DCIT-I, Kanpur V. SHRI KISHORILAL AGRAWAL, Kanpur

ITA 377/LKW/2011

• Counselvise Citation: 37723714 RSA 2011
• Duration Of Justice: 3 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 24-06-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Question of law; Deemed dividend
• Section: 260A; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A , LUCKNOW BEFORE SHRI S UNIL KUMAR YADAV , JUDICIAL MEMBER AND SHRI. A. K. GARODIA , ACCOUNTANT MEMBER ITA NO. 377/LKW/2011 ASSESSMENT YEAR: 2007 - 08 DCIT - 1 KANPUR V. SHRI. KISHORI LAL AGARWAL 63/3, THE MALL KANPUR PAN: AANPA5550G (APP ELL ANT) (RESPONDENT) APP ELL ANT BY: SHRI. MANOJ KUMAR GUPTA, CIT (DR) RESPONDENT BY: SHRI. RAKESH GARG, ADVOCATE DATE OF HEARING: 24 0 6 2014 DATE OF PRONOUNCEMENT: 25 0 7 2014 O R D E R PER SUNIL KUMAR YADAV: THIS APPEAL WA S PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A) MAINLY ON TWO GROUNDS ONE IS WITH REGARD TO THE DISALLOWANCE OF DEDUCTION UNDER SECTION 80IB OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED IN SHORT THE ACT') AND THE OTHER IS WITH REGARD TO THE ADDITION MADE HAVING INVOKED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 2 . THIS APPEAL WAS DISPOSED BY THE TRIBUNAL VIDE ITS ORDER DATED 29.11.2013, AGAINST WHICH AN APPEAL UNDER SECTION 260A OF THE ACT WAS FILED BY THE ASSESSEE BEF ORE THE HON'BLE HIGH COURT OF ALLAHABAD RAISING A QUESTION OF LAW I.E. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE TWO LENDING COMPANIES WHO HAVE ADVANCED INTEREST BEARING LOAN TO THE APPELLANT HAVE DONE SO NOT IN THE ORDIN ARY COURSE OF BUSINESS, BY COMPLETELY OVERLOOKING THAT THE LENDING OF MONEY PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 2 - : HAS BEEN SPECIFICALLY MENTIONED IN THE MEMORANDUM OF ASSOCIATION OF BOTH THE COMPANIES IN THE OBJECTS WHICH ARE ANCILLARY TO CARRY OUT THE MAIN OBJECTS OF THE COMPANY. VIDE JUDGM ENT DATED 17.4.2014, THE HON'BLE HIGH COURT OF ALLAHABAD HAS DISPOSED OF THE APPEAL BEARING INCOME TAX APPEAL DEFECTIVE NO.35 OF 2014 AND HAS RESTORED THE APPEAL TO THE TRIBUNAL WITH A DIRECTION TO CONSIDER THE APPLICABILITY OF THE SECOND INGREDIENT OF CLA USE (II) OF THE EXCLUSION CONTAINED IN SECTION 2(22)(E) OF THE ACT. THE RELEVANT OBSERVATION OF THE HON'BLE HIGH COURT IS EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: - WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE TRIBUNAL HAS MANIFESTLY MIS APPLIED ITS MIND TO THE INGREDIENTS SET OUT IN SECTION 2(22) (E). THE FIRST INGREDIENT OF EXCLUSIONARY CLAUSE (II) OF SECTION 2(22)(E) IS THAT THE ADVANCE OR LOAN MUST BE MADE TO THE SHAREHOLDER BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS. THE FIRS T INGREDIENT DOES NOT REQUIRE THAT THE COMPANY MUST BE ENGAGED IN MONEY LENDING BUSINESS. MOREOVER, 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. THE SECOND INGREDIENT, UNDOUBTEDLY, REQUIRES THAT THE LENDING OF MONEY SHOULD BE A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. WHAT IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY HAS TO BE DETERMINED AS A MATTER OF FACT. THE CIT(A) HAD ADVERTED TO THE POSITION OF TOTAL ASSETS OF THE COMPANIES AND OBSERVED THAT THE POSITION WAS AS FOLLOWS : - NAME OF THE COMPANY TOTAL ASSETS AS ON 31/03/07 LOANS & ADV. AS ON %AGE OF TOTAL KUKKI COLOR PHOTOS PVT. LTD. 1468596/ - 1026110/ - 69.87 KUKKI COLOR PRINTS PVT. LTD. 5072899/ - 196 15937 - 38.67 BOTH THE INGREDIENTS WE RE CONSIDERED BY THE CIT(A). ON THE FIRST INGREDIENT, THE CIT(A) HELD THAT THE LENDING OF MONEY WAS IN THE PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 3 - : ORDINARY COURSE OF BUSINESS HAVING DUE REGARD TO THE OBJECTS CONTAINED IN THE MEMORANDUM OF ASSOCIATION. ON THE SECOND INGREDIENT, THE CIT(A) HELD TH AT ONE OF THE LENDING COMPANIES HAD ADVANCED INTEREST BEARING LOANS TO THE EXTENT OF 69.87% OF THE TOTAL ASSETS WHILE THE SECOND COMPANY HAD DEPLOYED 38.67% OF ITS TOTAL ASSETS TOWARDS INTEREST BEARING LOANS. THE TRIBUNAL HAS NOT CONSIDERED WHETHER THE SEC OND INGREDIENT WAS DULY FULFILLED. IN VIEW OF THE AFORESAID POSITION, WE ARE OF THE VIEW THAT THE TRIBUNAL WAS CLEARLY IN ERROR IN ALLOWING THE APPEAL ON THE GROUND THAT THE FIRST PART OF THE INGREDIENT OF THE EXCLUSIONARY PROVISION OF SECTION 2(22)(E) NAM ELY CLAUSE (II) WAS NOT FULFILLED. THE BASIS OF THE REASONING OF THE TRIBUNAL IS CLEARLY ERRONEOUS. THE TRIBUNAL, IN OUR VIEW, HAS MISAPPLIED THE LEGAL TEST IN HOLDING THAT SINCE THE COMPANIES DID NOT CARRY ON MONEY LENDING BUSINESS, THE ADVANCES WHICH WER E MADE TO THE ASSESSEE WOULD NOT BE IN THE ORDINARY COURSE OF ITS BUSINESS. THIS, AS WE HAVE NOTED EARLIER, IS NOT THE TEST WHICH IS TO BE FULFILLED IN