Income Tax Appellate Tribunal - Mumbai
Uni Recuclers P. Ltd, Mumbai vs Assessee on 24 December, 2009
1 I.T.A No.2662/ Mum/2010
Uni Recuclers P. Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL,
"F" BENCH, MUMBAI.
[ Coram: D.K. Agarwal, JM and Pramod Kumar, AM ]
I.T.A No.2662/ Mum/2010
Assessment year: 2006-07
Uni Recuclers P. Ltd. ..... Appellant
2 nd floor, United India Building, Sir P.M. Road, Fort,
Mumbai-400 001
Pa No.AAACU 0641 E
Vs
ACIT, Circle 2(3) ,.... Respondent
Mumbai.
Appearances:
Sunil Jhunjhunwala, for the appellant
L.K.Agarwal, for the respondent
ORDER
Per Pramod Kumar:
1. By way of this appeal, the assessee has called into question correctness of CIT(A)'s order dated 24.12. 2009, in the matter of assessment under section 143(3) of the Income tax Act, 1961, for the assessment year 2006-07.
2. Ground Nos.1 to 3 relate to confirmation of disallowance of `.
1,48,602 u./s.14A of the Income tax Act, 1961.
2 I.T.A No.2662/ Mum/2010Uni Recuclers P. Ltd
3. Briefly stated the facts of the case are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed exempt income of `. 79,37,927 and Rs. 13,987. The AO asked the assessee to give reasons as to why disallowances be not made in view of the Board's notification No.45/2008. After considering the assessee's submissions and following the decision of the ITAT in the case of Daga Capital Management Pvt. Ltd. the AO worked out the disallowance at Rs. 4,67,308 u/s.14A and added the same to the total income of the assessee, which was restricted to Rs. 1,48,602 by the CIT (A) in first appeal.
4. Learned Representatives agree that so far as the question of Rule 8D is concerned, the issue is now covered in favour of the assesee by the Hon'ble Jurisdictional High Court's judgement in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (328 ITR 81), but a reasonable disallowance for expenses incurred in earning dividend income is nevertheless to be computed by the AO. In view of the decision of the Hon'ble Jurisdictional High Court in the case of Godrej Boyce Mfg Co. Ltd (supra) and as agreed to by the parties, we remit the issue to the file of the AO to re-compute the disallowance u/s.14A in the light of the law laid down by the Hon'ble Jurisdictional High Court in the case of Godrej Boyce Mfg Co. Ltd (supra). Ground Nos.1 to 3 are allowed for statistical purposes.
5. Ground Nos.4 to 6 relate to confirmation of addition of Rs. 6,68,117 as deemed dividend u/s.2(22)(e) of the Act in respect of loan received from Elian Trading Co. P.ltd.
6. Briefly stated material facts are like this. During the course of assessment proceedings, the Assessing Officer noted that the assessee had taken a loan of Rs. 87,90,125 from Elian Trading Co. Pvt.Ltd.. It was also noted that the assessee company and Elian Trading Co. Pvt.Ltd. were having common directors and common share holders, i.e. Sujata Parekh Kumar was 3 I.T.A No.2662/ Mum/2010 Uni Recuclers P. Ltd having substantial interest of more than 20% in the share capital of the assessee company and holding more than 10% of the voting power in Elian Trading Co. Pvt.Ltd. It was further observed that Elian Trading Co. Pvt.Ltd had reserves and surplus amounting to Rs. 6,68,177 as on 31.3.2006. It was in this backdrop that the Assessing officer required the assessee to show cause as to why the sums be not treated as deemed dividend u/s.2(22)(e) of the Act. In response to the AO's requisition, it was, inter alia, explained by the assessee that the loan given to the assessee was in the ordinary course of business and that lending of loan is a substantial part of the business of Elian Trading Co. Pvt.Ltd.. The Assessing Officer, however, did not accept this explanation. He was of the view that substantial part of the profits of Elian Trading Co. Pvt.Ltd. consists of services charges and not lending monies. Aggrieved, the assessee carried the matter in appeal before the CIT(A) but without any success. It was noted by the CIT (A) that more than 50% of the income of Elian Trading Co. Pvt.Ltd. comprises of service charges in the year under consideration. It was further observed by the CIT(A) that "in the normal parlance, the expression 'substantial' would always mean 50% or more unless explicitly defined otherwise in the statute" and that "since, admittedly, there is no such definition provided by the statute, the interpretation adopted by the AO is upheld". The assessee is not satisfied and is in further appeal before us.
