The assessee preferred an appeal against the order passed by the National Faceless Appeal Centre for Assessment Year 1995–96. At the outset, the Tribunal condoned a delay of 440 days in filing the appeal, accepting the assessee’s explanation that the delay was caused due to age-related chronic ailments and physical limitations, and that there was no deliberate or negligent inaction.

On merits, the Tribunal noted that the case was in the second round of litigation. In the first round, the Coordinate Bench of the Tribunal had directed the Assessing Officer to verify, on the basis of the memorandum of association and the financial working of the lender company, whether the company from which the assessee had borrowed funds was engaged in the business of lending money. The Assessing Officer was also directed to decide the issue in light of the judgment of the Hon’ble Bombay High Court in CIT v. Parle Plastics Pvt. Ltd.

Despite the said directions, the authorities below reiterated the addition of ₹9,05,495 by treating the loan received by the assessee as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The addition was sustained mainly on the reasoning that the principal activity of the lender company, M/s. Royal Antibiotics and Investment Pvt. Ltd., was manufacturing and sale of finished goods, and that the interest income from loans was comparatively insignificant when viewed against the company’s total turnover.

The assessee, however, contended that as per the memorandum of association, money lending was one of the objects of the lender company. It was submitted that during the relevant year, the company had disclosed interest income of ₹9,18,896, including interest received from the assessee, and that loans and advances constituted more than 50% of the total assets of the company. The assessee further argued that the correct test was not to compare sales turnover with interest income, but to examine the profitability and scale of lending activity independently to determine whether lending was a substantial and routine business of the company.

The Tribunal observed that the Assessing Officer had failed to carry out the verification as directed earlier and had instead relied on gross turnover figures without analysing the actual profit earned from lending activities and the financial deployment of funds. It was noted that one of the main objects of the lender company was money lending, and therefore, the Assessing Officer was required to examine whether the lending activity constituted a substantial part of the company’s business in terms of its objects, assets deployed, and financial results.

In view of these observations, the Tribunal held that the assessee’s contentions were prima facie plausible and that the issue required fresh factual verification. Accordingly, the Tribunal remanded the matter to the file of the Assessing Officer for adjudication afresh, after examining the memorandum of association, financial statements, and the nature and extent of lending activities, in accordance with law.

The appeal was thus allowed for statistical purposes.

Source Link- https://itat.gov.in/public/files/upload/1768375418-st2bjb-1-TO.pdf

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