RESPECT OF THE FIRST INGREDIENT OF CLAUSE (II). HOWEVER, SINCE THE TRIBUNAL HAS NOT CONSIDERED THE ISSUE AS TO WHETHER THE SECOND INGREDIENT OF CLAUSE (II) WAS DULY FULFILLED, WE ARE OF THE VIEW THAT IT WOULD BE PROPER TO RESTORE THE PROCEEDINGS BEFORE THE TRIBUNAL FOR FRESH EVALUATION ON THE AFORESAID ASPECT. ACCORDINGLY, WE RESTORE THE APPEAL TO THE TRIBUN AL FOR CONSIDERING THE APPLICABILITY OF THE SECOND INGREDIENT OF CLAUSE (II) OF THE EXCLUSION CONTAINED IN SECTION 2(22)(E). IN THIS VIEW OF THE MATTER, IT IS NOT NECESSARY FOR THE COURT TO FINALLY DECIDE THE SUBSTANTIAL QUESTION OF LAW AS FRAMED. WE, HOWE VER, FIND NO MERIT IN THE CONTENTION OF LEARNED COUNSEL APPEARING ON BEHALF OF THE REVENUE THAT THE APPEAL BY THE ASSESSEE DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. UNDOUBTEDLY, AN APPEAL UNDER SECTION 260 - A MUST RAISE A SUBSTANTIAL QUESTION O F LAW AND NOT AN ISSUE PERTAINING MERELY TO APPRECIATION OF FACTS (COMMISSIONER OF INCOME TAX VS. P. MOHANAKALA). THE TEST IS FULFILLED. 3 . CONSEQUENTLY, THE APPEAL WAS LISTED FOR HEARING AND THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE AND THE DEPARTMENTAL REPRESENTATIVE WERE HEARD. PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 4 - : 4 . THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE HON'BLE HIGH COURT WAS SATISFIED WHILE RESTORING THE MATTER BACK TO THE TRIBUNAL THAT THE ADVANCE OR LOAN WAS GIVEN TO THE ASSESSEE BY A COMPANY IN THE ORDIN ARY COURSE OF ITS BUSINESS. THEIR LORDSHIPS HAVE RESTORED THE MATTER TO THE TRIBUNAL FOR ADJUDICATION OF THE SECOND INGREDIENT OF CLAUSE (II) OF THE EXCLUSION CONTAINED IN SECTION 2(22)(E) OF THE ACT , WHETHER THE LENDING OF MONEY WAS A SUBSTANTIAL PART O F BUSINESS OF THE ASSESSEE - COMPANY. THEREFORE, SCOPE OF ARGUMENT IS LIMITED ON THE POINT OF SECOND INGREDIENT OF CLAUSE (II) OF THE EXCLUSION CONTAINED IN SECTION 2(22)(E) OF THE ACT. 5 . IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT S UBSTANTIAL PART OF BUSINESS HAS NOT BEEN DEFINED IN THE ACT. MOREOVER, IT IS ALSO NOT SIMILAR TO THE MAJOR PART OF BUSINESS. SUBSTANTIAL PART OF BUSINESS CAN ONLY BE LOOKED INTO IN THE LIGHT OF CAPITAL EMPLOYED FOR DIFFERENT TYPE OF BUSINESS OF THE ASSESSEE. HE HAS FURTHER CONTENDED THAT OUT OF TOTAL ASSETS OF THE COMPANY, LOAN S OR ADVANCES AS ON 31.7.2007 WERE MORE THAN 69% IN THE CASE OF KUKKI COLOR PHOTOS PVT. LTD . AND MORE THAN 38% IN THE CASE OF KUKKI COLOR PRINTS PVT. LTD. THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PARLE PLASTICS LTD. AND A NOTHER [2011] 332 ITR 63 (BOM) IN SUPPORT OF HIS CONTENTION THAT THE EXPRESSION SUBSTANTIAL PART DOES NOT CONNOTE AN IDEA OF BEING THE MAJOR PART OR THE PART THAT CONSTITUTES MAJORITY OF THE WHOLE. IT WAS FURTHER CONTENDED THAT IF THE LEGISLATURE INTENDED THAT A PARTICULAR MINIMUM PERCENTAGE OF THE BUSINESS OF A LENDING COMPANY SHOULD COME FROM THE BUSINESS OF LENDING, T HE LEGISLATURE COULD HAVE SPECIFICALLY PROVIDED FOR THAT PERCENTAGE WHILE DRAFTING CLAUSE (II)OF SECTION 2(22)(E) OF THE ACT. IT WAS FURTHER CONTENDED THAT THE LEGISLATURE HAD DELIBERATELY USED THE WORD SUBSTANTIAL INSTEAD OF USING THE WORD MAJOR AND/ OR SPECIFYING ANY PERCENTAGE OF BUSINESS OR PROFIT TO BE COMING FROM THE LENDING BUSINESS OF THE LENDING COMPANY FOR PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 5 - : THE PURPOSE OF EXCLUSION CLAUSE (II) OF SECTION 2(22)(E) . THE LD. COUNSEL FOR THE ASSESSEE HAS FURTHER CONTENDED THAT IF ANY BUSINESS OF A COMPANY , WHICH THE COMPANY DOES NOT REGARD AS SMALL, TRIVIAL OR INCONSEQUENTIAL AS COMPAR E D TO THE WHOLE OF THE BUSINESS , IS SUBSTANTIAL BUSINESS. 6 . THE LD. COUNSEL FOR THE ASSESSEE HAS FURTHER INVITED OUR ATTENTION TO CLAUSE (B) OF EXPLANATION 3 BELOW SE CTION 2(22) OF THE ACT WITH THE SUBMISSION THAT SUBSTANTIAL INTEREST HAS BEEN DEFINED IN THIS CLAUSE, ACCORDING TO WHICH A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PREVIOUS Y EAR, BENEFICIALLY ENTITLED T O NOT LESS THAN TWENTY PER CENT OF THE INCOME OF THAT CONCERN. THEREFORE, IN THE SAME MANNER, THE DEFINITION OF SUBSTANTIAL BUSINESS SHOULD BE EXAMINED AND IF THE COMPANYS CAPITAL EMPLOYED IN THE MONEY LENDING BUSINESS IS MO RE THAN 20%, THEN IT SHOULD BE HELD THAT SUBSTANTIAL PART OF BUSINESS OF THE COMPANY IS MONEY LENDING BUSINESS. IN THE INSTANT CASE, MORE THAN 38% IN THE CASE OF KUKKI COLOR PRINTS PVT. LTD. AND MORE THAN 69% IN THE CASE OF KUKKI COLOR PHOTOS PVT. LTD. OF THE CAPITAL WAS EMPLOYED IN THE MONEY LENDING BUSINESS. THEREFORE, IT CANNOT BE HELD THAT LENDING MONEY IS NOT SUBSTANTIAL PART OF B U SINESS OF THE ASSESSEE - COMPANY. 