Case: Commissioner of Income Tax Vs. Parle Plastics Limited &amp; Another

exceed 50% of the whole. In our view, the expression "substantial part" does not connote an idea of being the "major part" or the part that constitutes majority of the whole. If the legislature really intended that more than 50% of the business of the lending company must come from the business of lending, nothing prevented the legislature from using the expression "majority of business". If the legislature at all intended that a particular minimum percentage of the business of a lending company should come from the business of lending, the legislature could have specifically provided for that percentage while drafting clause (ii) of Section 2(22) of the Act. The legislature had deliberately used the word "substantial" instead of using the word "major" and/or specifying any percentage of the business or profit to be coming from the lending business of the lending company for the purpose of clause (ii) of Section 2(22) of the Act. We would give a an illustration to ascertain the meaning of the expression "substantial business" or "substantial income" of a company. In the modern days, large number of companies do not restrict to one or two businesses. They carry on numerous activities and carry on numerous businesses and have numerous business divisions. Let us take a case of a first company which has 3 divisions of works consisting of three different types of business. Turn over as well as the profit of the first division is 40%; turn over and profit of second division is 30% and the turn over and profit of the third line of business is 30%. In the case of this company no part of the business has turn over exceeding 50% and no part of the business company generates profit of more than 50% of the total. In such a case can it be said that none of the businesses of the said company is a substantial business of the company. In our view not. The first business which constitutes 40% of the turn over and contributes 40 % to the profit would be the single largest part of the business of the company, the second and third divisions of the business, each of which contributes 30% of the turn over as well as profit of the company, though not the major and not even single largest part of the business of the company, would still be a substantial part of the business of the company, because if any part of the three divisions of the business of the company was to be closed down, that would result in loss of turn over and/or business of 30%, ordinarily no company would regard such part of the business as insignificant. As rightly observed in Strouds 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 substantial part of the turn over, though it contributes a relatively small portion of the profit, would be 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 % of the total profit of the company would also be substantial part of its business. Percentage of turn over 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 substantial part of its 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.12. Applying these tests to the present case, we do not find that the ITAT has committed any error in coming to the conclusion that lending of money was a substantial part of the business of AMPL. The ITAT has noted that 42% of the total assets of AMPL as on 31.3.1996 and 39% of the total assets of AMPL as on 31.3.1997 were deployed by it by way of total loans and advances. By no means, the deployment of about 40% of the total assets into the business of lending could be regarded as an insignificant part of the business of AMPL. The ITAT has also held that the income AMPL had received by way of interest of Rs.1,08,18,036/- while its total profit was Rs.67,56,335/-,. Excluding the income earned by AMPL by way of interest, the other business had resulted into net loss. In our view, the ITAT has taken into consideration the relevant factors and has applied the correct tests to come to the conclusion that lending of money was substantial part of the business of the AMPL. Since lending of money was a substantial part of the business of AMPL, the money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it has to be excluded from the definition of "dividend" by virtue of clause (ii) of Section 2(22) of the Act. Hence, question no.2 is answered in favour of the assessee and against the Revenue.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]Affirming the order of the Tribunal, the Full Bench held that the special deduction under Chapterof the Act, (which includes Sectionhas to be computed on the gross total income determined after all deductions allowable under Sections 30 to 43D of the Act and any device adopted by the assessee to reduce or inflate the profits of eligible business has got to be rejected. Quantum of deduction under Sectionof the Act has to be determined by computing the gross total income from the business after taking into consideration all the deductions allowable under Sections 30 to 43D of the Act. In view of the decision of the Full Bench, question No.1 is answered in favour of the Revenue and against themaking of a provision for an interest which the assessee would ultimately be required to pay to the lender on the money lent cannot be regarded as a payment made by the company to the assessee. As such, the amount of Rs.32,13,367/which represents only the provision made for interest which the assessee was liable to pay to AMPL by way of an interest on the outstanding amount could not be regarded as the payment made by AMPL within the meaning of clause (e) of Section 2(22) of the Act. Only the amount ofwas actually received by the assessee as and by way of loan or advance from AMPL would fall within inclusive clause (e) of the definition of "dividend" appearing in Section 2(22)(e) of theare unable to agree for the reasons indicatedour view, the expression "substantial part" does not connote an idea of being the "major part" or the part that constitutes majority of the whole. If the legislature really intended that more than 50% of the business of the lending company must come from the business of lending, nothing prevented the legislature from using the expression "majority of business". If the legislature at all intended that a particular minimum percentage of the business of a lending company should come from the business of lending, the legislature could have specifically provided for that percentage while drafting clause (ii) of Section 2(22) of the Act. The legislature had deliberately used the word "substantial" instead of using the word "major" and/or specifying any percentage of the business or profit to be coming from the lending business of the lending company for the purpose of clause (ii) of Section 2(22) of theour view not. The first business which constitutes 40% of the turn over and contributes 40 % to the profit would be the single largest part of the business of the company, the second and third divisions of the business, each of which contributes 30% of the turn over as well as profit of the company, though not the major and not even single largest part of the business of the company, would still be a substantial part of the business of the company, because if any part of the three divisions of the business of the company was to be closed down, that would result in loss of turn over and/or business of 30%, ordinarily no company would regard such part of the business as insignificant. As rightly observed in Strouds 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.Applying these tests to the present case, we do not find that the ITAT has committed any error in coming to the conclusion that lending of money was a substantial part of the business of AMPL. The ITAT has noted that 42% of the total assets of AMPL as on 31.3.1996 and 39% of the total assets of AMPL as on 31.3.1997 were deployed by it by way of total loans and advances. By no means, the deployment of about 40% of the total assets into the business of lending could be regarded as an insignificant part of the business of AMPL. The ITAT has also held that the income AMPL had received by way of interest of Rs.1,08,18,036/while its total profit was Rs.Excluding the income earned by AMPL by way of interest, the other business had resulted into net loss. In our view, the ITAT has taken into consideration the relevant factors and has applied the correct tests to come to the conclusion that lending of money was substantial part of the business of the AMPL. Since lending of money was a substantial part of the business of AMPL, the money given by it by way of advance or loan to the assessee could not be regarded as a dividend, as it has to be excluded from the definition of "dividend" by virtue of clause (ii) of Section 2(22) of the Act. Hence, question no.2 is answered in favour of the assessee and against the Revenue.