Income Tax Appellate Tribunal - Mumbai
Jayant H Modi , Mumbai vs Assessee on 10 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A", MUMBAI
Before Shri P.M.Jagtap, Accountant Member
and Shri Amit Shukla, Judicial Member..
I.T.A. No.4461/Mum/2010.
Assessment Year : 2006-07.
Shri Jayant H. Modi, Jt. Commissioner of
29, Sharda Sadan, Vs. Income Tax- 12(2)
11, S.A. Brelvi Road, Mumbai.
Fort, Mumbai - 400 001.
PAN AAHPM 5225A
Appellant. Respondent.
Appellant by : Shri Vipul B. Joshi.
Respondent by : Shri P.K. Shukla.
Date of hearing : 10-10-2012
Date of pronouncement : 23 -11-2012.
ORDER
Per P.M. Jagtap, A.M. :
This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-23, Mumbai dated 22-03-2010.
2. Ground No. 1 of this appeal involve the issue relating to disallowance of Rs.25,37,548/- made by the AO and confirmed by the learned CIT(Appeals) u/s 14A of the Act read with Rule 8D of Income-tax Rules.
3. The assessee in the present case is an individual who filed his return of income for the year under consideration on 31-10-2006 declaring total income of Rs.3,25,94,140/- which was comprising of income from business, short term capital gain and income from other sources. In the said return, dividend income of 2 ITA No.4461/Mum/2010 Rs.6,50,986/- received by the assessee during the year under consideration was claimed to be exempt from tax. No disallowance on account of expenses incurred in relation to earning of the said income, however, was made by the assessee as required by the provision of section 14A. The AO, therefore, worked out such expenses incurred by the assessee in relation to earning of exempt dividend income at Rs.25,37,548/- by applying Rule 8D of the Income-tax Rules and made disallowance to that extent u/s 14A. On appeal, the learned CIT(Appeals) confirmed the said disallowance made by the AO relying on the decision of Mumbai Special Bench of ITAT in the case of Daga Capital Management 117 ITD 169 (Mum)(SB) wherein it was held that Rule 8D had retrospective application.
4. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the decision of Special Bench of ITAT in the case of Daga Capital Management (supra) has been reversed by the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. 234 CTR 1 holding that Rule 8D is applicable prospectively from assessment year 2008-09. As further held by the Hon'ble Bombay High Court, disallowance u/s 14A of the Act for the years prior to assessment year 2008-09 has to be made by adopting some reasonable method. Keeping in view the decision of Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra), we set aside the impugned order of the learned CIT(Appeals) confirming the disallowance made by the AO u/s 14A by applying Rule 8D and restore the matter to the file of the AO with a direction to recompute the disallowance to be made u/s 14A on some reasonable basis.
5. Ground No. 1 of the assessee's appeal is accordingly treated as partly allowed for statistical purposes.
3 ITA No.4461/Mum/20106. The issue raised by the assessee in ground No.2 of this appeal relates to the addition of Rs.3,38,85,459/- made by the AO and confirmed by the learned CIT(Appeals) on account of loans taken from M/s JMC Securities Pvt. Ltd. treating the same as deemed dividend u/s 2(22)(e) of the Act.
