CIT vs. Parle Plastics Ltd (Bombay High Court)

DATE: (Date of pronouncement)
DATE: December 11, 2010 (Date of publication)

Click here to download the judgement (parle_plastic_deemed_dividend.pdf)

S. 2(22)(e) applicable only to loans given in the year. S. 2(22)(e) not applicable if lending is not “trivial” part of business

The assessee availed of loans and advances of Rs. 2.18 crores from a closely held company (“AMPL”) of which Rs. 11.68 lakhs was received during the year. As the shareholders holding majority of the share capital in the assessee also held the majority of the shareholding in AMPL, the AO took the view that the said loan / advance was assessable as “deemed dividend” u/s 2(22)(e) in the hands of the assessee. The CIT (A) confirmed the view of the AO though he held that only the loan / advance received during the year was assessable as “deemed dividend” and not the brought forward balance. On appeal by the assessee, the Tribunal deleted the addition on the ground that the granting of loans was a substantial part of the business of AMPL and so the loan could not be treated as ”deemed income” in the hands of the assessee. On appeal by the department, HELD dismissing the appeal:

(i) S. 2(22)(e) covers only the amount received during the previous year by way of loans / advances and not amounts received in an earlier year. Further, increase in the outstanding on account of provision for interest is not covered;

(ii) S. 2(22)(ii) excludes loans and advances where (a) the loan or advance was made by the lending-company in the ordinary course of its business and (ii) lending of money is a “substantial part” of the business of the lending-company. The first condition was satisfied as the business of the assessee was complimentary to the business of AMPL. As regards the second condition, the expression “substantial part” does not connote an idea of being the “major part” or the part that constitutes majority of the whole. Any business 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 such as turnover, profit, employees, capital employed etc are required to be looked into while considering whether a part of the business of a company is a “substantial part of its business”;

(iii) On facts, as about 40% of the total assets of AMPL were deployed by way of loans and advances, and its interest income was substantial compared to the total income, lending of money was a “substantial part of its business” and the money given by it by way of loan / advance was excluded from the definition of “dividend” under s. 2(22)(ii).

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