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2015 (3) TMI 1154 - AT - Income TaxDeemed dividend u/s. 2(22)(e) - Held that - we find that the liquid funds available with the assessee were ₹ 31,24,44,463/- and assessee had granted loans during the year amounting to ₹ 11,26,65,003/-, which works out to 36.06% of total liquid funds available. Hence, it can be safely concluded that the lending activity is substantial part of the business of M/s. JAFPL from the factual position as stated herein above from the angle of funds deployment criterion. The provisions of section 2(22)(e) of the Act cannot be made applicable for inter corporate deposits as received by the assessee. Thus in respect of expression substantial part of the business and the alternative argument of the assessee that what was received by the assessee from M/s. JAFPL is only in the nature of inter corporate deposits and not loans and advances. Hence, the provisions of section 2(22)(e) of the Act cannot be made applicable in the facts of the case, we hold that no addition could be made in the hands of the assessee u/s. 2(22)(e) of the Act. - Decided in favour of assessee Disallowance u/s. 14A - Held that - We find that no satisfaction was recorded by the ld.AO in terms of Rule 8D(1) of the IT Rules, 1962, which is mandatory as in the instant case, the assessee had disallowed a sum of ₹ 15,451/- voluntarily in the return of income u/s. 14A and without giving a categorical finding how the said figure is incorrect having regard to the accounts of the assessee, the ld.AO cannot resort to directly adopt the Rule 8D(2) and make disallowance thereon. We find that both the ld. AO as well as the ld. CIT(A) had not addressed this aspect, which is crucial and it goes to the root of the matter. We hold that without recording satisfaction in terms of rule 8D(1), the ld.AO cannot directly apply the Rule 8D(2) of the I.T Rules 1962. Thus we have no hesitation in directing the ld. AO to delete the addition made on this count u/s. 14A of the Act - Decided in favour of assessee
Issues Involved:
1. Deemed Dividend under Section 2(22)(e) of the Income Tax Act. 2. Disallowance under Section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deemed Dividend under Section 2(22)(e): The primary issue in this appeal was whether a sum of Rs. 1,09,15,000/- received by the assessee from its group company, M/s. Jet Age Finance Pvt. Ltd (JAFPL), should be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act. The assessee, holding 11.81% shares in JAFPL, received this amount as a loan and repaid it within the same financial year. The Assessing Officer (AO) argued that since JAFPL had substantial accumulated profits and did not declare dividends, the loan should be treated as deemed dividend. However, the assessee contended that JAFPL, being a Non-Banking Financial Company (NBFC) engaged in the money lending business, falls under the exception clause of Section 2(22)(e) as lending is a substantial part of its business. The Tribunal examined the provisions of Section 2(22)(e) and the meaning of "substantial part of the business," noting that this term is not defined in the Income Tax Act. Referring to various judicial precedents, including the Hon'ble Bombay High Court's decision in CIT Vs. Parle Plastics Limited, the Tribunal concluded that "substantial" does not necessarily mean "majority" but indicates a significant portion of the business. JAFPL's activities, including granting loans and advances amounting to more than 30% of its capital, were considered substantial. The Tribunal also noted that the loans were frequently received and repaid, indicating a current account relationship rather than a one-off transaction. Additionally, the Tribunal considered the argument that the amounts received were inter-corporate deposits rather than loans, supported by various judicial decisions distinguishing between loans, advances, and deposits. Based on these findings and the judicial precedents, the Tribunal held that the provisions of Section 2(22)(e) were not applicable, and no addition could be made in the hands of the assessee under this section. Consequently, the revenue's appeal on this ground was dismissed. 2. Disallowance under Section 14A: The second issue involved the disallowance made by the AO under Section 14A of the Income Tax Act, which pertains to expenses incurred in relation to income not includible in total income. The assessee had voluntarily disallowed Rs. 15,451/- under Section 14A in its return, but the AO applied Rule 8D(2)(iii) and made a disallowance of Rs. 3,13,008/-. On appeal, the CIT(A) directed the AO to reduce the disallowance to Rs. 87,216/-. The Tribunal noted that the AO did not record any satisfaction regarding the correctness of the assessee's claim as required under Rule 8D(1), which is a mandatory precondition before applying Rule 8D(2). Citing the Hon'ble Jurisdictional Calcutta High Court's decision in CIT, Central II Vs. REI Agro Ltd, the Tribunal emphasized that without such satisfaction, the AO cannot directly apply Rule 8D(2). As the AO and CIT(A) failed to address this crucial aspect, the Tribunal directed the AO to delete the addition made under Section 14A. Consequently, the revenue's appeal on this ground was dismissed, and the assessee's cross-objection was allowed. Conclusion: The appeal of the revenue was dismissed, and the cross-objection of the assessee was allowed. The Tribunal concluded that the sum received by the assessee from JAFPL did not constitute deemed dividend under Section 2(22)(e), and the disallowance under Section 14A was not justified due to the lack of recorded satisfaction by the AO.
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