2016 (2) TMI 625 - AT - Income Tax

Deemed dividend under Section 2(22)(e) - Held that - It is only the payment by a company during the relevant previous year which could be brought to tax (when it satisfies other conditions of section 2(22)(e) as deemed dividend. The phrase used u/s 2(22)(e) is any payment by company . In case the AO s action is to be upheld, then the appellant becomes liable to tax every year as long as the opening balance of advance continues in his books of accounts. This could not be the meaning of section 2(22)( e). Therefore, find no merit in the addition made by the AO under this head - Decided in favour of assessee Addition under Section 36(1)(iii) - Held that - The appellant company had taken TOD (Temporary Over Draft) from Central Bank of India on which it has paid ₹ 72,618/- Bank of Punjab. The AO has not established in his order-that the borrowed funds have been diverted for making investment. In fact the AR has submitted that except for the TOD no loan was raised and just ₹ 72,618/- was expended on the same. An investment of ₹ 4.5 crores has been made during the previous year relevant to current assessment year and no fresh loans have been raised. There are fresh funds in the form of sundry creditors & advances from customers which more or less match with the fresh quantum of investment. The secured loan at the year end was Nil. All these facts go to show that the AO has not been able to show-that the borrowed funds have not been utilized for the purpose of business and that they have been diverted to finance the non-business tax exempt activity. Therefore the disallowance u/s 36(1 )(iii) cannot be made - Decided in favour of assessee Disallowance u/s 14A - applicability of rule 8D - Held that - Assessing Officer has not complied with the requirement of recording dissatisfaction as to the correctness of claim of the assessee as held in Judgement of Delhi High Court in the case of Maxopp Investement 2011 (11) TMI 267 - Delhi High Court the action of the AO in invoking rule 8D was not justified. Despite the observation, the CIT(A) has upheld disallowance of ₹ 4,22,000 towards administrative expenses. In view of the above discussion, we find that the order of ld. CIT(A) on the issue in dispute is well reasoned and, therefore, no interference is required - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition on account of deemed dividend under Section 2(22)(e).
2. Deletion of addition under Section 36(1)(iii).
3. Deletion of addition under Section 14A.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Deemed Dividend under Section 2(22)(e):

The Revenue contested the deletion of an addition of Rs. 55,14,626/- as deemed dividend under Section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) observed that an advance from M/s. Sharad Enterprises Pvt. Ltd. was present as an opening balance in the assessee's books. The AO noted that the assessee company subscribed to the share capital of M/s. Sharad Enterprises Pvt. Ltd. and acquired more than 10% of its equity shares during the relevant previous year. Based on this, the AO concluded that the assessee was liable for deemed dividend due to the accumulated profits in M/s. Sharad Enterprises Pvt. Ltd.

However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the advance was received in a prior year when the assessee was not a shareholder of M/s. Sharad Enterprises Pvt. Ltd. Consequently, the conditions of Section 2(22)(e) were not met. The Tribunal upheld the CIT(A)'s decision, stating that the provisions of Section 2(22)(e) require the advance to be received during the relevant year and the recipient to be a shareholder at that time. Since these conditions were not fulfilled, the addition was not sustainable.

2. Deletion of Addition under Section 36(1)(iii):

The Revenue challenged the deletion of an addition of Rs. 72,618/- under Section 36(1)(iii) of the Act. The AO noticed an investment of Rs. 9,74,56,010/- and disallowed the interest payment of Rs. 72,618/- based on the decision in Cheminvest Ltd. Vs. ITO. The AO presumed that the borrowed funds were diverted for investment activities.

The CIT(A) examined the disallowance and found that the interest was paid towards a working capital loan, which was an allowable expenditure. The CIT(A) noted that the investments were made from the assessee's owned sources and not from borrowed funds. The Tribunal agreed with the CIT(A), stating that the AO failed to establish that the borrowed funds were used for non-business activities. Thus, the disallowance under Section 36(1)(iii) was not justified.

3. Deletion of Addition under Section 14A:

For the assessment year 2010-11, the Revenue contested the deletion of an addition of Rs. 70,72,280/- under Section 14A. The AO observed that the assessee received dividend income and had significant investments. The AO invoked Rule 8D to disallow expenses related to earning exempt income.

The CIT(A) found merit in the assessee's submission that the interest-bearing funds were not used for investment activities. The AO did not record any dissatisfaction with the assessee's claim that no expenditure was incurred for investment activities, as required by law. However, the CIT(A) acknowledged that some expenditure would be incurred for maintaining investments and restricted the disallowance to Rs. 4,22,000/-. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not justify the invocation of Rule 8D and the CIT(A)'s partial allowance was reasonable.

Conclusion:

The Tribunal dismissed both appeals by the Revenue, upholding the CIT(A)'s decisions on all contested issues. The Tribunal found no justification for the additions made by the AO under Sections 2(22)(e), 36(1)(iii), and 14A. The decision was pronounced in the open court on 19th February 2016.