Subject: M/s Deeksha Holdings Pvt. Ltd. and M/s Jyotsana Holdings Pvt. Ltd. The ITAT disagreed with the findings of facts rendered
Referred Sections:
Section 2(22)(e) of the Income Tax Act,
Section 43B of the Income Tax Act, 1961?
Section 45-1A of the Reserve Bank of India Act,
Section 2(22)(e) of the Act.
Section 2(24)(x) of the Act
Section 36(1)(va) of the Act
Section 43-B of the Act
Section 36(1)(va) of the Act.
Section 36(1)(iii) of the Act
Referred Cases / Judgments:
Income Tax vs. Bharat Hotels Limited, ITA 62 of 2007
India Cements Ltd. vs. Commissioner of Income Tax, 60 ITR 52
Income Tax vs. Parle Plastics Ltd., 332 ITR 63 (Bom).
$~10
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 06.09.2018
+ ITA 271/2005
COMMISSIONER OF INCOME TAX DEL ..... Appellant
Through: Mr. Raghvendra Singh, Advocate.
versus
M/S BHARAT HOTELS LTD. ..... Respondent
Through: Mr. Ajay Vohra, Sr. Advocate with
Mr. Gaurav Jain, Mr. Prakash
Kumar and Mr. Aniket D. Agrawal,
Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A. K. CHAWLA
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1. Three questions of law arise in this case:-
"(1) Whether the Income Tax Appellate Tribunal was correct
in law and on the facts of the case in deleting the addition of
Rs.1.2 crores made by the Assessing Officer as deemed
dividend under Section 2(22)(e) of the Income Tax Act,
1961?
(2) Whether the payment of provident fund and employees
state insurance dues deposited by the Assessee within the
grace period would qualify for deduction under Section 43B
of the Income Tax Act, 1961?
(3) Whether the Income Tax Appellate Tribunal was correct
in law in deleting the disallowance of Rs.74,01,771/- on the
ground that it was a revenue expenditure?"
ITA 271/2005 Page 1 of 8
Question No.1
2. The facts here are that the Assessing Officer (hereafter ,,AO)
brought to tax a total amount of `1.2 crores for the relevant Assessment
Year (A.Y.) 2000-01 holding that these denoted amounts as deemed
dividend under Section 2(22)(e) of the Income Tax Act, 1961 (hereafter
,,the Act). The AO rejected the assessees contention that these amounts
were not covered by the exceptions stipulated by the statute i.e. proviso
(ii) to Section 2(22)(e) of the Act. The CIT(A) confirmed the additions.
Upon the assessees appeal, the Income Tax Appellate Tribunal (hereafter
,,ITAT) re-apprised the records and found that the amounts were received
from two companies M/s Deeksha Holdings Pvt. Ltd. and M/s Jyotsana
Holdings Pvt. Ltd. The ITAT disagreed with the findings of facts
rendered by the lower authorities to the effect that since the business of
the said lender companies did not involve substantial money lending, the
amounts did not fall within the proviso (ii) to Section 2(22)(e) of the Act
but rather were taxable as deemed dividend.
3. Learned counsel for the Revenue contended that a bare look at the
pattern of income and investments of the two lending companies would
show that money lending constitutes a fraction of their activities. With
reference to M/s Deeksha Holdings Pvt. Ltd. it was pointed out that the
total income from interest was only to the tune of 8.18% of the
investments. Likewise, it was stated that of the total investments, lending
constituted only 18.77% of M/s Deeksha Holdings Pvt. Ltd.s business.
ITA 271/2005 Page 2 of 8
As far as M/s Jyotsana Holdings Pvt. Ltd.s investments went, the AO had
noticed that the lending business was to the tune of about 32%. Counsel
for the Revenue relied upon the circular of the Reserve Bank of India,
which spells out as to what constitutes a "Non -Banking Financial
Company (NBFC)" in terms of Section 45-1A of the Reserve Bank of
India Act, 1934. It was urged that since in this case the business of money
lending constituted less than 50% and was in any case did not constitute
the pre-dominant business of the lending companies, the amounts
received, could not be excluded by virtue of proviso (ii) to Section
2(22)(e) of the Act.
4. The assessee in this case as the record reveals, sought exclusion
from the treatment of the income as deemed dividend under Section
2(22)(e) of the Act stating that the loan received was from two companies
(M/s Deeksha Holdings Pvt. Ltd. and M/s Jyotsana Holdings Pvt. Ltd.),
which were concededly NBFC. The record would show that these two
companies were also engaged in other activities, some of which constitute
non-banking financial activities, such as investments, lease funding in
different sectors etc. Apparently, some part of the activities was also
investments in paintings and commodities.
5. In this Courts opinion the ITATs findings cannot be faulted given
that almost 19% of the investments of one lender and over 30% of the
business activities of the other lending company, fell within the
expression mentioned in proviso (i) to Section 2(22)(e) of the Act. The
test of substantiality, in our opinion, is not confined to what the RBI
declares it to be, generally. There can be NDFC and NBFC i.e. an entity
ITA 271/2005 Page 3 of 8
which may carry out more than one financial non-banking activity. In the
present case too these companies carry on more than one non-banking
financial activity up to 3 or 4. In such event, the 50% test to benchmark
whether the amounts fall within or outside the 2 nd proviso to Section
2(22)(e) of the Act would fail. This Court notices that this view is
reflected in the judgment of the Bombay High Court in Commissioner of
Income Tax vs. Parle Plastics Ltd., 332 ITR 63 (Bom).