7 . PER CONTRA, THE LD. CIT (D.R.) HAS CONTENDED THAT SUBSTANTIAL PART OF BUSINESS OF THE ASS ESSEE - COMPANY IN MONEY LENDING BUSINESS IS TO BE EXAMINED IN THE LIGHT OF PERCENTAGE OF CAPITAL EMPLOYED IN MONEY LENDING BUSINESS WITH THE PERSONS OR PARTIES OTHER THAN THE ASSESSEE. IF THE ASSESSEE IS THE SOLE BORROWER OF THE COMPANY AND APART FROM ASSE SSEE, THE COMPANY HAS NOT GIVEN ANY LOAN OR ADVANCE TO ANY OTHER PERSON, IT CANNOT BE CALLED THAT SUBSTANTIAL PART OF BUSINESS OF THE COMPANY IS MONEY LENDING. THE LD. CIT (D.R.) HAS FURTHER CONTENDED THAT THE BUSINESS IS OCCUPATION OR PROFESSION WHICH OC CUPIES TIME, ATTENTION AND LABOUR OF PERSON NORMALLY WITH AN OBJECT OF MAKING PROFIT. IN SUPPORT OF HIS PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 6 - : CONTENTION, THE LD. CIT (D.R.) ,SHRI. MANOJ GUPTA HAS PLACED RELIANCE UPON THE JUDGMENT IN THE CASE OF STATE OF GUJARAT VS. R.M. C OMPANY 1967 (19 STC 1) . IN THE INSTANT CASE, WHATEVER LOAN AND ADVANCE WAS GIVEN BY THE COMPANY, IT WAS ONLY TO THE ASSESSEE AND NOT TO ANY OTHER PERSON. THEREFORE, IF THE LOAN S OR ADVANCES GIVEN TO THE ASSESSEE ARE EXCLUDED, NO PART OF CAPITAL WAS EVER EMPLOYED IN THE MONEY LENDING BUSINESS. IN SUPPORT OF TH IS CONTENTION, LD. CIT (D.R.) HAS INVITED OUR ATTENTION TO THE BALANCE SHEET OF KUKKI COLOR PHOTOS PVT. LTD. APPEARING AT PAGE 3 OF THE COMPILATION OF THE ASSESSEE AND BALANCE SHEET OF KUKKI COLOR PRINTS PVT. LTD. APPEARI NG AT PAGE 24 OF THE COMPILATION OF THE ASSESSEE. 8 . THE LD. CIT (D.R.) , MR GUPTA HAS FURTHER PLACED RELIANCE UPON THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF KRISHNA GOPAL MAHESHWARI VS. ACIT, FIROZABAD, 363 ITR 280 (ALLD) IN WHICH THEIR LORDSHIPS OF THE JURISDICTIONAL HIGH COURT HAS EXAMINED THE ISSUE OF SUBSTANTIAL BUSINESS IN DETAIL. THE LD. CIT (D.R.) HAS ALSO PLACED RELIANCE UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF MRS REKHA MODI VS. INCOME TAX OFFICER, NEW DELHI, 13 SOT 512 , IN WHICH IT WAS HELD THAT IF THE MONEY LENDING BUSINESS OF THE COMPANY CONSTITUTE S LESS THAN 20% OF THE TOTAL BUSINESS OF THE COMPANY, LENDING MONEY COULD NOT BE SAID TO BE SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. THE LD. CIT (D.R.) HAS ACCOR DING LY SUBMITTED THAT THOUGH IT HAS BEEN HELD BY THE JURISDICTIONAL HIGH COURT THAT MONEY LENDING BUSINESS IS A BUSINESS IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE , RELYING UPON THE MEMORANDUM OF ASSOCIATION, BUT THE SECOND INGREDIENT THAT MONEY LE NDING BUSINESS IS SUBSTANTIAL PART OF BUSINESS OF THE COMPANY WAS NOT ESTABLISHED BY THE ASSESSEE. THEREFORE, LOAN S AND ADVANCES GIVEN TO THE ASSESSEE ARE DEEMED DIVIDEND IN THE LIGHT OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 9 . HAVING HEARD THE RIVAL SU BMISSIONS AND FROM A CAREFUL PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW, JUDGMENTS REFERRED TO BY THE PARTIES PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 7 - : AND THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT IF THE ASSESSEE RECEIVES LOAN S OR ADVANCES FROM A COMPANY , IN WHICH IT HAS SUBSTANTIAL INTE REST, THE SAME LOAN AND ADVANCES WOULD BE TREATED AS DEEMED DIVIDEND IN THE LIGHT OF PROVISIONS OF SECTION 2(2)(E) OF THE ACT. BUT THERE ARE EXCEPTIONS IN THIS PROVISION AND AS PER EXCLUSORY CLAUSE (II), IF THE ASSESSEE ESTABLISH THAT ADVANCE OR LOAN MAD E TO SHAREHOLDERS/ASSESSEE BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS AND THE LENDING OF MON E Y IS SUBSTANTIAL PART OF BUSINESS OF THE COMPANY . LOAN AND ADVANCES BY THE COMPANY WOULD NOT BE DEEMED DIVIDEND. THUS, IN ORDER TO GET OUT OF THE CLUTCH ES OF SECTION 2(22)(E) OF THE ACT, THE ASSESSEE IS REQUIRED TO ESTABLISH TWO INGREDIENTS I.E. (1) LOAN OR ADVANCE WAS GIVEN TO THE ASSESSEE OR SHAREHOLDER BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS AND (2) LENDING OF MONEY IS SUBSTANTIAL PART OF B USINESS OF THE COMPANY. IN THE INSTANT CASE, THE HON'BLE HIGH COURT OF ALLAHABAD IS SATISFIED, RELYING UPON THE MEMORANDUM OF ASSOCIATION, ETC., THAT THE ADVANCE OR LOAN WAS GIVEN TO THE ASSESSEE IN THE ORDINARY COURSE OF ITS BUSINESS. BUT FOR SECOND ING REDIENT WHETHER THE MONEY LENDING BUSINESS IS SUBSTANTIAL PART OF BUSINESS OF THE COMPANY, THE MATTER HAS BEEN RESTORED TO THE TRIBUNAL. 