Court Restores Case to Tribunal: Is Lending Money a Substantial Part of Company's Business.

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Case Name:

Ravi Agarwal vs Assistant Commissioner of Income Tax (High Court of Allahabad)

Income Tax Appeal No.190 of 2014

Date: 3rd November 2014

Key Takeaways

1. The court emphasized the importance of thoroughly examining whether lending money constitutes a substantial part of a company's business before applying Section 2(22)(e) of the Income Tax Act.

2. The court demonstrated a willingness to allow for a fresh examination of facts when crucial aspects of a case haven't been adequately considered.

3. The judgment highlights the complexity of determining what constitutes a "substantial part" of a company's business in the context of tax law.

Issue

Does the lending of money constitute a substantial part of Sarnath Finance Limited's business, thereby exempting the loan given to the assessee (Ravi Agarwal) from being considered as a dividend under Section 2(22)(e) of the Income Tax Act, 1961?

Facts

1. Ravi Agarwal (the assessee) received a loan of Rs. 21.20 lacs from Sarnath Finance Limited (SFL) during the assessment year 2003-04.

2. Agarwal is a shareholder of SFL.

3. The Assessing Officer added this amount to Agarwal's income, considering it as a dividend under Section 2(22)(e) of the Income Tax Act.

4. The case went through various stages of appeal, ultimately reaching the High Court.

5. The Income Tax Appellate Tribunal had previously made a decision based on SFL's balance sheet and the assessee's stance in interest tax proceedings.

Arguments

Assessee's (Ravi Agarwal) Arguments:

1. The loan received from SFL should be exempt under clause (ii) of Section 2(22)(e) as it was made in the ordinary course of business, and lending money constitutes a substantial part of SFL's business.

Tax Department's Arguments:

1. The loan should be treated as a dividend under Section 2(22)(e) of the Income Tax Act.

2. Based on SFL's balance sheet, the company's transactions were more in the nature of hire purchase rather than money lending.

Key Legal Precedents

1. Section 2(22)(e) of the Income Tax Act, 1961: This section defines what constitutes a "dividend" for tax purposes, including certain loans or advances made by a company to its shareholders.

2. The case of Commercial Motors Finance Ltd. (mentioned but details not provided in the given context)

Judgement

1. The court found that the Tribunal had not adequately considered the nature of SFL's transactions before determining whether lending money was a substantial part of its business.

2. The court decided it would be inappropriate to decide on the applicability of the exclusionary clause (ii) of Section 2(22)(e) without a thorough examination of facts.

3. The case was restored back to the Income Tax Appellate Tribunal for a fresh decision on the applicability of Section 2(22)(e).

4. The court left open all rights and contentions of the parties to be argued before the Tribunal.

FAQs

1. Q: What is Section 2(22)(e) of the Income Tax Act about?

  A: It defines certain payments, including loans or advances from a company to its shareholders, as dividends for tax purposes, with some exceptions.

2. Q: Why did the court send the case back to the Tribunal?

  A: The court felt that the Tribunal hadn't adequately examined whether lending money was a substantial part of SFL's business, which is crucial for determining the applicability of Section 2(22)(e).

3. Q: What does "substantial part of the business" mean in this context?

  A: The judgment doesn't provide a clear definition, which is part of why the case was sent back for further examination. It's a key point that needs to be determined based on the specific facts of the company's operations.

4. Q: Does this judgment set a precedent for similar cases?

  A: While it doesn't set a definitive precedent on the interpretation of Section 2(22)(e), it does emphasize the need for a thorough examination of a company's business nature in such cases.

5. Q: What happens next in this case?

  A: The case will go back to the Income Tax Appellate Tribunal, where both parties can present their arguments again, focusing on whether lending money is a substantial part of SFL's business.

The appeal by the assessee arises from an order of the Income Tax Appellate Tribunal dated 2 May 2014 for AY 2003-04. Prior thereto, the Tribunal had, during the pendency of the appeal, declined to accept certain additional grounds raised by the assessee, by an order dated 25 July 2012. The assessee has questioned both the order declining permission to raise the additional grounds as well as the order on merits.

The learned counsel for the assessee has submitted that the questions of law, as framed, have not been properly formulated and on his request, we allow him to carry out an amendment in terms of the draft tendered for the purpose of correcting the substantial questions of law. The amendment may be carried out forthwith. As amended, the questions of law read as follows:- “(A) Whether on facts and in the circumstances of the case, it was proper for the Tribunal, while adjudicating additional grounds of appeal, to cast an obligation on the assessee, to establish a negative fact, through shifting of onus, which otherwise, was the onus of the Revenue; i.e. establishing the proof of issuance/service of jurisdictional notice under section 143(2) of the Act. 1. the Tribunal.

