2016 (1) TMI 322 - AT - Income Tax

Addition on deemed dividend u/s 2(22) - Held that - In the case of the assessee the provisions of Section 2(22)(e) of the Act will not be applicable because there is a close nexus between the business activity of the assessee-company and its sister concern and the loan received from the assessee s sister concern is utilized for the very purpose of acquiring the shares of the sister concern itself in order to have a strategical edge over the competing business environment. The benefit of the entire transaction has flowed to the assessee s sister company also because the assessee had obtained the loan from its sister company in order to purchase the shares of the very same sister company and thus avoid the perils of those shares being held by two entities thus endangering its existence. - Decided in favour of the assessee. Disallowance u/s 14A read with Rule 8D - Held that - In the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee s sister concerns. See EIH Associated Hotels Ltd v. DCIT 2013 (9) TMI 604 - Decided in favour of the assessee.

Summary

Issues:
1. Disallowance under Section 14A read with Rule 8D
2. Addition made under Section 2(22)(e)

Issue 1: Disallowance under Section 14A read with Rule 8D

The Revenue appealed against the order of the Commissioner of Income Tax(A)-1, Chennai, challenging the direction to consider only specific investments for calculating the average investment under limb (iii). The Revenue also disputed the deletion of investments in subsidiary companies for the average investment calculation, arguing that such investments could earn dividend income. The assessee, on the other hand, contended in its cross objection that Section 14A read with Rule 8D should not apply to its case based on the circumstances. The Tribunal, considering precedents, directed the Assessing Officer to rework the disallowance by excluding investments in associate companies for the purpose of Rule 8D(2)(iii). The Tribunal also held that the provisions of Section 14A read with Rule 8D would not be applicable to investments made for acquiring shares of sister concerns, aligning with previous decisions. Consequently, the Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection.

Issue 2: Addition made under Section 2(22)(e)

The Revenue argued that Section 2(22)(e) should apply to the assessee, citing the loan transactions between the assessee and its subsidiary company. The Revenue emphasized that the loan transactions fell within the purview of Section 2(22)(e) based on the provisions of the Act. However, the Tribunal, after considering the facts of the case and relevant legal precedents, concluded that the provisions of Section 2(22)(e) would not be applicable to the assessee. The Tribunal highlighted that the loan received from the sister concern was utilized strategically to consolidate the business and benefit both entities. Referring to judgments like Farida Holdings Pvt. Ltd. v. DCIT and EIH Associated Hotels Ltd v. DCIT, the Tribunal held that the trade advances and regular business transactions carried out by the assessee did not qualify as deemed dividends under Section 2(22)(e). Consequently, the Tribunal ruled in favor of the assessee on this issue, dismissing the Revenue's contentions.

In conclusion, the Appellate Tribunal, ITAT Chennai, in its judgment dated 27th November 2015, addressed and resolved the issues related to disallowance under Section 14A read with Rule 8D and the addition made under Section 2(22)(e). The Tribunal upheld the assessee's position on both issues, dismissing the Revenue's appeal and allowing the assessee's cross-objection based on detailed analysis and legal interpretations of relevant provisions and precedents.