C/TAXAP/811/2019 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 811 of 2019 PRINCIPAL COMMISSIONER OF INCOME TAX 4 Versus MOHAN BHAGWATPRASAD AGRAWAL Appearance: MRS MAUNA M BHATT(174) for Appellant(s) No. 1 for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 20/01/2020 ORAL ORDER (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. This tax appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act, 1961) is at instance of Revenue and is directed against order dated 12th April, 2019 passed by Income Tax Appellate Tribunal, Bench A, Ahmedabad (for short Tribunal) in ITA No.29/Ahd/2019 for A.Y.2015-16. 2. Revenue has proposed following questions as substantial questions of law; (A) Whether on facts of case and in law, Appellate Tribunal is correct to hold that assessee has received sum of Rs.2,50,80,923/- from M/s.Shreem Design Infrastructure Pvt. Ltd and Rs.76,53,711/- from M/s. Aatrey Infrastructure Pvt. Ltd in ordinary course of business of creditor companies? Page 1 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER (B) Whether on facts of case and in law, Appellate Tribunal is correct to hold that provision of section 2(22)(e) of Act are not attracted in this case? (C ) Whether on facts of case and in law, Appellate Tribunal is correct to hold that creditor companies in this case i.e. M/s. Shreem Design Infrastructure Pvt. Ltd and M/s. Aatrey Infrastructure Pvt. Ltd are also into business of money lending? 3. Assessing Officer made disallowance as deemed dividend under Section 2(22)(e) of Act, 1961 as assessee was having 11.61% of share holding in M/s. Shreem Design & Infrastructure Pvt. Ltd. (for short SDIPL ) and 22.81% share holding in M/s. Aatrey Infrastrucutre Pvt. Ltd. (for short AIPL ).,the companies in which public are not substantially interested. Assessing Officer, therefore, held that provisions of Section 2(22)(e) of Act, 1961 are applicable in case of present assessee as assessee has obtained loan and advances from aforesaid companies. 4. In response to same, assessee filed its reply in writing stating that SDIPL and AIPL are covered by specific exemption given in sub-clause (ii) of Section 2(22)(e) of Act which provides that any advances 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 would be excluded. It was further submitted by assessee that at Page No. 2 Para-6 and at Page No.4, Para-20 of Memorandum of Association of both Companies, money lending was authorized. However, as main object of both Companies was to carry on business of builder, Page 2 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER masons and general construction, industrial construction etc., and to carry out construction business of property lands, flats, houses, shops, offices, industrial estate etc., Assessing Officer made addition of Rs.2,50,80,923/- in respect of SDIPL and Rs.76,53,711/- in respect of AIPL to extent of accumulated profit treating same to be deemed divided. Thereafter same was added to total income of both assessee. appeal filed by respondent-assessee before CIT (A) was dismissed. 5. Being dissatisfied, assessee preferred appeal before Income Tax Appellate Tribunal. Tribunal, after taking into consideration various decisions relied upon by assessee, arrived at following findings; '12. We have heard rival submissions and perused material available on record. We find that AO has made addition on account of loans and advances taken from M/s. SDIPL and M/s. AIPL being Rs.2,50,80,923 and Rs. 76,53,711 respectively being accumulated profit as conditions laid down u/s. 2(22)(e) are satisfied. claim of assessee that loans and advances were obtained in ordinary course of business of money lending on which interest was paid at market rate @9% and Moneylender Company's substantial part of money lending business was not accepted on ground that main object of lender companies was not carrying on money lending business. perusal audit report for assessment year 2014-15 shows that SDIPL has done money lending business which constitutes substantial part of its business as percentage ratio of loan and advances to total funds available comes to 79.37% and percentage of loan and advances to total assets of company comes to 69.71%. ratio of loans and advances given to unsecured loan was at 105.25%. Similarly, AIPL percentage ratio of loan and advances to total funds available comes to 35.66% and percentage of loan and advances to total assets of company comes Page 3 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER to 32.45%. ratio of loans and advances given to unsecured loan was at 56.29%.We further observe that though memorandum of article of Association of company does not authorized money lending business as main object, but page 2 paragraphs 6 and at page 4 para 20 authorized lending of surplus money by these companies. perusal of sub clause (ii) of section 2 (22) (e) shows that it does not envisaged such condition of authorization. In order to appreciate that there is no requirement of main object as of money lending business, it would be relevant to reproduced sub clause (ii) of section 2(22)(e) which read as under:- "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." (bold letter emphasized by us ). Thus, provision makes it clear that there is no specific requirement that MOA of company specifically mention in main object as money lending business and it is not necessary for license. Now coming to term substantial part of company business, which has not been defined specifically, but same can be understood from Explanation 3 (b) to section 2(22)(e) which is as follows: "Explanation 3(b)- person shall be deemed to have substantial interest in concern, other than company, if he is, at any time during previous year, beneficially entitled to not less than twenty percent of income of