ORDER
Pramod Kumar A.M.
In this revenue’s appeal, which is directed against Commissioner (Appeals)’s order dated 28-3-2000 for the assessment year 1997-98, following grievances have been raised :
“On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the disallowance of interest paid to HDFC of Rs. 71,939 which was made by the assessing officer on the ground that the payment was made due to infraction of law.
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 76,74,436 being deemed dividend under section 2(22)(e) of the Act, on account of the loans received from Phoenix Distributors (P) Ltd.”
2. As far as first grievance of the revenue is concerned, the impugned disallowance was made by the assessing officer by making rather cryptic observation as follows :
“The assessee has paid Rs. 45,32,422 as interest to HDFC. Out of this, Rs. 71,939 is penal interest. Penal interest is not allowable expenditure, and, hence, I disallow Rs. 71,939 out of interest paid and add back the same to total income.”
In appeal, the Commissioner (Appeals) deleted the disallowance so made by the assessing officer by taking note of assessee’s contention that “there is no infraction of law involved and it is a case of additional tax levied by HDFC for some contractual delays” and observing that “since there is no infraction of law, the additional interest, though termed as penal interest, is clearly a normal incidence of business”. Revenue is aggrieved and in appeal before us.
3. Having heard the rival contentions and having perused the material on record, we see no reasons to disturb the well reasoned stand of the Commissioner (Appeals). As there is nothing on record to suggest that the interest paid as penal interest in on account of infraction of law, and as the penal interest is on account of contractual delays, the disallowance has rightly been deleted by the Commissioner (Appeals). We confirm and approve his action in doing so. The grievance raised by the revenue is devoid of any merits.
4. Ground No. 1 is thus dismissed.
5. Coming to the second grievance raised by the revenue, the relevant material facts are like this. During the course of assessment proceedings, the assessing officer noticed that the assessee had taken a loan of Rs. 1,40,00,000 from Phoenix Distributors Private Limited (hereinafter referred to as the PDPL). It was also noted that one Shri R.M. Goculdas is holding more than 10% equity of PDPL and is also holding more than 20% shares of the assessee company. The assessee accepted the factual position regarding shareholding pattern and applicability of section 2(22)(e) of the Act from that point of view, but it was contended by the assessee that in view of the fact that the main business of the assessee company was money lending, the provisions of section 2(22)(e) are not applicable on the facts of this case. The assessing officer rejected this contention for various reasons, including,-(a) the receipts on account of interest are only 15.56% of the gross receipts; (b) out of 445 bank transactions that the assessee had in the whole year, only one bank transaction pertained to the money lending business; (c) there is no mention about money lending business, as one of the businesses of the PDPL, in the assessment order for the preceding year; and (d) PDPL was not assessed to interest tax. It was thus held that the provisions of section 2(22)(e) are applicable on the facts of this case and to the extent loans received from PDPL are covered by ‘accumulated profits’ the same shall be taxable in the hands of the assessee company as ‘deemed dividend’. The next question then was quantification of the ‘deemed dividend’ taxable in the hands of the assessee. It was contended by the assessee that the capital gain exempt under section 54E was Rs. 1,19,13,657 and capitalization of profits by issuance of bonus shares was Rs. 1,19,00,000 which are to be excluded from accumulated profits. The assessing officer rejected this claim and held that both the deductions cannot be made simultaneously. It was held that out of tax exempt receipt of Rs. 1,19,13,657, an amount of Rs. 1,19,00,000 was already capitalized. The remaining accumulated profit was Rs. 76,88,093, from which a further amount of Rs. 13,657 being balance tax exempt gain, was reduced. The accumulated profit was thus worked out to Rs. 76,74,436 which was added back to assessee’s income under section 2(22)(e) as ‘deemed dividend’. Aggrieved by the addition so made by the assessing officer, the assessee carried the matter in appeal before the Commissioner (Appeals). The Commissioner (Appeals) was of the view that the assessing officer was not justified in comparing gross interest receipts with gross amount of other receipts; that is to be really seen is the income from the respective heads, and, if that is the criterion, the interest income of the assessee is more than other profits of the assessee. It was also observed ‘that more than 60% of the assets of the assessee are deployed in money lending. The Commissioner (Appeals) also held that even a single transaction constitutes business, that this has to be viewed in the context of outstanding loan position and the organized manner in which this activity has been carried out over the years, that non-disclosure of such business in the income-tax return and default in payment of interest tax cannot have any bearing on the merits of this case and that it is sufficient, for coverage by the exclusion clause in section 2(22)(e), that money lending business of the lender should be one of significant’, ‘sizeable’ or ‘noteworthy’ businesses of the lender. The Commissioner (Appeals) accordingly held that money lending business formed a substantial part of PDPL’s business, taking the present case outside the ambit of section 2(22)(e). The addition was thus deleted. Revenue is aggrieved and is in appeal before us.
5.1 We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
6. We deem it appropriate to reproduce the relevant legal provision, contained in section 2(22)(e) of the Income Tax Act, which is 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 31-5-1987, 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;”
7. There is no dispute about the fact that the case of the assessee meets the conditions laid down under section 2(22)(e) and assessee’s only defence about non-taxability as a deemed dividend is that the case is covered by the second exemption, i.e. Clause (it), inasmuch as the money lending activity constituted substantial business activity of the PDPL. The Commissioner (Appeals) finally upheld this contention and it was on this basis that the taxability of deemed dividend under section 2(22)(e) was deleted.