10 . DURING THE COURSE OF HEARING, OUR ATTENTION HAS BEEN INVITED TO THE BALANCE SHEET OF BOTH THE COMPANIES I.E. KUKKI CO LOR PRINTS PVT. LTD. AND KUKKI COLOR PHOTOS PVT. LTD. AS ON 31.3.2007 APPEARING AT PAGE 3 AND 24 OF THE COMPILATION OF THE ASSESSEE. AS PER BALANCE SHEET OF KUKKI COLOR PRINTS PVT. LTD., THE TOTAL LOAN OR ADVANCE OF RS.19,61,593/ - W AS GIVEN ONLY TO THE PR OPRIETORSHIP CONCERN I.E. SHANKY FILES OF THE ASSESSEE , WHO IS ADMITTEDLY HAVING MORE THAN 20% SHAREHOLDING IN THE COMPANY. SIMILARLY, IN THE CASE OF KUKKI COLOR PHOTOS PVT. LTD., TOTAL LOAN S OR ADVANCE S WERE GIVEN AT RS.10,26,110/ - TO SHANKY FILES, PROPR IETORSHIP CONCERN OF THE ASSESSEE , WHO IS ADMITTEDLY HAVING MORE THAN 20% SHAREHOLDING IN THE COMPANY. THEREFORE, FROM BOTH THESE BALANCE SHEETS, IT IS ABUNDANTLY CLEAR PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 8 - : THAT WHATEVER LOAN S AND ADVANCES WERE GIVEN BY THE COMPAN IES , IT WAS ONLY TO THE ASSES SEE AND NOT TO ANY OTHER PERSON. THEREFORE, WE HAVE TO EXAMINE THE ISSUE OF SUBSTANTIAL PART OF BUSINESS OF THE ASSESSEE - COMPANY IN THE LIGHT OF THE FACT THAT LOAN S AND ADVANCES WERE GIVEN TO THE ASSESSEE I.E. SHAREHOLDER OF THE COMPANY. IN THAT SITUATIO N, CAN THE COMPANY CAN BE CALLED TO HAVE SUBSTANTIAL PART OF BUSINESS OF MONEY LENDING. 11 . WE HAVE CAREFULLY EXAMINED THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF KRISHNA GOPAL MAHESHWARI VS. ACIT, FIROZABAD (SUPRA), IN WHICH AS PER BA LANCE SHEET OF THE COMPANY, THE TOTAL LOANS AND ADVANCES ARE ONLY RS.47,90,339/ - , OUT OF WHICH LOAN TO THE EXTENT OF RS.37,28,029/ - WAS GIVEN TO THE ASSESSEE AND THE HON'BLE COURT HAS CONCLUDED THAT SUBSTANTIAL PART OF LOAN HAS BEEN TAKEN BY THE ASSESSEE. IN THE LIGHT OF THESE FACTS, THE HON'BLE COURT HAS CONCLUDED THAT THE ASSESSEE HAS FAILED TO ESTABLISH THAT SUBSTANTIAL PART OF BUSINESS OF THE COMPANY IS MONEY LENDING. THEIR LORDSHIPS HAVE ALSO EXAMINED AS TO WHAT IS SUBSTANTIAL PART OF BUSINESS. THE RELEVANT OBSERVATIONS OF THE HON'BLE HIGH COURT OF ALLAHABAD IS EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: - 9 . WE HEARD BOTH THE PARTIES AT LENGTH AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. 10 . IN THE INSTANT CASE, IT APPEARS THAT NEITHER THE COMP ANY NOR THE ASSESSEE HAVING THE LICENCE OF MONEY - LENDING BUSINESS. FURTHER, AS PER THE BALANCE - SHEET OF THE COMPANY, TOTAL LOANS AND ADVANCES ARE ONLY RS.47,90,339 OUT OF WHICH LOAN TO THE EXTENT OF RS. 37,28,029 WAS GIVEN TO THE ASSESSEE. HENCE, A SUBSTANT IAL PART OF THE LOAN HAS BEEN TAKEN BY THE ASSESSEE. IN THE CIRCUMSTANCES, THERE IS NO CHANCE TO ACCUMULATE THE PROFITS PERTAINING TO THE AVAILABLE FUNDS. THEREFORE, QUESTION (IV) CANNOT BE ANSWERED. 11 . IT ALSO APPEARS FROM THE RECORD THAT NOT A SINGLE RUPEE INCOME HAS BEEN SHOWN FROM THE MONEY - LENDING ACTIVITY. THE INTEREST EARNED ON FDRS NO STRETCH IMAGINATION, CAN BE SAID TO HAVE BEEN EARNED FROM MONEY - LENDING BUSINESS. WHAT IS NOW BEING CLAIMED, PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 9 - : I.E., AN INTEREST OF RS. 62,280 FROM THE APPELLANT ON THE AD VANCES GIVEN. THUS, THE EXPLANATION BEING OFFERED BY THE ASSESSEE IS CONTRARY TO THE FACTS ON RECORD. FURTHER, IT IS ALSO EVIDENT THAT THE ASSESSEE DID NOT TAKE INTEREST BEARING LOANS, FROM ADVANCES OR DIFFERENT PARTIES. THE AUDITOR HAS CLAIMED THAT THE CO MPANY HAS NOT GRANTED BUT TAKEN UNSECURED LOAN INTEREST - FREE FROM OTHER PARTIES COVERED IN THE REGISTER MAINTAINED UNDER SECTION 30A OF THE COMPANIES ACT, 1956. IN MONEY - LENDING BUSINESS THE TRANSACTION ARE TAKEN AND GIVEN MONEY TO EARN INTEREST. THE HON'B LE SUPREME COURT IN THE CASE OF STATE OF GUJARAT V. RAIPUR MANUFACTURING CO. LTD. [1967] 19 STC 1 (SC), HAS HELD THAT THE WORD 'BUSINESS' USED IN THE SENSE OF AN OCCUPATION, OR PROFESSION WHICH OCCUPIES THE TIME, ATTENTION AND LABOUR OF A PERSON, NORMALLY WITH THE OBJECT OF MAKING PROFIT. TO REGARD AN ACTIVITY AS 'BUSINESS' THERE MUST BE A COURSE OF DEALINGS, EITHER ACTUALLY CONTINUED OR CONTEMPLATED TO BE CONTINUED WITH A PROFIT MOTIVE, AND NOT FOR SPORT OR PLEASURE. 12 . IT MAY BE MENTIONED THAT THE WORD 'DIV IDEND' IN ITS ORDINARY MEANING, IS A DISTRIBUTIVE SHARE OF THE PROFITS OR INCOME OF A COMPANY GIVEN TO ITS SHAREHOLDERS. IT MAY BE IN THE FORM OF ADVANCE, OR LOAN, OR PAYMENT FOR THE BENEFIT OF THE SHAREHOLDERS. THE WORDS 'DEEMED DIVIDEND' IS NOT DEFINED I N THE INCOME - TAX ACT BUT THE SAME HAS COME INTO EXISTENCE THROUGH JUDICIAL INTERPRETATION. 13 . HOWEVER, THE 'DIVIDEND' IS TAXABLE AND COVERED BY THE DEFINITION OF SECTION 2(24) OF THE ACT, WHERE THE INCOME IS DEFINED AS INCLUDING 'DIVIDEND'. WHAT IS TAXABLE A S 'DIVIDEND' NEED NOT NECESSARILY BE PAID IN MONEY ; IT MAY BE PAID IN MONEY'S WORTH BY THE DELIVERY, SAY, OF GOODS OR SECURITIES OR SHARES IN ANOTHER COMPANY AND THE AMOUNT OF THE 'DIVIDEND' SHOULD BE TAKEN TO BE THE MARKET VALUE OF THE MONEY'S WORTH ON T HE DATE THE 'DIVIDEND' IS DECLARED AS PER THE RATIO LAID DOWN IN THE CASE OF CIT V. CENTRAL INDIA INDUSTRIES LTD. [1971] 82 ITR 555 (SC). 