(B) Whether provisions of section 292BB were applicable to the present proceeding, especially since the present proceedings stood concluded prior to 1.4.2008 as already held by this Hon'ble Court in the case of CIT Vs. Mohd Khaleeq.

(C) Whether the term lending of money includes hire purchase, transactions, for the purpose of Section 2(22)(e) of the Act.

(D) Whether in view of the decision of this Hon'ble High Court in Commercial Motors Finance Ltd., M/s SFL should be treated as an entity engaged in money lending business and hence loan/advance to the assessee, was made in the ordinary course of its business and his, hence outside the ambit of section 2(22)(e) of the Act.

(E) Whether on a true and proper interpretation of section 2(22)(e), it is the Main Objects of the company, contained in the memorandum of association, that determine, what business of the company would constitute the "Substantial Part of Business" of the company.”

We are not impressed with the first limb of the submission of the assessee in regard to the correctness of the order of the Tribunal dated 25 July 2012, declining permission to raise additional grounds. The assessee sought to raise the ground that the notice under Section 143(2) of the Income Tax Act, 19612 was not served in accordance with the provisions contained in Section 282 of the Act and hence the order of assessment under Section 143(3) of the Act was null and void. Hence, it was sought to be urged that the assessee ought to be treated as having been assessed on the returned income by the intimation under Section 143(1) of the Act. 2. the Act

The assessee did not raise the issue that he was not served with a notice under Section 143(2) of the Act during the course of the assessment proceedings. The ground was raised for the first time in the appeal before the Tribunal, nearly five years after the appeal was filed, which is not in dispute.

Hence, it is clear that the ground was purely an afterthought and had no substance whatsoever. We are, therefore, not inclined to accept the submission on that aspect of the matter.

The principal submission which has been raised before the Court pertains to the applicability of the provisions of Section 2(22)(e) of the Act. During the course of the year relevant to the assessment year, the assessee received an amount of Rs.21.20 lacs by way of a loan from a company by the name of Sarnath Finance Limited3

. The assessee is a shareholder of SFL.

The Assessing Officer made an addition to the extent of Rs.21.20 lacs which formed the bone of contention. Section 2(22)(e) of the Act, insofar is material, defines the expression 'dividend' in an inclusive manner as follows:-

"2(22) "dividend" includes-

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part 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 entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;

but "dividend" does not include-

(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company."

Learned counsel appearing on behalf of the assessee states that there is no dispute about the applicability of the aforesaid ingredients and the aforesaid provision, save and except for clause (ii). According to the assessee, he had received an advance or loan as a shareholder from the company in its ordinary course of business and the lending of money constitutes a substantial part of the business of the company.

The Tribunal has basically considered two aspects. Firstly, the Tribunal relied on the balance sheet of the assessee which indicates that the assessee had obtained secured loans from the Bank of Baroda against the hypothecation of stock (Schedule-3). Moreover, Schedule-8 to the balance sheet indicates stock on hire purchase. Only on this basis, the Tribunal held that the hire purchase transactions conducted by SFL are not in the nature of a loan but SFL owns the assets which are given on hire by it. The second aspect which was noted was that, in the course of the interest tax proceedings before the Commissioner of Income Tax (Appeals), the assessee had taken the stand that the amount received by SFL were hire charges and not interest income and would, therefore, not be liable for interest tax.

Insofar as the second aspect is concerned, learned counsel appearing on behalf of the assessee has placed on the record an order of the Tribunal dated 9 June 2005 (for AYs 1996-97, 1997-98, 1999-2000 and 2000-01), whereby the matter has been restored back to the Assessing Officer. Insofar as the first aspect is concerned, the Tribunal has not considered the nature of the transactions of the company before determining as to whether, within the meaning of exclusionary clause (ii) of Section 22(2)(e) of the Act, the lending of money is a substantial part of the business of the company. According to the assessee, the exclusionary clause would be attracted because the lending of money constitutes a substantial part of the business of the company.

In our view, it would not be possible to decide the issue of the applicability of the exclusionary clause merely on an a priori basis and it would be appropriate to restore the proceedings back to the Tribunal for a decision afresh.

In the circumstances, insofar as the questions A and B are concerned, no substantial questions of law would arise. However, in regard to the applicability of the provisions of Section 2(22)(e) of the Act, we restore the proceedings back to the Tribunal for a decision afresh. We leave open all the rights and contentions of the parties to be urged before the Tribunal. The appeal is, accordingly, disposed of. There shall be no order as to costs.

Order Date :- 3.11.2014

VMA

(Dr. D.Y. Chandrachud, C.J.)

(P.K.S. Baghel, J.)