7. During the year under consideration, the assessee had received loan amount of Rs.551.45 lakhs from M/s JMC Securities Pvt. Ltd. wherein he was holding 1.53,025 equity shares out of total 3 lakhs equity shares issued. The assessee thus was beneficial owner of shares in the said company holding more than 10% shares and since the said company, namely, M/s JMC Securities Pvt. Ltd. had accumulated profits of Rs.3,38,85,459/- as on 31-03-2006, the AO required the assessee to explain why the loan amount to the extent of Rs.3,38,85,459/- should not be brought to tax in his hands as deemed dividend u/s 2(22)(e). In reply, the assessee submitted that although M/s JMC Securities Pvt. Ltd. was incorporated with the main object of carrying on business as share and stock brokers, its memorandum of association allowed the said company to carry on the business, inter alia, of lending or advancing money. It was also pointed out that the said company had earned only interest income of Rs.9,16,088/- and commission in finance business of Rs.3,88,000/ during the year under consideration which was chargeable to tax under the head "Profits and Gains of business or profession". It was contended that lending of money thus was a substantial part of the business of the said company and consequently it was covered under the exclusion provided in clause (ii) of section 2(22)(e). This stand of the assessee was not found acceptable by the AO. According to him, although M/s JMC Securities Pvt. Ltd. had not engaged in carrying on the business as share and stock broker in pursuance of its main object during the year under consideration, lending of money was only one of the many objects incorporated in the memorandum of association as incidental or 4 ITA No.4461/Mum/2010 ancillary to the attainment of the main object. He also noted that as per the balance sheet of the said company as on 31st March, 2006, loans and advances given were only Rs.6.99 lakhs i.e. 1.51% of the balance sheet total whereas investment in shares was to the extent of Rs.420.65 lakhs i.e. 91.05% of the balance sheet total. He also noted that the gain earned by the said company on sale of investment was 92.68% of the total receipt whereas interest income earned was only 4.38% of the total receipts. He held that the analysis of application of funds as well as the income composition was sufficient to show that making investment in shares was a substantial part of the business of M/s JMC Securities Pvt. Ltd. and the contention of the assessee that lending of money was a substantial part of the business of the said company was not acceptable. He, therefore, rejected the contention of the assessee that exclusion clause (ii) of section 2(22)(e) was applicable in its case and added a sum of Rs.3,38,85,459/- to the total income of the assessee as deemed dividend u/s 2(22)(e).
8. The addition made by the AO on account of deemed dividend u/s 2(22)(e) was disputed by the assessee in an appeal filed before the learned CIT(Appeals). The submissions made before the AO on this issue were reiterated on behalf of the assessee before the learned CIT(Appeals) in support of his contention that exclusion clause (ii) of section 2(22)(e) was clearly applicable. In support of this contention, reliance was placed on behalf of the assessee on the decision of Mumbai Bench of ITAT in the case of Jhamu U. Sugand vs. DCIT 284 ITR (AT) 82 and that of Ahmedabad Bench of ITAT in the case of ITO vs. Krishnomics Ltd. reported in 308 ITR (AT) 8. This contention of the assessee was not found acceptable by the learned CIT(Appeals). According to him, the exception provided in clause (ii) to section 2(22)(e) was applicable in the cases where lending of money was a substantial part of the business of the company and not the 5 ITA No.4461/Mum/2010 substantial part of the business income of the company. He noted that the main object of the JMC Securities Pvt. Ltd. was to carry on the business of shares and stock brokers and lending of money was only one of the objects which was incidental or ancillary to the main object. He held that it, therefore, could not be said that lending of money constituted substantial part of the business of the lending company i.e. JMC Securities Pvt. Ltd. As regards the decisions of the Tribunal relied upon by the assessee, the learned CIT(Appeals) held that the same were distinguishable on facts inasmuch as money lending was the main business activity of the lending companies in the said cases. Accordingly, the addition made by the AO u/s 2(22)(e) by treating the loan amount received by the assessee from JMC Securities Pvt. Ltd. to the extent of accumulated profits as deemed dividend was confirmed by the learned CIT(Appeals).
9. At the time of hearing before us, the learned counsel for the assessee mainly reiterated the submissions made on behalf of the assessee before the authorities below on this issue. He also prepared and furnished details of composition of total income of M/s JMC Securities Pvt. Ltd. for the year under consideration as well as for the immediately preceding five years to show that interest income constituted substantial part of the business income of the said company. He also submitted that while ascertaining the position of deployment of funds, the AO has considered the position of only the last day of the previous year i.e. 31st March, 2005 ignoring that the maximum amount of loan advanced by M/s JMC Securities Pvt. Ltd. during the year under consideration was Rs.95,25,000/- which was to the extent of 32% of the total funds available. He contended that the activity of lending money thus was a substantial part of M/s JMC Securities Pvt. Ltd. and since the loan amount in question was made by the said company to the assessee in the ordinary course of its business, exclusion clause (ii) to section 2(22)(e) was clearly applicable. In 6 ITA No.4461/Mum/2010 support of this contention, he relied, inter alia, on the decision of Hon'ble Bombay High court in the case of CIT vs. Parle Plastics Ltd. 332 ITR 63.
