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2013 (11) TMI 565 - AT - Income TaxDisallowance u/s 36(1)(iii) - A.O. initiated proceedings u/s 14A - However, Rule 8D was not applicable - Nexus between the interest bearing funds taken and interest free advances given - Held that - The interest received on fixed deposits to an extent of Rs.28,54,383/- has a direct nexus with the interest paid to Bank on over draft, therefore the contention that only net amount can be considered has validity. However since interest payment arose in regular business transactions, in our view, no further amount is required to be disallowed under section 36(1)(iii) as the interest paid has a direct nexus with the business activity of the assessee - However, advance was given for the business purpose, this aspect was not established, therefore disallowance of interest at 13% i.e. Rs.26 Lacs on the amount paid to Mr. C U Shah has to be disallowed under section 36(1)(iii). To that extent the disallowance made by the CIT(A) gets sustained - Decided partly in favour of Assessee. Disallowance of business loss - Held that - BSE membership Card which was eligible for depreciation has been converted into 10,000 shares AY 2006-07 as per the evidence on record and para 5.17 CIT(A). Therefore once the membership card was converted to equity shares, if any loss arise on conversion can only be considered in AY 2006-07 not on AY 2008-09. The cause of action arose in that year and so claim for loss should have been made in the year 2006-07, when the membership card was converted to shares, if at all, a claim can be made. During the year, assessee sold 2737 shares out of 10,000 shares it received from the BSE. Therefore, the entire loss if at all also cannot be allowed as there are still shares held by the Assessee. Another reason in not allowing the claim is that under the provisions of the Act, the cost of acquisition is always taken at the original cost of membership. There are no provisions either for adjusting the depreciation already allowed or allowing the loss so arrived at on the basis of WDV. Since assessee get higher benefit in taking the cost of acquisition at the original value, the loss can only be considered as Capital loss, which can not be adjusted or allowed - Decided against assessee. Disallowance under section 14A read with rule 8D - Held that - invoking Rule 8D does not arise as there was no satisfaction recorded by the AO under section 14A(2). More over, the assessee stock in trade cannot be considered as investment for disallowance under Rule 8D following the Principles laid down by the Hon ble Karnataka High Court in the case of CCI Ltd. (supra). Stock in Trade cannot be considered as investment for the purpose of working out disallowance at half percent also under Rule 8D(iii). There is only an investment of Rs.10,500/- as per the balance sheet which can only be considered for this purpose. Therefore, since the dividend earned is incidental to the business activity of the assessee, we restrict the disallowance to 5% on the amount earned as dividend under section 14A which should meet the ends of justice on the facts of the case. AO is directed to work out the disallowance under section 14A - Decided in favour of assessee. Disallowance u/s 36 - Held that - there is only one direct nexus of borrowed fund being advanced to sister concern, i.e. borrowed fund of Rs.2.00 Crores from Mr. C.U. Shah. Therefore, consistent with the finding in AY 2007-08, the interest paid to Mr. C.U.Shah on the borrowed Rs.2.00 Crores made during the year has to be disallowed and to that extent disallowance under section 36(1)(iii) gets confirmed. Now coming to the balance of the amounts, first of all there is a direct nexus with the interest and fixed deposits. In view of large increase in assessee s turn over and business activity, interest paid to the Banks has increased substantially. Therefore it cannot be stated that the interest paid does not pertain to the business activity of the assessee. It is also very difficult to establish a direct nexus of borrowed funds with advancing of funds interest free. Therefore, we are of the opinion that AO is correct in restricting the disallowance to 20% of the amount. Since a direct advance of Rs. 2 crores was made from the advance paid to Mr. C.U. Shah was already disallowed, We direct the Assessing Officer to restrict the disallowance under section 36(1)(iii) out of the balance interest paid on unsecured loans to an extent of 20%. This excludes the Bank interest and bank charges. Thus, the order of the CIT(A) stands modified and the disallowance under section 36(1)(iii) with restricted to interest paid to Mr. C.U. Shah at 100% and 20% of the balance of the interest paid on unsecured loans - Decided partly in favour of assessee. Deemed dividend - Held that - section 2(22)(e) merely decides whether a payment is deemed to be dividend or not, it does not decide in whose hands the said sum is chargeable. For that purpose one will have to rely on section 8. As the appellant company is not the registered holder of shares of the lender concern, the loan/advance obtained by the appellant from the sister concerns cannot be treated as deemed dividend in the hands of the appellant company. At the most the amount of advance can be assessed in the hands of shareholder (Shri Kamal Bakliwal) who is the beneficial owner of such shares. - Decided against the revenue.
Issues Involved:
1. Disallowance of interest under Section 36(1)(iii). 2. Disallowance under Section 14A read with Rule 8D. 3. Treatment of shares received in demutualization. 4. Disallowance under Section 40(a)(ia). 5. Deemed dividend under Section 2(22)(e). Detailed Analysis: 1. Disallowance of Interest under Section 36(1)(iii): The assessee contested the CIT(A)'s decision to enhance income by disallowing interest paid to the bank and Mr. C.U. Shah. The CIT(A) had disallowed Rs. 46,84,997/- under Section 36(1)(iii) in addition to the disallowance under Section 14A. The Tribunal noted that the assessee had sufficient interest-free funds to cover the interest-free advances to sister concerns. The Tribunal sustained the disallowance of Rs. 26 lakhs paid to Mr. C.U. Shah due to a direct nexus with borrowed funds but allowed the assessee's contention on other interest payments, directing the AO to restrict the disallowance to Rs. 26 lakhs only. 2. Disallowance under Section 14A read with Rule 8D: For AY 2007-08, the CIT(A) restricted the disallowance under Section 14A to 5% of the dividend income, which the Tribunal found reasonable and upheld. For AY 2008-09, the Tribunal noted that the AO did not record satisfaction under Section 14A(2) and that shares were held as stock-in-trade, not investments. The Tribunal restricted the disallowance to 5% of the dividend income, directing the AO to work out the disallowance accordingly. 3. Treatment of Shares Received in Demutualization: The assessee's appeal for AY 2008-09 included a ground regarding the treatment of shares received in demutualization as capital gains instead of business income. The Tribunal rejected the additional ground claiming the written-down value of the Stock Exchange Card as a loss, noting that the conversion to shares occurred in AY 2006-07, and any loss should have been claimed then. 4. Disallowance under Section 40(a)(ia): The CIT(A) had disallowed Rs. 29,80,382/- under Section 40(a)(ia) for transaction charges, treating them as lease-line charges, Vsat charges, or data processing charges. The Tribunal admitted additional evidence showing these were D-mat charges paid to the bank, not transaction charges to the Stock Exchange. The issue was restored to the AO for fresh examination to determine if disallowance under Section 40(a)(ia) was warranted. 5. Deemed Dividend under Section 2(22)(e): The AO had treated advances to sister concerns as deemed dividend under Section 2(22)(e), adding Rs. 6,59,75,767/-. The CIT(A) deleted this addition, noting that the assessee company was not the registered shareholder of the lender company. The Tribunal upheld the CIT(A)'s decision, citing that deemed dividend can only be assessed in the hands of the registered shareholder, not the recipient concern. Conclusion: - Appeals by the assessee in ITA Nos. 4885/Mum/2011 and 2991/Mum/2012 were partly allowed. - Revenue appeals in ITA Nos. 4658/Mum/2011 and 2345/Mum/2012 were dismissed.
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