14 . UNDER THE COMPANIES ACT, 1956, A COMPANY CANNOT PAY DIVIDEND OTHERWISE THAN OUT OF THE PROFITS OF THE YEAR OR ANY OTH ER UNDISTRIBUTED PROFITS. BUT 'THERE IS NOTHING IN LAW TO PREVENT A COMPANY USING AN INCOME RECEIPT AS CASH IN ITS HANDS TO DISCHARGE A PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 10 - : CAPITAL LIABILITY OR TO PURCHASE A CAPITAL ASSET, AND THEN, AFTER THE CLOSE OF ITS FINANCIAL YEAR, PAYING A DIVIDEND OUT OF OTHER CASH, OR BORROWING FOR THE PURPOSE, TO THE EXTENT OF THE CREDIT BALANCE STANDING ON THE PROFIT AND LOSS ACCOUNT'. IN ANY EVENT, DIVIDEND DOES NOT LOST ITS TAXABLE CHARACTER AS DIVIDEND MERELY BECAUSE IT IS PAID OUT OF CAPITAL IN VIOLATION OF THE LAW. SIMILARLY, NON - OBSERVANCE BY THE COMPANY OF THE FORMALITIES REQUIRED BY THE COMPANY LAW FOR DECLARATION OF DIVIDEND WOULD NOT AFFECT THE SHAREHOLDER'S LIABILITY TO TAXATION IN RESPECT OF THE DIVIDEND. 15 . A SHAREHOLDER IS LIABLE TO PAY TAX ON HIS DIVIDEN D INCOME WITHOUT ANY CREDIT FOR THE TAX PAID BY THE COMPANY ON ITS OWN PROFITS; AND FURTHER, THE COMPANY MUST DEDUCT, UNDER SECTION 194 (EXCEPT AS OTHERWISE PROVIDED IN THAT SECTION), THE SHAREHOLDER'S TAX AT SOURCE WHILE PAYING THE DIVIDEND. 16 . FOR THE PURPO SE OF THIS SECTION, THE SHAREHOLDERS MUST HAVE 10 PER CENT. OR MORE VOTING POWER IN THE CLOSELY - HELD COMPANY. THEREFORE, FOR EXAMPLE, IF A CLOSELY HELD COMPANY GIVES A LOAN TO ITS DIRECTOR WHO HOLDS 10 PER CENT. OF THE VOTING POWER OF THE COMPANY, THEN THE AMOUNT RECEIVED BY THE DIRECTOR FROM THE COMPANY WILL BE TAXED IN HIS HANDS. IN THE PRESENT CASE, THIS CONDITION IS FULFILLED. 17 . A 'DIVIDEND' IS NOT CAPITAL BUT THE PRODUCE OF CAPITAL. SUBJECT TO WELL RECOGNISED LIMITATIONS, 'DIVIDEND' IS A WORD OF GENERAL AND INDEFINITE MEANING WITHOUT ANY NARROW, TECHNICAL OR RIGID SIGNIFICANCE. AS EXPLAINED ABOVE, THE TERM 'DIVIDEND' IS APPLIED TO A DISTRIBUTIVE SUM, SHARE OR PERCENTAGE ARISING FROM SOME JOINT VENTURE AS PROFITS OF A CORPORATION. IN THE SECOND SENSE, IT IS PROPORTIONATE AMOUNT PAID ON LIQUIDATION OF A COMPANY. IN THIS CONTEXT, 'DIVIDEND' IS REFERRED TO AS CORPORATE PROFITS SET APART FOR RATEABLE DIVISION AMONGST THE SHAREHOLDERS BEING SURPLUS ASSETS OBTAINED IN EXCESS OF CAPITAL. 18 . NEEDLESS TO MENTION THAT THE DEFINITION OF THE WORD 'DIVIDEND' IS INCLUSIVE AND NOT EXHAUSTIVE AND SINCE IT CREATES AN ARTIFICIAL LIABILITY TO TAX, IT SHOULD BE STRICTLY CONSTRUED, AS PER THE RATIO LAID DOWN IN THE CASE OF KANTILAL MANILAL V. CIT [1961] 41 ITR 275 (SC). PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 11 - : IT MERELY EXTENDS THE CONNOTATION OF THE WORD 'DIVIDEND', SO AS TO COMPRISE ITEMS OF DISTRIBUTION OR PAYMENT BY A COMPANY WHICH NORMALLY MAY NOT BE REGARDED AS 'DIVIDEND'. 19 . IT IS CLARIFIED THAT DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT IS NOT DIVIDEND FOR AL L PURPOSES OF THE ACT BUT ONLY FOR THE PURPOSE OF MAKING AN ASSESSMENT ON THE AMOUNT OF LOAN ADVANCED BY THE COMPANY IN FAVOUR OF THE SHAREHOLDER, TO THE EXTENT OF ACCUMULA TED PROFITS OF THE COMPANY, AS PER THE RATIO LAID DOWN IN THE CASE OF CIT V. T. P. S . H. SELVA S AROJA [2000] 244 ITR 671 (MAD). THE H ON'BLE COURT IN THE CASE OF CIT V. ALAGUSUNDARAM CHETTIAR [1977] 109 ITR 508 (MAD), HELD THAT THE TE RM 'PAYMENT' MUST NOT BE GIVEN A LITERAL INTERPRETATION BUT IT MUST BE SEEN W HETHER A JURAL RELATIONSHIP OF DEBTOR AND CREDITOR WAS CREATED BETWEEN TH E PARTIES AND IT WAS NOT NECES SARY THAT PAYMENT SHOULD HAVE BEEN MADE IN CASH OR IN KIND TO THE ASSESSEE. 20 . AS PER THE PROVISION OF SUB - CLAUSE (E) OF S ECTION 2(22) OF THE ACT BY WAY OF LOAN TO A SHAREHOLDER AMOUNT S TO DIVIDEN D. SECTION 2(22)(E) OF THE ACT DEFINES AS UNDER : '2.(22) 'DIVIDEND' INCLUDES - . . . (A) TO (D) (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC AR E SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PAR T OF THE ASSETS OF THE COMPANY OR OTHERWISE) 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 (NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIG HT TO PARTI CIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT. OF THE VOTIN G POWER, OR TO ANY CONCERN, IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCER N) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLD ER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 12 - : THUS, FOR A DIVIDEND TO ARISE UNDER THIS SUB - CLAUSE, THE FOLLOWING C ONDITIONS SHOULD BE FULFILLED : (I) THE COMPANY MUST BE A COMPANY SHARES OF WHICH ARE CLOSELY - HELD. (II) MONEY (NOT MONEY'S WORTH) SHOULD BE PAID BY THE COMPANY. (III) THE MONEY MUST FORM A PART OF THE ASSETS OF THE COMPANY. (IV) IT MAY BE PAID EITHER BY WAY OF ADVANCE OR LOAN OR IT MAY BE 'ANY PAYMENT'. (V) (A) THE PAYEE MUST BE A SHAREHOLDER OF THE COMPANY HAVING SUBSTANTIAL INTEREST IN THE COMPANY, OR (B) THE PAYEE MUST BE A PERSON WHO IS ACTING ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH S HAREHOLDER. 