10. The learned DR, on the other hand, strongly relied on the orders of the authorities below in support of the Revenue's case on this issue that exclusion clause (ii) to section 2(22)(e) was not applicable in the facts of the assessee's case.
11. We have considered the rival submissions and also perused the relevant material on record. The issue for our consideration in the present context is whether the exclusion clause (ii) of section 2(22)(e) of the Act is applicable in the facts of the present case or not. As provided in the said clause, any advance or loan made by a company to a shareholder or concern in which the shareholder has a substantial interest would not be regarded as a deemed dividend u/s 2(22)(e) if lending of money is a substantial part of the business of the lending company and the loan or advance is made by the lending company in the ordinary course of its business. The expression used in clause (ii) of section 2(22)(e) is "substantial part of the business" and the same has been interpreted by the Hon'ble Bombay High Court in the case of Parle Plastics Ltd. (supra) cited by the learned counsel for the assessee. As held by the Hon'ble Bombay High Court, the said expression does not connote an idea of being the "major part" or the part that constitute majority of the whole. Elaborating further, it was explained by the Hon'ble Bombay High Court 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 and 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. It was held that sometimes a portion which contributes a substantial part of the turnover, though it contributes relatively small portion of the profit, would be a substantial part of the business. Similarly, a portion which is relatively small as 7 ITA No.4461/Mum/2010 compared to the total turnover, but generates a large portion, say more than 50% of the total profit of the company would also be a substantial part of his business.
12. In the present case, interest income earned by M/s JMC Securities Pvt. Ltd. during the year under consideration was to the tune of Rs.9,16,088/- which constituted about 70% of its total business income amounting to Rs.13,04,088/-. Moreover, the maximum amount of loan advanced by M/s JMC Securities Pvt. Ltd. during the year under consideration was to the tune of Rs.95,45,000/- which constituted 32% of the total funds available with the said company. If these facts and figures are considered in the light of the decision of Hon'ble Bombay High Court in the case of Parle Plastics Ltd. (supra), it becomes abundantly clear that lending of money was a substantial part of a business of M/s JMC Securities Pvt. Ltd. and the loan in question to the assessee was made by the said company in the ordinary course of its business. It, therefore, follows that the conditions stipulated in clause (ii) of section 2(22)(e) were duly satisfied and the amount of loan advanced by M/s JMC Securities Pvt. Ltd. to the assessee could not be regarded as a deemed dividend. Before us, the learned counsel for the aassesse has also filed a copy of the assessment order passed u/s 143(3) of the Act in the case of M/s JMC Securities Pvt. Ltd. for the year under consideration i.e. assessment year 2006-07 wherein the nature of the business of the said company was clearly indicated as "finance" and it was further mentioned in the body of order that the said company during the year under consideration continued into business of short term finance of idle funds. As such, considering all the facts of the case and keeping in view the decision of Hon'ble Bombay High Court in the case of Parle Plastics Ltd. (supra), we are of the view that the addition made by the AO u/s 2(22)(e) on account of the loan advanced by M/s JMC Securities Pvt. Ltd. to the assessee by treating the same as deemed dividend is not sustainable and the learned CIT(Appeals) is not justified 8 ITA No.4461/Mum/2010 in confirming the same. Accordingly, we delete the said addition and allow ground No.2 of the assessee's appeal.
13. In the result, the appeal of the assessee is partly allowed as indicated above.
Order pronounced Court on this 23rd day of Nov., 2012.
Sd/- Sd/-
(Amit Shukla) (P.M. Jagtap)
Judicial Member Accountant Member
Mumbai,
Dated : 23rd Nov., 2012.
Wakode
Copy to :
1. Applicant.
2. Respondent
3. C.I.T.
4. CIT(A)
5. D.R., H-Bench.
(True copy)
By Order
Assistant Registrar,
ITAT, Mumbai.