2012 (12) TMI 1125 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made u/s 2(22)(e) of the Act.
2. Disallowance of interest expenditure u/s 14A read with Rule 8D.

Summary:

Issue 1: Deletion of addition made u/s 2(22)(e) of the Act

The Revenue argued that the CIT(A) erred in deleting the addition of Rs. 2.99 crores made u/s 2(22)(e) of the Act, which was considered as deemed dividend. The assessee, the Managing Director of M/s. ASL Capital Holdings Pvt. Ltd., received Rs. 4.99 crores from the company, which the Assessing Officer treated as deemed dividend since the company was closely held and had substantial accumulated profits. The assessee contended that the amount was received as a quid pro quo arrangement for providing a personal guarantee for the company's bank loan, a claim the Assessing Officer rejected. However, the CIT(A) accepted the assessee's argument, stating that the arrangement was a case of 'business expedience' and could not be treated as deemed dividend. The Tribunal upheld the CIT(A)'s decision, agreeing that the arrangement was commercial expedience and not an advancement of loan or deposit, thus not falling under the definition of deemed dividend u/s 2(22)(e).

Issue 2: Disallowance of interest expenditure u/s 14A read with Rule 8D

The assessee challenged the disallowance of Rs. 19,67,681/- u/s 14A read with Rule 8D, upheld by the CIT(A). The Assessing Officer had disallowed the amount, stating that the assessee claimed exempt dividend income of Rs. 38,26,191/- without attributing any expenditure. The Tribunal noted that the Assessing Officer did not record satisfaction regarding the correctness of the assessee's claim before making the disallowance, which is a prerequisite under section 14A(2). Additionally, Rule 8D, prescribing the method for determining such expenditure, was applicable only from the date of its introduction on 24.03.2008 and not retrospectively. The Tribunal remitted the issue back to the Assessing Officer to decide afresh in accordance with the law, considering the correct interpretation of section 14A and Rule 8D.

Conclusion:

The appeal filed by the Revenue was dismissed, and the Cross Objections of the assessee were accepted for statistical purposes. The Tribunal directed the Assessing Officer to reconsider the disallowance u/s 14A following the correct legal mandate and after providing adequate opportunity to the assessee.