The Court had then held as follows:-
"As rightly observed in Stroud's Judicial Dictionary, it is not
possible to give any fixed definition of the word "substantial"
in relation to "a substantial business of a company". 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. 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. Sometimes a portion which contributes a
substantial part of the turnover, though it contributes a
relatively small portion of the profit, would be a substantial
part of the business. Similarly, a portion which relatively a
small as compared to the total turnover, but generates a large,
say more than 50 per cent, of the total profit of the company
would also be a substantial part of its business. Percentage of
turnover in relation to the whole as also the percentage of the
profit in relation to the whole and sometimes even percentage
of a manpower used for a particular part of business in relation
to the total man power or working force of the company would
be required to be taken into consideration. Employees of a
company are now called its "human resources" and, therefore,
the percentage of "human resources" used by the company for
carrying on a particular division of business may also be
required to be taken into consideration while considering
whether a particular business forms a substantial part of its
ITA 271/2005 Page 4 of 8
business. Undisputedly, the capital employed by a company for
carrying on a particular division of its business as compared to
the total capital employed by it would also be relevant while
considering whether the part of the business of the company
constitutes "substantial part of the business" of the company."
6. In view of the above discussion, the first question of law is
answered against the Revenue.
Question No.2
7. The issue here concerns the interplay of Section 2(24)(x) of the Act
read with Section 36(1)(va) of the Act alongside provisions of the
Employees Provident Funds and Miscellaneous Provisions Act, 1952
(especially Regulation 38 of the Employees Provident Funds Scheme,
1952) and the provisions of the Employees State Insurance Act, 1948.
The AO had brought to tax amounts which were deducted by the
employer/assessee from the salaries and wages payable to its employees,
as part of their contributions. It is not in dispute that the employers right
to claim deductions under the main part of Section 43-B of the Act is not
an issue. The question the AO had to then decide was whether the
amounts deducted from the salaries of the employees which had to be
deposited within the stipulated time (in terms of notification/circular dated
19.03.1964 which was modified on 24.10.1973), as far as the EPF
contribution went and the period of three weeks as far as the ESI
contributions went. The AO made a tabular analysis with respect to the
contributions deducted and actually deposited. The cumulative effect of
notifications under the Employees Provident Funds Act, 1952 and the
ITA 271/2005 Page 5 of 8
Employees State Insurance Act, 1948 was that in respect of the EPF
Scheme contributions the deductions were to be deposited within 15 days
of the succeeding wage period with a grace period of 5 days; for ESI
contributions the deposit with the concerned statutory authority had to be
made within three weeks of the succeeding wage month/period. The CIT
in this case confirmed the additions made by the AO based on the entire
amounts that were disallowed. The ITAT however granted complete
relief.
8. Having regard to the specific provisions of the Employees
Provident Funds Act and ESI Act as well as the concerned notifications
which granted a grace period of 5 days (which appears to have been late
withdrawn recently on 08.01.2016), we are of the opinion that the ITATs
decision in this case was not correct. The assessee undoubtedly was
entitled to claim the benefit and properly treat such amounts as having
been duly deposited, which were in fact deposited within the period
prescribed (i.e. 15 + 5 days in the case of EPF and 21 days + any other
grace period in terms of the extent notification). As far as the amounts
constituting deductions from employees salaries towards their
contributions, which were made beyond such stipulated period, obviously
the assessee was not entitled to claim the deduction from its returns.
9. In view of this discussion, the Revenues appeal is partly allowed.
The AO is directed to examine the contributions made with reference to
the dates when they were actually made and grant relief to such of them
which qualified for such relief in terms of the prevailing provisions and
ITA 271/2005 Page 6 of 8
notifications. We also clarify that the assessee would be entitled to
deduction in terms of Section 36(1)(va) of the Act.
Question No.3
10. On this issue we notice that three amounts were sought to be
disallowed by the AO. The first item pertains to expenditure incurred by
the assessee for the construction of a hotel in Sri Nagar. In appeal the CIT
noticed that the assessee had conceded to a ratio of 75%:25%, as
constituting the capital and Revenue streams and confirmed such
treatment. The Revenue appealed against this decision to the ITAT which
dismissed it, by a separate order of 02.06.2006. That order was the
subject matter of an appeal (by the Revenue) being Commissioner of
Income Tax vs. Bharat Hotels Limited, ITA 62 of 2007. In the judgment
of 31.07.2015 the ITATs decision was upheld. As a conseq uence, the
question of law is answered in favour of the assessee and against the
Revenue (which has appealed against the rejection in the appeal filed by
the assessee).
11. So far as the other two amounts noting the expenditure on account
of salary (which the assessee claimed was expenditure towards salary
which was claimed as a deduction and the interest paid for loans, that
were used for creating infrastructure in Mumbai and Goa; the ITAT had
granted complete relief to the assessee. This Court finds no infirmity with
the treatment of salaries as Revenue expenditure. As far as the interest
expenditure goes, this Court notices that the period in question is covered
by the provisions of Section 36(1)(iii) of the Act as it stood prior to its
amendment in 2003. In respect of that provision, the law as it existed at
ITA 271/2005 Page 7 of 8
the relevant time i.e. in A.Y. 2000-01, was governed by India Cements
Ltd. vs. Commissioner of Income Tax, 60 ITR 52 which held that there
can be no distinction between expenditure of one kind or the other, when
it came to borrowed funds and the treatment of interest thereon.
Consequently, this question of law has to be and is answered against the
Revenue and in favour of the assessee.
12. For the above reasons, save and except the partly relief granted in
question no.2 the appeal is dismissed.
S. RAVINDRA BHAT, J
(JUDGE)
A. K. CHAWLA, J
(JUDGE)
SEPTEMBER 06, 2018
nn
ITA 271/2005 Page 8 of 8
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