such concern." Similar, definition is given in section 2(32) of Act which read as under:-"A person who has substantial interest in company" in relation to company, means 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, carrying not less than twenty percent of voting power." Thus, as per definition as given in above sections, word used as "substantial" would mean where assessee company has carried on money lending business of more than 20% or more of total income of closely held company and turnover of loans funds to total fund of company is above 20% , then any loan or advances made by said company to its shareholders cannot be deemed dividend asper exclusion clause (ii) to section 2(22)(e) of Act. learned counsel for assessee supported his view by placing reliance on decision of Hon'ble Supreme Court in case K. N. Guruswamy vs. State of Mysore Page 4 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER AIR 1954 SC 592 (PP1-7) and contended that word appearing in section and rules must be given same meaning unless there is nothing to indicate contrary. Since, SDIPL has carried out money lending business in percentage ratio of loan and advances to total funds available comes to 79.37% and percentage of loan and advances and M/s. AIPL has carried out its money lending business in percentage ratio of 35.65% of loans and advances of total available, which is more than twenty percent as mentioned in Explain (b) to section 2(22)(e) and section 2(32) of Act. Further, Hon`ble Bombay High Court in case of CIT v. Parley Plastics Ltd. [2011] 332 ITR 63 (Bombay) held as follows "12. Applying these tests to present case, we do not find that ITAT has committed any error in coming to conclusion that lending of money was substantial part of business of AMPL. ITAT has noted that 42% of total assets of AMPL as on 31.3.1996 and 39% of total assets of AMPL as on 31.3.1997 were deployed by it by way of total loans and advances. By no means, deployment of about 40% of total assets into business of lending could be regarded as insignificant part of business of AMPL. ITAT has also held that income AMPL had received by way of interest of Rs.1,08,18,036/- while it's total profit was Rs.67,56,335. Excluding income earned by AMPL by way of interest, other business had resulted into net loss. In our view, ITAT has taken into consideration relevant factors and has applied correct tests to come to conclusion that lending of money was substantial part of business of AMPL. Since lending of money was substantial part of business of AMPL, money given by it by way of advance or loan to assessee could not be regarded as dividend, as it has to be excluded from definition of "dividend" by virtue of clause (ii ) of Section 2(22) of Act. Hence, question No.2 is answered in favour of assessee and against Revenue." 13. In present case, we observe that 69.71% of total assets of SDPL as on 31.3.2015 and 32.45% of total assets of AIPL as on 31.3.2015 were deployed by above lender companies by way of total loans and advances. By no means, deployment of about 69.71% and 32.45% of total assets into business Page 5 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER of lending could be regarded as insignificant part of business of SDPL and AIPL. We find that find that SDPL had received by way of interest of Rs.1,67,16,067 while its total profit was Rs. 50,48,266 excluding interest income earned by SDPL by way of interest, Similarly AIPL has earned interest income of Rs. 17,68,467 and other business had resulted into insignificant income. Therefore, we are of considered opinion that considering relevant factors and as ratio laid down by Hon`ble Bombay High Court in above cited decision, lending of money was substantial part of business of both lender companies under consideration from whom assessee has received loans and advances. learned counsel for assessee has relied on decision of Hon`ble Delhi High Court in case of CIT v. Bharat Hotels Ltd. [2019] 103 taxmann.com 295 (Delhi) wherein it was held that where assessee received loan from two companies which were substantially involved in money lending business, Tribunal rightly concluded that proviso (ii) to section 2(22)(e) would apply to assessee1s case and addition of deemed dividend made to assessee`s income was to be deleted. Since lending of money was substantial part of business of SDIPL and AIPL, money given by it by way of advance or loan to assessee could not be regarded as dividend, as it has to be excluded from definition of "dividend" by virtue of clause (ii ) of Section 2(22) of Act. We therefore, hold accordingly. 14. We further find that loan taken from SDIPL and AIPL were compensated by way of interest @9% being market rate paid by assessee on loan, therefore, assessee in real sense did not derive any benefit of company so as to provisions (ii) of sec. 2(22)(2) of Act. learned counsel for assessee relied in case of ACIT vs. M/s. Zenon (India) Pvt. Ltd. ITA No. 1124/Kol/2012 (Paper Book 38 to 43 and Smt. Sangita Jain vs. ITO ITA No. 1817/Kol/2009 (Paper Book 44 to 51) which supports his contentions. learned counsel for assessee placed reliance in case of Shri Pradip Kumar Malhotra v. CIT [I.T.A.No. 219 of 2013 dated 02.08.2011 of Hon`ble Calcutta High Court] [PB- 24-37]. Wherein it was held by Honourable Calcutta High Court that phrase " by way of advance or loan" appearing in section 2(22)(e) must be construed to mean those advances or loans, which is shareholder enjoys for Page 6 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER simply on account of being Partner, who is beneficial owner of shares, but if such loan or advance is given to such shareholder as consequence of any further consideration, which is beneficial to Company, received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within