2016 (2) TMI 268 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - As first appellate authority has examined the meaning of the expression a company in which the public are substantially interested within the meaning of the provisions of sec. 2(18) of the Act read with the relevant provisions of the Companies Act. There should not be any dispute that the provisions of sec 2(22)(e) are attracted only if the loan or advance is received from a company in which public are not substantially interested. Since the ADIPL does not fall in the category of company in which public are not substantially interested , we are of the view that the Ld CIT(A) was justified in holding that the provisions of sec. 2(22)(e) are not attracted. - Decided in favour of assessee

Issues Involved:
1. Disallowance of Repairs & Maintenance expenses.
2. Disallowance of due diligence fee.
3. Disallowance under Section 14A of the Income Tax Act.
4. Assessment of deemed dividend under Section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Repairs & Maintenance Expenses:
The first issue pertains to the disallowance of Rs. 12,34,345/- from Repairs & Maintenance expenses, treating them as capital expenditure. The Assessing Officer (AO) listed certain items as capital in nature and disallowed them, allowing depreciation instead. The CIT(A) confirmed this disallowance, citing the non-production of relevant bills and invoices. However, it was noted that the AO had indeed perused the submitted bills and details. The Tribunal found that the AO disallowed even minor items and significant software purchases without discussing their nature and usage period. The Tribunal opined that the purpose of these expenses needs to be ascertained to decide if they should be capitalized or allowed as revenue expenditure. The Tribunal directed a fresh examination of this issue by the AO, referencing the Supreme Court decision in Saravana Spinning Mills Ltd and the Special Bench decision in Amway India.

2. Disallowance of Due Diligence Fee:
The second issue involves the disallowance of a Rs. 14.00 lakhs due diligence fee paid to Price Waterhouse Coopers. The assessee argued that this fee was for due diligence conducted for its internal divisions and was a commercial necessity, not a new profit-earning apparatus. The tax authorities treated it as capital expenditure without examining the expenditure's purpose. The Tribunal found that the AO disallowed the fee without discussion, and the CIT(A)'s observations were claimed to be incorrect by the assessee. The Tribunal directed a fresh examination of this issue by the AO.

3. Disallowance under Section 14A:
The third issue concerns the disallowance under Section 14A of the Act. The assessee received Rs. 20.77 lakhs in dividend income and made a disallowance of Rs. 35.57 lakhs under Section 14A. However, the AO computed the disallowance as per Rule 8D at Rs. 1.22 crores, confirmed by the CIT(A). The assessee contended that the AO did not record dissatisfaction with the assessee's methodology for computing the disallowance, thus could not invoke Rule 8D. The Tribunal agreed, stating that the AO must first examine the assessee's workings and, if dissatisfied, then resort to Rule 8D. The Tribunal directed a fresh examination of this issue by the AO.

4. Assessment of Deemed Dividend under Section 2(22)(e):
The revenue's appeal contested the deletion of deemed dividend assessment under Section 2(22)(e). The assessee had taken inter-corporate deposits of Rs. 11.80 crores from its subsidiary, ADIPL, which the AO assessed as deemed dividend. The CIT(A) ruled in favor of the assessee, stating that ADIPL is a company in which the public are substantially interested, thus Section 2(22)(e) does not apply. The CIT(A) analyzed the definitions under Sections 2(22) and 2(18) of the Act and the Companies Act, concluding that ADIPL, being a subsidiary of a public company, is itself a public company. The Tribunal upheld the CIT(A)'s decision, confirming that the provisions of Section 2(22)(e) are not attracted as ADIPL is a company in which the public are substantially interested.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal, directing fresh examinations by the AO on the issues of Repairs & Maintenance expenses, due diligence fee, and disallowance under Section 14A. The Tribunal upheld the CIT(A)'s decision regarding the non-applicability of Section 2(22)(e) on inter-corporate deposits from ADIPL.

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