2013 (12) TMI 1577 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - Held that - Inter-corporate deposits cannot be treated as a loan falling within the purview of section 2(22)(e) of the Act. In view of the decision taken by the coordinate Bench that intercorporate deposits received cannot be considered as a loan or advance so as to visit an assessee with the hazards of section 2(22)(e) of the Act, Ld. CIT(Appeals) was in our opinion justified in deleting the addition Disallowance under section 14A - Held that - CIT(Appeals) after verifying the cash flow statement came to a conclusion that loans raised were not used by the assessee for the purpose of any investment earning dividend income claimed as exempt. Disallowance of interest as stipulated in sub-clause (ii) of clause (2) of Rule 8D can be done only when an assessee has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt. Ld. CIT(Appeals) had given a clear finding after verifying the cash-show that the loan amounts were not used for any investment resulting in the dividend income. Nothing has been brought on record by the Revenue to show that the finding of ld. CIT(Appeals) is not according to facts. We are therefore not inclined to interfere with the order of ld. CIT(Appeals)

Summary

Issues Involved:
1. Deletion of an addition of Rs. 1,60,00,000/- under section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance of expenditure attributable to dividend restricted to 1/2 % of the average value of investment.

Issue-wise Detailed Analysis:

1. Deletion of an Addition of Rs. 1,60,00,000/- under Section 2(22)(e) of the Income Tax Act, 1961:

Facts and Arguments:
The assessee, engaged in trading bullion, declared an income of Rs. 1,62,09,940/- for the relevant assessment year. During assessment proceedings, it was noted that the assessee held shares in M/s. Chandra's Chemical Enterprises (P) Ltd. and M/s. D.L. Jewels (P) Ltd., from which it received unsecured loans of Rs. 1,50,00,000/- and Rs. 10,00,000/- respectively. The Assessing Officer (AO) considered these loans as deemed dividends under section 2(22)(e) of the Act, as the companies had substantial accumulated profits.

The assessee contended these were inter-corporate deposits (ICDs) received in the ordinary course of business, supported by a legal opinion from Dr. Debi Prosad Pal. However, the AO rejected this, stating the assessee was not a Banking or non-Banking Financial Institution and had not taken RBI permission for term deposits. Consequently, an addition of Rs. 1,60,00,000/- was made.

CIT(Appeals) Decision:
The CIT(Appeals) accepted the assessee's argument, noting the sums were for specific periods at specified interest rates and were common in corporate management. Relying on the Delhi High Court's decision in CIT vs. Ankitek Pvt. Ltd., the CIT(Appeals) held that deposits received in the normal course of business could not be considered loans and advances under section 2(22)(e), thus deleting the addition.

Tribunal's Analysis:
The Tribunal reviewed ledger accounts showing the amounts as ICDs with specific interest rates. The Tribunal emphasized that primary entries in the ledger and cash/bank books are more critical than their classification in the balance sheet. It concluded that the amounts received were ICDs and not loans or advances. The Tribunal referenced the case of IFB Agro Industries Ltd., which distinguished between loans/advances and deposits, supporting the view that ICDs do not fall under section 2(22)(e).

Conclusion:
The Tribunal upheld the CIT(Appeals)'s decision, confirming that ICDs are distinct from loans and advances and thus not subject to deemed dividend provisions under section 2(22)(e). The revenue's grounds were dismissed.

2. Disallowance of Expenditure Attributable to Dividend Restricted to 1/2 % of Average Value of Investment:

Facts and Arguments:
The AO applied Rule 8D of the Income Tax Rules to compute the disallowance under section 14A of the Act. The assessee appealed, arguing that the interest earned was not attributable to investments generating exempt dividend income. The CIT(Appeals) verified the cash flow statement and concluded that the loans were not used for investments resulting in dividend income, thus restricting the disallowance to 1/2 % of the average value of investments.

Tribunal's Analysis:
The Tribunal noted that the CIT(Appeals) had given a clear finding based on the cash flow statement, which was not contested by the Revenue. The Tribunal agreed that disallowance of interest under Rule 8D(2)(ii) is applicable only when interest expenditure is not directly attributable to any particular income or receipt.

Conclusion:
The Tribunal upheld the CIT(Appeals)'s decision to restrict the disallowance, finding no reason to interfere. The revenue's ground on this issue was dismissed.

Final Judgment:
The appeal filed by the Revenue was dismissed in its entirety. The Tribunal pronounced the order in the open court on 19th December 2013.