sarnath Finance Co. is admittedly engaged in business of loans and advances, as is clear from memorandum of association. Tribunal picks holes from balance sheet of Sarnath Finance Co. contending that under heading Loans and Advances Company had made sub groups, namely, Loans and Advances and stocks on hire including hire purchase . Tribunal, therefore, concluded that substantial part of business of said Finance Company was hire purchase. In our view, Tribunal has side tracked issue without realising that stocks on hire was also shown under heading of Loans and Advances in balance sheet of Finance Company. break up of different kinds of loans and advances indicated by said Finance Company in its balance sheet was for its convenience. fact remains that Finance Company was substantially carrying on business of lending money which was its main business. 13. In light of aforesaid, we are of view that Tribunal and authorities below committed manifest error in holding that loan and advance given by Sarnath Finance Company to appellant was 9 deemed dividend. In fact, it was covered by exclusionary clause (ii) of Section 2(22)(e) of Act. 14. In light of aforesaid, appeal is allowed. question of law is answered in favour of assessee and against Department. Dated : 8.10.2015 AKJ (Surya Prakash Kesarwani,J.) (Tarun Agarwala,J.) Ravi Agarwal v. Assistant Commissioner of Income Tax, Circle-II, Bareilly
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