2014 (4) TMI 963 - AT - Income Tax

Deemed dividend u/s 2(22)(e) of the Act Loans received Held that - CIT(A) rightly was of the view that the loan/advance was not received by the assesssee company during the year and the AO was not justified in making the addition by invoking the deeming provisions of Section 2(22)(e) of the Act - CIT(A) had set aside the addition revenue merely relied on the order of the AO - He could not point out any specific error in the order of CIT(A) - revenue could not controvert the finding of the CIT(A) that the amount of Rs. 8 lacs outstanding loan from M/s. Sarjan Financial Pvt. Ltd was the opening balance of the year revenue could not bring any material to show that any amount was received by the assessee during the previous year relevant to the assessment year from M/s. Sarjan Financial Pvt Ltd as loan or advance thus, there was no reason to interfere with the order of CIT(A) Decided against Revenue. Disallowance u/s 14A of the Act Restriction out of operating expenses Held that - The assessee earned dividend income - The assessee incurred operating expenses - According to the AO since the major income of the assessee was by way of dividend thus, Rule 8D was not applicable to the assessee, he disallowed proportionate operating expenses by taking the proportionate total exempt income and total income - CIT(A) restricted the disallowance by working out the same in accordance with Rule 8D of the Income Tax Rule, 1962 revenue could not show any provision of law which empowers the revenue to over-ride the provisions of Rule 8D while working out disallowance u/s 14A of the Act so as to make disallowance of an amount more than the amount worked out as per Rule 8D there is no reason to interfere with the order of CIT(A) Decided against Revenue.

Summary

Issues:
1. Deletion of deemed dividend income under section 2(22)(e) of the IT Act.
2. Disallowance of operating expenses under section 14A of the Act.

Issue 1: Deletion of Deemed Dividend Income:
The appeal was filed by the Revenue against the order of the ld. CIT(A)-VIII, Ahmedabad, challenging the deletion of deemed dividend income of Rs. 8 lacs under section 2(22)(e) of the IT Act. The AO had added the amount based on loans allegedly received by the assessee company from Sarjan Financial Pvt. Ltd. The appellant argued that no loan or advance was received during the relevant year, and the amount in question was from the previous year. The ld. CIT(A) agreed with the appellant, noting that the loan/advance was not received during the relevant year, and therefore, the addition was unjustified. The Tribunal upheld the CIT(A)'s decision, stating that the AO failed to prove any loan received during the relevant year, confirming the deletion of the addition.

Issue 2: Disallowance of Operating Expenses:
The second ground of appeal concerned the disallowance of operating expenses under section 14A of the Act. The AO disallowed a portion of operating expenses based on the exempt dividend income earned by the assessee. The assessee contended that the disallowance should be calculated as per Rule 8D of the Income Tax Rules, while the AO had used a different method. The ld. CIT(A) restricted the disallowance to Rs. 1,28,000, following Rule 8D. The Revenue argued that the disallowance should be based on the proportion of total exempt income to total income. The Tribunal upheld the CIT(A)'s decision, stating that there was no provision allowing the Revenue to override Rule 8D and confirmed the disallowance of Rs. 1,28,000. The appeal of the Revenue was dismissed in this regard.

In conclusion, the Tribunal upheld the deletion of deemed dividend income and the restriction of disallowance of operating expenses as per Rule 8D. The appeal of the Revenue was dismissed in both issues.