7. We have heard the learned representatives, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
8. On a perusal of statement of particulars of M/s. Elian Trading Co. Pvt.Ltd as filed before us at page 42 of Paper Book, we have noticed that interest earning constitute 47.52% of the gross receipts whereas 75.01% of gross assets are used in giving advances. However, even on these facts, the authorities below have declined to treat the lending of funds as substantial activity of Elian Trading Co. Pvt.Ltd solely on the ground that profits from 4 I.T.A No.2662/ Mum/2010 Uni Recuclers P. Ltd money lending were less than 50% of over all profits. However, in view of Hon'ble Bombay High court judgment's in the case of CIT vs. Parle Plastics Ltd in ITA No.37 of 2002 order dated 20 th September, 2010, a copy of which was filed before us by the learned counsel, the approach so adopted by the authorities below is clearly unsustainable in law. In Parle Plastics Ltd's case (supra), Their Lordships have, inter alia, observed that "In our view, the expression 'substantial part' does not connote an idea of being the 'major part' or the part that constitutes majority of the whole". Their Lordships observed that "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". It was in this background that Their Lordships held that even in a situation where only 42% of the assets of a company were deployed in granting loans and advances, lending of money were to be considered as substantial part of business of the company. We may in this regard refer to the following observations of the Hon'ble Bombay High Court:
"11. The expression used under clause (ii) of Section 2(22) is "substantial part of the business". We would, therefore, have to ascertain the meaning of the word "substantial", appearing in the expression "substantial part of the business". Stroud's Judicial Dictionary, Fifth Edition, gives the first meaning of word "substantial" as "A word of no fixed meaning, it is an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole". The decision of Terry's Motors Lt. v. Rinder [1948] S.A.S.R. 167) is given in support of this meaning. In the meaning no.8, while considering "substantial amount", it is stated that out of a rent of £80 p.a.., £13 p.a. attributable to the amount paid for furniture, was a substantial amount, on the basis of the decision in Maclay v. Dixon 170 L.T.
49. In meaning no.15, relying upon the decision of Ladbrooke (Football) v. William Hill (Football) [1964] 1 W.L.R. 273, it is said that in deciding whether the reproduced part of copyright material is a "substantial" part of the whole, it is the quality rather than the quantity of the part that should be considered. Black's Law Dictionary, Sixth Edition defines the word "substantial" as "of real worth and importance; of considerable value; valuable; belonging to substance; actually 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 5 I.T.A No.2662/ Mum/2010 Uni Recuclers P. Ltd wherein a view has been taken that in order to show that a part of the whole to be treated as "substantial part", the part must exceed 50% of the whole. In our view, 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% 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 clause (ii) of Section 2(22) 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 coming from the lending business of the lending company for the purpose of clause (ii) of Section 2(22) of the Act. We would give a an illustration to ascertain the meaning of the expression "substantial business" or "substantial income" of a company. In the 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 a case of a first company which has 3 divisions of works consisting of three different types of business. Turn over as well as the profit of the first division is 40%; turn over and profit of second division is 30% and the turn over and profit of the third line of business is 30% . In the case of this company no part of the business has turn over exceeding 50% and no part of the business company generates profit of more than 50% of the total. In such a case can it be said that none of the businesses of the said company is a substantial business of the company. In our view not. 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. As rightly observed in Stroud's Judicial Dictionary, it is not possible to give any fixed definition of the word "substantial" in relation to "a substantial business of a company". 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 6 I.T.A No.2662/ Mum/2010 Uni Recuclers P. Ltd 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 turn over, though it contributes a relatively small portion of the profit, would be substantial part of the business. Similarly, a portion which relatively a small as compared to the total turnover, but generates a large, say more than 50 % of the total profit of the company would also be substantial part of its business. Percentage of turn over in relation to the whole as also the percentage of the profit in relation to the whole and sometimes even percentage of a manpower used for a particular part of business in relation to the total man power 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.
12. Applying these tests to the present case, we do not find that the ITAT has committed any error in coming to the conclusion that lending of money was a substantial part of the business of AMPL. The ITAT has noted that 42% of the total assets of AMPL as on 31.3.1996 and 39% 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% of the total assets into the business of lending could be regarded as an insignificant part of the business of AMPL. The ITAT has also held that the income AMPL had received by way of interest of 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 into net loss. In our view, the ITAT has taken into consideration the relevant factors and has applied the correct tests to come to the conclusion that lending of money was substantial part of the business of the 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 has to be excluded from the definition of "dividend" by virtue of clause (ii) of Section 2(22) of the Act. Hence, question no.2 is answered in favour of the assessee and against the Revenue."
7 I.T.A No.2662/ Mum/2010Uni Recuclers P. Ltd
9. As evident from a plain reading of the above observations made by the Hon'ble Bombay High Court, which are in the context of deemed dividend under section 2(22)(e), the approach adopted by the authorities below is clearly erroneous. There is no support for the stand taken by the authorities below that only when more than 50% of the profits come from a particular activity, the said activity can be said to be substantial business of the assessee. In this view of the matter and applying the test laid down by the Hon'ble Bombay High Court in the case of Parle Plastics Ltd (supra) on the given facts (in which 75% of the assets are deployed in money lending business and 47% of the receipts are on account of interest), in our considered view, the substantial business of Elian Trading Co. Pvt.ltd. can indeed be said to be money lending. In this view of the matter, the advances received from Elian Trading Co. Pvt.Ltd., will not be hit by Section 2(22)(e) as the substantial activity of Alian Trading Co. P.Ltd., was giving loans and advances. Accordingly, we uphold the grievance of the assessee and allow Ground Nos.4 to 6.
10. In the result, appeal is allowed.
Pronounced in the open court on 23 rd February, 2011
Sd/- Sd/-
(D.K.Agarwal ) (Pramod Kumar)
(Judicial Member) (Accountant Member)
Mumbai, Dated 23 rd February, 2011
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),6, Mumbai
4. Commissioner of Income Tax, 2 , Mumbai
5. Departmental Representative, Bench 'F, Mumbai //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI 8 I.T.A No.2662/ Mum/2010 Uni Recuclers P. Ltd 9 I.T.A No.2662/ Mum/2010 Uni Recuclers P. Ltd