8. In our considered view, in order to satisfy the conditions laid down by second exception to section 2(22)(e), not only that the company lending money should have substantial business activity of ‘money lending’ but also the loan or advance in question should be given ‘in the ordinary course of business’. It is only when these twin conditions are satisfied that the case can be said to be covered by the aforesaid exception. In the statement of facts before the Commissioner (Appeals), the assessee has narrated the relevant facts as follows :
“During the year ended 31-3-1997, the appellant company had received loan of Rs. 140 lakhs from Phoenix Distributors Private Limited. Phoenix Distributors Private Limited is a company carrying on the trading and money lending business. This is evident from the continuity, regularity and volume of money lending transactions. interest earned forms a sizeable portion of PDPL’s taxable income. PDPL has given loans to various associate companies and is earning substantial interest on these loans and advances. It was therefore contended before the learned A.C. that section 2(22)(e) does not apply in respect of loans /advances given by the said PDPL.”
It is thus clear that, even by assessee’s own admission, the said business of the PDPL extended only to giving loans to “various associate companies” and earning interest income therefrom. It is difficult for us to comprehend as to how giving loans and advances to associated concerns can be construed as an independent ‘business’. This could be a profitable way to employ the surplus funds within the group and to help the group concerns or otherwise associated concerns but it cannot constitute business on the given set of facts. There is nothing on the record to show that it is an organized business activity with a view to make profits. The quantum of income, in the present context, is not of much significance either. The question of quantum becomes relevant only when it is established that money lending is a business in the first place. Learned counsel’s reliance on the Memorandum of Association is not of much help either; just because a clause is set out in the memorandum of association of the company, which are often as widely worded as possible, does not mean that the business covered by that clause has actually been carried out. Learned Commissioner (Appeals)’s reliance on the Hon’ble Supreme Court’s judgment in the case of Commissioner of Income Tax v. P.K.N. Co. Ltd. (1966) 60 ITR 65 (SC) is misplaced inasmuch as this judgment can infact be an authority for the proposition that mere existence of an enabling clause to do a business does not mean that such business has actually been carried out, because, in this case, Their Lordships have observed that “the nature of transaction must be determined on a consideration of all the circumstances, and the fact that this transaction is within the powers (as given by the Memorandum of Association) is relevant but has, standing alone, not much significance”. On the given set of facts, it is not possible to hold that the assessee-company was engaged in the business of lending of money particularly as, even according to the assessee, the lending is within the group concerns. If profit was the motive of making these loans and advances, which is a sine qua non for any business activity, restricting the transactions to transactions with associated concerns seems totally out of place. Even if we are to assume that it was a business, it does not help the case of the assessee because a solitary transaction in the year, irrespective of the size of the said transaction, cannot be said to constitute ‘substantial business’ of PDPL. One of the argument of the assessee is that out of total assets of Rs. 4.15 crores, the sum employed in giving loans and advances to group concerns is Rs. 2.63 crores which constitutes 63% of the total assets, and for this reason, it should be considered as substantial business of PDPL. This plea is also devoid of any substance. If that be any criterion, in a case where cash and bank balances of a business constitute say 50% of the assets side total, the main business of the company can be claimed to be keeping cash in hand and bank. At the cost of repetition, we may mention that for the purpose of deciding what is main business of an assessee, we have to see which are the major organized activities of the assessee for earning profits. It is also noteworthy that PDPL was not assessed to interest tax and rightly so because, on the facts of the case, it could not have been said to have been engaged in the business of money lending. The assessment records of PDPL, which are essentially based on the information supplied by PDPL, also do not show that PDPL was engaged in the business of money lending. The assessee’s case fails on these tests learned counsel has referred to the benchmark of 20% income, to decide whether or not it is covered by the expression ‘substantial’, but these benchmarks in section 2(22)(e) and 40A(2)(b) are in altogether different context of determining ‘substantial interest’. The quantum of receipts from the interest is also less than 16% which can hardly be termed as substantial. Keeping all these factors in mind, we are of the considered view that the Commissioner (Appeals) did err in coming to the conclusion that assessee’s case was covered by second exception to section 2(22)(e). We, therefore, vacate the relief given by the Commissioner (Appeals).
9. Learned counsel contends that even if revenue succeeds in appeal, it still makes no difference to the assessee because ‘accumulated profits’ are negative figures. In the computation that he has filed, he has reduced a figure of Rs. 1,22,95,000 on the ground that this amount was added back as deemed dividend in the earlier years and the same could not be taxed again now. In response to our query, however, he admits that -the addition so made was subsequently deleted in appellate proceedings but then he is unable to file the relevant orders. This plea is devoid of any substance. When the addition made in the preceding year has already been deleted, there cannot be relevance of the same in determining ‘deemed dividend’ for this year. In principle, we agree that in case the accumulated profits of PDPL are already taxed as ‘deemed dividend’ in the hands of the assessee to that extent, addition cannot be made again, but we do not think that situation exists here. The addition made is perhaps already deleted and the matter is settled at that. However, since the complete facts in respect thereof are not available to us, we have to remit this matter to the file of the assessing officer for quantification aspect. Learned counsel has also contended that capital gains considered in the past as exempt are required to be reduced from the accumulated profits, but then as we arc remitting the matter to the file of the assessing officer for quantification of deemed dividend, we also consider it appropriate to direct the assessee to place all the relevant facts, with supporting evidences and authorities relied upon, before the assessing officer who will decide on all aspects related to quantification of dividend, including this aspect of the matter, by way of a speaking order in accordance with the law and after giving due and fair opportunity of hearing to the assessee.
10. Ground No. 2 is thus allowed for statistical purposes in the terms indicated above.
11. In the result, the appeal is partly allowed for statistical purposes in the terms indicated above.