21 . THE EXPRESSION 'PERSON WHO HAS A SUBSTA NTIAL INTEREST IN THE COMPANY' IS DEFINED IN SECTION 2(32), AS MEANING 'A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGH T TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PER CENT. OF THE VOTING POWER'. IF THESE CONDITIONS ARE FULFILLED, THEN A DIVIDEND WOULD ARISE TO THE EXTENT TO WHICH THE COMPANY POSSESSES ACCUMULATED PROFITS. 22 . FURTHER, FROM THE ASSESSMENT YEAR 1988 - 89 (ONWARDS) THE PROVISIONS OF SECTION 2(22)(E) HAVE UNDERGONE MODIFICA TION BY THE FINANCE ACT, 1987. ACCORDINGLY, IT ALSO INCLUDES ADVANCES OR LOAN S MADE TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR PAR TNER AND IN WHICH HE HAS A SUB STANTI AL INTEREST. IN THE LATTER CASE, THE ADVANCE OR LOAN WILL LOGICALLY HAVE TO BE TREATED AS DIVIDEND IN THE HANDS OF THE SHAREHOLDER CONCERNED AND NOT THE CONCERN BECAUSE THE SCOPE OF THE SUB - CLAUSE IS ONLY TO ROPE IN BENEFITS GIVEN BY A CLOSELY - HELD COMPAN Y TO CERTAIN SHAREHOLDERS, DIRECTLY OR INDI RECTLY. THIS CONSTRUCTION, HOWEVER, WILL CREAT E DIFFICULTIES IN A CASE PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 13 - : WHERE MORE THAN ONE SHAREHOLDER HAS A SUBSTANTI AL INTEREST IN THE CONCERN. IT WOULD, THEREFORE, BE MORE LOGICAL TO TA X THE CONCERN WHICH ENJOY S THE BENEFIT FROM THE ADVANCE OR LOAN THOUGH IT H AS DIRECTLY NOTHING TO DO WITH THE CLOSELY - HELD COMPANY. IT IS ALSO CONCEIVABLE THAT PAYMENTS MADE TO A CONCERN IN WHICH THE SHAREHOLDER HAS NO INTEREST OR EVEN LESS THAN SUB STANTIAL INTEREST IF THEY CAN BE SHOWN TO HAVE BEEN MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER SO AS TO ATTRACT THE SECOND PART OF THE SUB - CLAUSE IS DISCUSSED BY THE AUTHOR I N [2013] 359 ITR 13 (JOURNAL). 23 . IN THE CASE OF CIT V. ALAGUSUNDARAM CH ETTIAR (SUPRA) IT W AS OBSERVED THAT THE PROVISIONS OF THIS CLAUSE ARE ATT RACTED TO ANY PAYMENT BY A COM PANY, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COM PANY OR OTHERWISE) BY WAY OF (1) ADVANCE ; OR (2) LOAN ; (3) ANY PAYMENT ON BEHALF OF ANY SHAREHOLD ER ; OR (4) ANY PAYMENT FOR THE INDIVIDUAL BENEFIT OF ANY SHAREHOLDER. THE FIRST TWO CASES DE AL WITH A PAYMENT TO THE SHARE HOLDER DIRECTLY. THE LAST TWO CASES CONTEM PLATE PAYMENT BY A COMPANY NOT TO THE SHAREHOLDER BUT TO A THIRD PARTY ON B EHALF OF OR FOR THE INDIVIDUAL BENEFIT OF THE SHAREHOLDER. ON THE DATE WHEN THE LOAN IS ADVAN CED, THE RECIPIENT SHOULD BE A SHAREHOLDER. IF IT IS NOT SO ESTABLISHED, THE PROVI SIONS OF SECTION 2(22)(E) WILL NOT APPLY AS OBSERVED IN THE CASE OF CIT V. H . K. MITTAL [1996] 21 9 ITR 420 (ALL). 24 . THUS, ANY PAYMENT BY ANY COMPANY OF ANY SUM REPRESENTING A PART OF THE ASSETS BY WAY OF ADVANCE WOULD COME WITHIN THE MISCHIEF OF DEEMED DIVIDEND. IT WOULD SEEM THAT DEPOSITS MADE BY A CLOSELY - HELD COMPANY WOULD ALSO BE COVERED BY THE EXPR ESSIONS 'ADVANCE OR LOAN'. ADVANCES GIVEN BY A COMPANY TO ITS SHA REHOLDERS SHOULD BE TREATED AS PAYMENT OUT OF ACCUMULATED PROFITS OF THE C OMPANY, WHETHER CAPITALISED OR NOT, AND MUST BE TREATED AS DIVIDEND AND WOULD GO TO REDUCE THE TAX LIA BILITY, WHENEVE R SUCH TAX LIABILITY IS REQUIRE D TO BE DETERMINED AS OBSERVED IN THE CASE OF CIT V. G. NARASIMHAN [1999] 236 ITR 3 27 (SC). PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 14 - : 25 . IN VIEW OF THE ABOVE DISCUSSION, THE ASSESSE E HAS FAILED TO ESTABLISH THAT SUBSTANTIAL PART OF THE BUSINESS OF THE COM PANY IS MONEY - L ENDING. WHEN IT IS SO THEN WE FINDS NO REASON TO INTERFERE WITH THE IMPUGNED ORDER PASSED BY THE LOWER AUTHORITIES WHO HAVE RIGHT LY OBSERVED THAT THE AMOUNT OF RS. 37,28,059 IS TO BE INCLUDED IN THE INC OME OF ASSESSEE AS DEEMED DIVI DEND UNDER SECTION 2(22 )(E) OF THE ACT . HENCE, THE IMPUGNED ORDER IS HEREBY SUSTAINED ALONG WITH THE REASONS MENTIONED THEREIN. 