INCOME TAX ACT, 1961

--Dividend --Deemed dividend under section 2(22)(e)Loan or advance to shareholders--Assessee received loan amount from M/s JMC Securities (P) Ltd. wherein he was holding more than 10 per cent shares of the same as a beneficial owner. Assessing officer held that the loan amount received by assessee to the extent of accumulated profit of the said company should be liable to tax in assessee's hands as deemed dividend under section 2(22)(e). Assessee however, contended that lending of money was a substantial part of the business of the said company, therefore, it was covered under the exclusion clause (ii) to section 2(22)(e). According to assessing officer, the above exception was applicable in the cases where lending of money was a substantial part of business of the company and not the substantial part of business income of the company and also noted that the main object of the company was to carry on the business of shares and stock brokers and lending of money was only incidental or ancillary to the main object, therefore, loan amount received by assessee to the extent of accumulated profits was considered as deemed dividend under section 2(22)(e), Held: Was not justified, as interest income earned by M/s JKMC Securities Private Ltd. during the year under consideration was constituted about 70 per cent of its total income. Moreover, the maximum amount of loan advanced by above company constituted 32 per cent of the total funds available with the said company. Therefore, it became clear that lending of money was a substantial part of business of the JMC Securities (P) Ltd. and the loan to assessee was made by the said company in the ordinary course of its business. Therefore, the conditions stipulated in clause (ii) of section 2(22)(e) were duly satisfied and the amount loan advance to assessee could not be regarded as deemed dividend.

As provided in clause, (ii) to section 2(22)(e) 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 under section 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 Bombay High Court in the case of CIT v. Parle Plastics Ltd. (2011) 332 ITR 63 (Bom). [Para 11] In the present case, interest income earned by M/s JMC Securities Pvt. Ltd. during the year under consideration constituted 70% of its total business income. Moreover, the maximum amount of loan advanced by M/s JMC Securities Pvt. Ltd. during the year under consideration 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., it becomes abundantly clear that lending of money was a substantial part of a business of 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. Assessee has also filed a copy of the assessment order passed under section 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., it is concluded that the addition made by the assessing officer under section 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. [Para 12]