2012 (12) TMI 871 - AT - Income Tax

Disallowance u/s 14A r.w.s. 8D - Held that - Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT holding that Rule 8D is applicable prospectively from assessment year 2008-09 & disallowance u/s 14A for the years prior to assessment year 2008-09 has to be made by adopting some reasonable method. As AY for the present case if 2005-06 impugned order of the CIT(A) confirming the disallowance u/s 14A is set aside and restore the matter to the file of the AO to recompute the disallowance - in favour of assessee for statistical purposes. Addition on deemed dividend u/s 2(22)(e) - loans taken from M/s JMC Securities Pvt. Ltd - Held that - Interest income earned by M/s JMC Securities Pvt. Ltd. during the year under consideration was to the tune of Rs.9,16,088/- which constituted about 70% of its total business income amounting to Rs.13,04,088/-. Moreover, the maximum amount of loan advanced by M/s JMC Securities Pvt. Ltd. during the year under consideration was to the tune of Rs.95,45,000/- which constituted 32% of the total funds available with the said company. If these facts and figures are considered in the light of the decision in the case of Parle Plastics Ltd. (2010 (9) TMI 726 - BOMBAY HIGH COURT), it becomes abundantly clear that lending of money was a substantial part of a business of M/s JMC Securities Pvt. Ltd. and the loan in question to the assessee was made by the said company in the ordinary course of its business. It, therefore, follows that the conditions stipulated in section 2(22)(e)(ii) were duly satisfied and the amount of loan advanced by M/s JMC Securities Pvt. Ltd. to the assessee could not be regarded as a deemed dividend. As the assessee has also filed a copy of the assessment order passed u/s 143(3) in the case of M/s JMC Securities Pvt. Ltd. for the assessment year 2006-07 wherein the nature of the business of the said company was clearly indicated as finance and it was further mentioned in the body of order that the said company continued into business of short term finance of idle funds. Thus the addition made by the AO u/s 2(22)(e) on account of the loan advanced by M/s JMC Securities Pvt. Ltd. to the assessee by treating the same as deemed dividend is not sustainable - in favour of assessee.

Summary

Issues:
1. Disallowance of expenses related to exempt dividend income under section 14A.
2. Treatment of loans as deemed dividend under section 2(22)(e).

Issue 1 - Disallowance of Expenses under Section 14A:
The appellant, an individual, declared income including exempt dividend income in the return. The AO disallowed expenses related to earning the exempt income under section 14A, using Rule 8D. The CIT(A) upheld this disallowance citing a Mumbai Special Bench decision. However, the Bombay High Court ruled that Rule 8D applies prospectively from 2008-09. Consequently, the ITAT set aside the CIT(A)'s order, directing the AO to recompute the disallowance on a reasonable basis. The appeal was partly allowed for statistical purposes.

Issue 2 - Treatment of Loans as Deemed Dividend:
The AO treated loans from a company as deemed dividend under section 2(22)(e) due to accumulated profits. The appellant argued that the lending of money was a substantial part of the company's business, invoking exclusion clause (ii) of section 2(22)(e). The AO rejected this, emphasizing the company's investment activities. The CIT(A) upheld the addition, distinguishing precedents cited by the appellant. During the appeal, the appellant provided details showing lending constituted a substantial part of the company's income. Citing the Bombay High Court's interpretation of "substantial part of the business," the ITAT found that lending was significant for the company. Considering the facts and the company's business nature, the ITAT ruled in favor of the appellant, deleting the deemed dividend addition. Ground 2 of the appeal was allowed.

In conclusion, the ITAT partially allowed the appeal concerning the disallowance of expenses under section 14A and allowed the appeal regarding the treatment of loans as deemed dividend under section 2(22)(e). The judgments were based on the interpretation of relevant legal provisions and precedents, ensuring a fair and reasoned decision in each issue raised.