12 . WE HAV E ALSO EXAMINED THE OTHER ORDER OF THE TRIBUNAL IN THE CASE OF MRS REKHA MODI VS. INCOME TAX OFFICER, NEW DELHI (SUPRA) , IN WHICH IT HAS BEEN H ELD THAT WHERE THE MONEY LENDING BUSINESS OF THE COMPANY CONSTITUTE S LESS THAN 20% OF ITS TOTAL BUSINESS, LENDING OF MONEY WAS NOT SUBSTANTIAL PART OF BUSINESS OF THE COMPANY. THE RELEVANT OBSERVATION OF THE TRIBUNAL IS EXTRACTED HEREUNDER: - THE EXPRES SION 'SUBSTANTIAL PART OF THE BUSINESS' USED IN ITEM (II) OF SECTION 2(22)(E) HAS NOT BEEN DEFINED IN THE STATUTE. HOWEVER, A SIMILAR EXPRESSION 'SUBSTANTIAL INTEREST' IS USED IN SUB - CLAUSE (E) OF SECTION 2(22) AND THE SAME HAS BEEN DEFINED IN EXPLANATION 3(B) TO SECTION 2(22)(E). ALTHOUGH THE TERM 'SUBSTANTIAL INTEREST AS DEFINED IN EXPLANATION 3(B) TO SECTION 2(22)(E) IS DIFFERENT THAN THE EXPRESSION 'A SUBSTANTIAL PART OF THE BUSINESS' USED IN ITEM (II), ONE THING THAT IS CLEARLY EVIDENT FROM THE SAID DE FINITION IS THAT THE FACTUAL POSITION AS IT STANDS DURING THE RELEVANT PREVIOUS YEAR ONLY IS SUPPOSED TO BE TAKEN INTO CONSIDERATION TO DECIDE THE ISSUE ABOUT SUBSTANTIAL INTEREST IN THE CONTEXT OF DEEMED DIVIDEND UNDER SECTION 2(22)(E). THIS ASPECT WHICH IS CLEARLY EVIDENT FROM THE DEFINITION 'SUBSTANTIAL INTEREST IN A CONCERN' GIVEN IN EXPLANATION 3(B) TO SECTION 2(22)(E) ITSELF, THUS, SUPPORTED THE CONTENTION OF THE REVENUE THAT MONEY IN QUESTION HAVING BEEN ADVANCED IN THE YEAR UNDER CONSIDERATION, THE FACTS AND FIGURES OF THE SAID YEAR ALONE NEEDED TO BE TAKEN IN TO ACCOUNT TO FIND OUT AS TO WHETHER THE LENDING OF MONEY WAS A SUBSTANTIAL PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 15 - : PART OF THE BUSINESS OF THE COMPANY 'A'. THEREFORE, THE FACTS AND FIGURES OF THE YEAR UNDER CONSIDERATION ALONE COULD BE TAKEN INTO CONSIDERATION TO ASCERTAIN THE EXACT POSITION AS DONE BY THE COMMISSIONER (APPEALS) IN HIS IMPUGNED ORDER WHILE UPHOLDING THE ACTION OF THE ASSESSING OFFICER ON THIS COUNT. IN THE INSTANT CASE, DURING THE PREVIOUS YEAR OUT OF THE TOTAL FUNDS OF RS.2.62 CRORES AVAILABLE WITH THE COMPANY 'A 'ONLY AN AMOUNT TO THE EXTENT OF RS. 42.68 LAKHS, I.E. 16.29 PER CENT WAS USED FOR MONEY - LENDING BUSINESS. SINCE THE MONEY - LENDING BUSINESS OF THE COMPANY 'A' CONSTITUTED THAN 20 PER CENT OF THE TOTAL BUSINE SS OF THE COMPANY 'A', THE LENDING OF MONEY COULD NOT BE SAID TO BE A SUBSTANTIAL PART OF THE BUSINESS OF COMPANY 'A. T HEREFORE, THE CONDITION STIPULATED IN ITEM (II) OF SUB - CLAUSE (E) OF SECTION 2(22) WAS NOT SATISFIED AND THE AMOUNT IN QUESTION ADVANCE D BY THE COMPANY 'A' TO THE ASSESSEE WAS NOT COVERED BY THE EXCEPTION PROVIDED IN THE SAID SUB - CLAUSE AS CLAIMED BY THE ASSESSEE. THEREFORE, THE AMOUNT IN QUESTION WAS RIGHTLY TREATED BY THE ASSESSING OFFICER AS DIVIDEND IN THE HANDS OF THE ASSESSEE BY APP LYING THE DEEMING PROVISIONS OF SECTION 2(22)(E) AND THE COMMISSIONER (APPEALS) WAS FULLY JUSTIFIED IN SUSTAINING THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS COUNT. 13 . WE HAVE ALSO EXAMINED THE JUDGMENT IN THE CASE OF CIT VS. PARLE PLASTICS LTD. AND ANOTHER (SUPRA), IN WHICH IT HAS BEEN HELD THAT EXPRESSION SUBSTANTIAL PART DOES NOT CONNOTE AN IDEA OF BEING THE MAJOR PART OR THE PART THAT CONSTITUTES MAJORITY OF THE WHOLE. IT WAS ALSO HELD THAT THE CAPITAL EMPLOYED BY A COMPANY FOR CARRYING ON A PA RTICULAR DIVIS I ON 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. THE RELEVANT OBSERVA TION OF THE HON'BLE BOMBAY HIGH COURT IS ALSO EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE: - PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 16 - : A PLAIN READING OF CLAUSE (II) OF SECTION 2(22)(E) OF THE ACT SHOWS THAT ANY ADVANCE OR LOAN MADE BY A COMPANY TO A SHAREHOLDER OR A CONCERN IN WHICH THE SHAREH OLDER HAS A SUBSTANTIAL INTEREST WOULD NOT BE REGARDED AS A DIVIDEND IF THE ADVANCE OR LOAN WAS MADE BY THE LENDING COMPANY, IF TWO CONDITIONS ARE SATISFIED NAMELY, (I) THAT THE LOAN OR ADVANCE WAS MADE BY THE LENDING COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS AND (II) LENDING OF MONEY WAS A SUBSTANTIAL PART OF THE BUSINESS OF THE LENDING COMPANY. THE EXPRESSION USED UNDER CLAUSE (II) OF SECTION 2(22)(E) 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 INTENDED THAT A PARTICULAR MINIMUM PERCENTAGE OF THE BUSINESS OF A LENDING COMPANY SHOULD COME FROM THE BUSINESS OF LENDING, THE LEGISLATURE COULD HAVE SPECIFICA LLY PROVIDED FOR THAT PERCENTAGE WHILE DRAFTING CLAUSE (II) OF SECTION 2(22)(E) OF THE ACT. 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 COMI NG FROM THE LENDING BUSINESS OF THE LENDING COMPANY FOR THE PURPOSE OF CLAUSE (II) OF SECTION 2(22)(E). 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 SUBSTANTIA L 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 A SUBSTANTIAL PART OF THE TURNOVER, THOUGH IT CONTRIBUTES A RELATIVELY SMALL PORTION OF THE PROFIT, WOULD BE A SUBSTANTIAL PART OF THE BUSINESS. SIMILARLY, A PORTION WHICH IS RELATIVELY SMALL AS COMPARED TO THE TOTAL TURNOVER, BUT GENERATES A LARGE PORTION, SAY MORE THAN 50 PER CENT. OF THE TOTAL PRO FIT OF THE COMPANY WOULD ALSO BE A 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 MANPOWER USED FOR A PARTICULAR PART OF THE B USINESS 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 PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 17 - : PERCENTAGE OF HUMAN RESOURCES USED BY THE COMPANY FO R CARRYING ON A PARTICULAR DIVISION OF BUSINESS MAY ALSO BE REQUIRED TO BE TAKEN INTO CONSIDERATION WHILE CONSIDERING WHETHER A PARTICULAR BUSINESS FORMS A 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. 