2017 (8) TMI 1320 - HC - Income Tax

Addition u/s 14A - Held that - This issue is squarely covered by the decision of Bombay High Court in Godrej & Boyce MFG. Co. Ltd. vs. Deputy Commissioner of Income Tax & anr. reported 2010 (8) TMI 77 - BOMBAY HIGH COURT also confirmed by SC 2017 (5) TMI 403 - SUPREME COURT OF INDIA wherein held Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. No mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted - Decided against revenue

Summary

Issues Involved:
1. Whether the Tribunal was legally justified in holding that the assessee was not liable to be assessed on account of "deemed dividend" under Section 2(22)(e) of the Income Tax Act.
2. Whether the Tribunal was legally justified in confirming the findings of the CIT(A) and holding that ?1,84,15,499/- was not liable to tax under Section 2(22)(e) on account of funds received from the company in which the assessee was holding more than 10% share capital.
3. Whether the findings of the tribunal are perverse in deleting the addition of ?92,94,092/- when the interest-bearing loans were taken from banks and parties and utilized in the investment of shares which earned tax-free dividend income, thereby requiring disallowance under Section 14A.

Issue-wise Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The appellant challenged the Tribunal's decision, which held that the assessee was not liable to be assessed on account of "deemed dividend" under Section 2(22)(e). The Tribunal's decision was based on the interpretation that trade advances in the nature of commercial transactions do not fall within the ambit of Section 2(22)(e). This interpretation aligns with the CBDT circular dated 12.06.2017, which clarified that trade advances/commercial transactions are not covered under Section 2(22)(e). The circular cited various case laws, including CIT vs. Creative Dyeing & Printing Pvt. Ltd., CIT vs. Amrik Singh, and CIT, Agra vs. Atul Engineering Udyog, which supported this view. Consequently, the court concluded that the appeal on this ground does not survive due to the settled position in the circular.

2. Funds Received from Company under Section 2(22)(e):
The Tribunal confirmed the CIT(A)'s findings that ?1,84,15,499/- received from the company, where the assessee held more than 10% share capital, was not liable to tax under Section 2(22)(e). The Tribunal's decision was again supported by the CBDT circular, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of deemed dividend under Section 2(22)(e). The court upheld this interpretation and ruled in favor of the assessee, dismissing the department's appeal on this issue.

3. Disallowance under Section 14A:
The Tribunal's deletion of the addition of ?92,94,092/- was challenged on the grounds that interest-bearing loans were utilized for investments in shares earning tax-free dividend income. The Tribunal's decision was supported by the Bombay High Court's ruling in Godrej & Boyce MFG. Co. Ltd. vs. Deputy Commissioner of Income Tax, which was confirmed by the Supreme Court. The Supreme Court emphasized that for Section 14A(1) to apply, there must be proof that the expenditure sought to be disallowed was actually incurred in earning the dividend income. The court noted that the Assessing Officer failed to establish a nexus between the expenditure disallowed and the earning of the dividend income. The court also cited various judgments, including Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., Commissioner of Income Tax vs. Winsome Textile Industries Ltd., and Commissioner of Income Tax vs. HDFC Bank Ltd., which supported the view that if interest-free funds are available and sufficient to meet the investments, it should be presumed that the investments were made from those funds. Consequently, the court ruled in favor of the assessee, stating that the disallowance under Section 14A was not justified.

Conclusion:
The court, considering the CBDT circular and the Supreme Court's observations, concluded that the issues regarding deemed dividend under Section 2(22)(e) and disallowance under Section 14A were settled in favor of the assessee. The appeal was dismissed, and the findings of the Tribunal were upheld.