meaning of Act. It was held that gratuitous loan or advance given by company to those classes of shareholders thus, would come within purview of section 2(22)(e) but not cases where loan or advance is given in return to advantage conferred upon company by such shareholder. Since, assessee has paid interest on loans and advances taken from SDIPL and AIPL, hence, he has compensated and no benefit has been derived. Therefore, applying ratio of Hon`ble Calcutta High Court as quoted above, and Co- ordinate Bench decisions ACIT vs. M/s. Zenon (India) Pvt. Ltd. ITA No. 1124/Kol/2012 (Paper Book 38 to 43 and Smt. Sangita Jain vs. ITO ITA No. 1817/Kol/2009 (Paper Book 44 to 51), loans and advances taken by assessee are not covered by provisions of section 2(22)(e) of Act. Thus, considering totality of facts and judicial decision as discussed above , we hold that AO was not justified in making addition on account of deemed dividend of Rs. 2,50,80.923 from SDIPL and Rs. 76,53,711 from AIPL. Hence, same are directed to be deleted. Accordingly, grounds of appeal raised by assessee are allowed. 6. Thus, Tribunal has arrived at finding of fact that 69.71% of total assets of SDPL as on 31.3.2015 and 32.45% of total assets of AIPL as on 31.3.2015 were deployed by both companies by way of loan and advances which could not be regarded as insignificant part of business. Tribunal found that SDPL had received, by way of interest, sum of Rs.1,67,16,067/- against its total profit of Rs.50,48,266/- excluding income earned by SDPL by way of interest, Similarly AIPL has earned amount of Rs. 17,68,467/- by way of interest and other business which resulted into insignificant income. Tribunal also recorded Page 7 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER that both companies were paid interest on loan and advances obtained by them at market rate of 9%. Tribunal, has also taken into consideration decision of Calcutta High Court in case of Shri Pradip Kumar Malhotra v. CIT, [I.T.A.No. 219 of 2013 dated 02.08.2011, which was relied upon by assessee, wherein it has been held that phrase " by way of advance or loan" appearing in section 2(22)(e) must be construed to mean those advances or loans, which shareholder enjoys for simply on account of being Partner, who is beneficial owner of shares, but if such loan or advance is given to such shareholder as consequence of any further consideration, which is beneficial to Company, received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within meaning of Section 2(22)(e) Act. 7. It would be, therefore, germane to refer to provisions of Section 2922)(e) of Act, 1961, which reads thus; 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 (i) distribution made in accordance with sub- clause Page 8 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER (c) or sub- clause (d) in respect of any share issued for full cash consideration, where holder of share is not entitled in event of liquidation to participate in surplus assets; (ia) distribution made in accordance with sub- clause (c) or sub- clause (d) in so far as such distribution is attributable to capitalised profits of company representing bonus shares allotted to its equity shareholders after 31st day of March, 1964, 2 and before 1st day of April, 1965 (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; (iii) any dividend paid by company which is set off by company against whole or any part of any sum previously paid by it and treated as dividend within meaning of sub- clause (e), to extent to which it is so set off. Explanation 1-The expression" accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before 1st day of April, 1946 , or after 31st day of March, 1948 , and before 1st day of April, 1956 . Explanation 2.-- expression" accumulated profits" in sub- clauses (a), (b), (d) and (e), shall include all profits of company up to date of distribution or payment referred to in those sub- clauses, and in subclause (c) shall include all profits of company up to the. date of liquidation, but shall not, where liquidation is consequent on compulsory acquisition of its undertaking by Government or corporation owned or controlled by Government under any law for time being in force, include any profits of company prior to three successive previous years immediately preceding previous year in which such acquisition took place]. Explanation 3.- For purposes of this clause,- Page 9 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 C/TAXAP/811/2019 ORDER (a) "concern" means Hindu undivided family, or firm or association of persons or body of individuals or company; (b) person shall be deemed to have substantial interest in concern, other than company, if he is, at any time during previous year, beneficially entitled to not less than twenty per cent of income of such concern;] 8. On perusal of above provision, it is clear that as assessee was holding more than 10% of shares in both companies, provisions of Section 2(22)(e) of Act would come into play. However, section further provides that dividend does not include any advances or loan made to share holder by Company in ordinary course of business where lending of money is substantial part of business of Company.. In case on hand, it is not in dispute that both companies were having money lending as substantial part of their business. Therefore, Tribunal has rightly hold that no addition can be made by way of deemed dividend in case of assessee. 9. In view of above, no question of law, much less any substantial question of law would arise for determination of this Court. appeal stands dismissed accordingly. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 10 of 10 Downloaded on : Tue Jan 28 10:42:59 IST 2020 Principal Commissioner of Income-tax-4 v. Mohan Bhagwatprasad Agrawal