14 . IN THE LIGHT OF AF ORESAID JUDICIAL PRONOUNCEMENT, WE HAVE EXAMINED THE FACTS OF THE CASE IN HAND AND WE ARE OF THE VIEW THAT THERE SHOULD NOT BE ANY CONTROVERSY THAT SUBSTANTIAL PART OF BUSINESS IS NOT EQUIVALENT TO THE WORD MAJOR PART OF BUSINESS, AS THE LEGISLATURE HA S NOT USED THE WORD S MAJOR PART OF BUSINESS IN PLACE OF SUBSTANTIAL PART OF BUSINESS. HAD IT BEEN USED, THEN IT WOULD HAVE TO BE EXAMINED THAT ASSESSEES BUSINESS SHOULD BE MORE THAN 50% IN THAT PARTICULAR ACTIVITY. BUT THE LEGISLATURE HAS CONSCIOUSL Y USED THE WORD S SUBSTANTIAL PART OF BUSINESS WHICH MEANS THAT 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. THEREFORE, IF PARTICULAR P ERCENT OF CAPITAL OF THE COMPANY IS EMPLOYED IN THE MONEY LENDING BUSINESS, THE COMPANY CAN BE CALLED TO HAVE SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING. IN THE LIGHT OF EXPLANATION 3(B) BELOW SECTION 2(22)(E) OF THE ACT , WHERE A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED T O NOT LESS THAN TWENTY PER CENT OF THE INCOME OF THAT CONCERN AND THE ORDER OF THE TRIBUNAL IN THE CASE OF MRS REKHA MODI VS. INCOME TAX OFFICER, NEW DELHI (SUPRA) AND OTHER JUDGMENT OF THE HON'BLE HIGH COURT, WE ARE OF THE VIEW THAT IF 20% OF THE CAPITAL OF THE COMPANY IS DEPLOYED IN MONEY LENDING BUSINESS OF THE COMPANY, THE PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 18 - : COMPANY SHALL BE HELD TO HAVE A SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING. 15 . WE HAVE ALSO EXAMINED THE DEFINITION OF MONEY LENDING BUSINESS AND WE ARE OF THE VIEW THAT MONEY LENDING BUSINESS MEANS THAT LENDER GIVES MONEY TO VARIOUS PERSONS AND COLLECT INTEREST THEREON FROM THE BORROWER S . THE LEND ER SHOULD BE ENGAGED REGULARLY IN GIVING LOANS TO VARIOUS PERSONS AND COLLECTING INTEREST THEREON. IF THE LENDER COMPANY GIVES A LOAN OR ADVANCE TO ONE PERSON ONLY, TH EN THE COMPANY CANNOT BE HELD TO HAVE SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING. 16 . TUR NING TO THE FACTS OF THE CASE IN HAND, WE FIND THAT THE AFORESAID TWO COMPANIES I.E. KUKKI COLOR PHOTOS PVT. LTD. AND KUKKI COLOR PRINTS PVT. LTD. , IN WHICH THE ASSESSEE HAS ADMITTED LY MORE THAN 10% SHAREHOLDING AND HAS SUBSTANTIAL INTEREST THEREIN, HAVE G IVEN LOAN AND ADVANCE TO ASSESSEE ONLY. EXCEPT THE ASSESSEE, THEY HAVE NOT GIVEN ANY LOAN OR ADVANCE TO ANY OTHER PERSON. UNDER THIS SITUATION, IT CANNOT BE HELD THAT THE COMPANY HAS SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING. THIS ASPECT WHETHER THE COMPANY HAS SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING CAN ONLY BE EXAMINED EXCLUDING THE LOAN AND ADVANCES GIVEN TO THE ASSESSEE. IF THE COMPANY IS ENGAGED IN ADVANCING LOAN S TO DIFFERENT PERSONS APART FROM ASSESSEE AND FULFILS THE CONDITIONS OF PERC ENTAGE OF CAPITAL EMPLOYED IN MONEY LENDING BUSINESS, IT CAN BE HELD THAT THE COMPANY HAS SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING. BUT IN THE INSTANT CASE, LOAN S AND ADVANCES WERE GIVEN ONLY TO THE ASSESSEE AND NOT TO OTHERS, THEREFORE, THE COMPANY CANNOT BE CALLED TO HAVE A SUBSTANTIAL PART OF BUSINESS IN MONEY LENDING. TH US , THE SECOND INGREDIENT OF EXCLUSION CLAUSE (II) CONTAINED IN SECTION 2(22)(E) OF THE ACT IS NOT SATISFIED IN THE INSTANT CASE AND THE ASSESSEE CANNOT GET THE BENEFIT OF EXCEPTI ONAL CLAUSE. PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ ) : - 19 - : 17 . KEEPING IN VIEW THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED OPINION THAT THE A.O. HAS RIGHTLY TREATED THE ADVANCE OR LOAN GIVEN TO THE ASSESSEE BY THE COMPANY I.E. KUKKI COLOR PHOTOS PVT. LTD. AND KUKKI COLOR PRINTS PVT. LTD. AS DEEMED DIVIDEND AND WE, THEREFORE, ARE NOT IN AGREEMENT WITH THE ORDER OF THE LD. CIT(A) WHO HAS NOT EXAMINED ALL THESE ASPECTS WHILE GRANTING RELIEF TO THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) IN THIS REGARD AND RESTORE THAT OF THE ASSESSING OFFICER. THUS, THE APPEAL OF THE REVENUE STANDS ALLOWED. 18 . THE APPEAL OF THE REVENUE IS ACCORDINGLY DISPOSED OF. ORDER PRONOUNCED IN THE OPEN COURT ON 25.7.2014. SD/ - SD/ - [ A. K. GARODIA ] [ S UNIL KUMAR Y ADAV ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 25 TH JU LY , 2014 JJ: 1707 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT 5 . DR ASSISTANT REGISTRAR PRINT TO PDF WITHOUT THIS MESSAGE BY PURCHASING NOVAPDF ( HTTP://WWW.NOVAPDF.COM/ )