2016 (2) TMI 753 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - Held that - Advance has been given by one Group Company to another so that that company is able to carry out and pursue its business activities with another party. This has not been doubted by the AO. It therefore, implies that this was a genuine business advance and not a ploy to pass on the profits as an advance and not as dividend in order to save payment of tax on dividend distribution. Base on above discussion, it is to be held that advance given by M/s. ABP Pvt. Ltd to the appellant cannot be categorized as deemed dividend u/s. 2(22)(e) of the I.T Act, 1961 - Decided in favour of assessee. Nature of expenditure - revenue v/s capital - Held that - The expenditure incurred by the assessee towards brokerage, stamp duty and registration charges for acquiring the office space of 5650 sq.ft at Gariahat Mall on lease for the purpose of assessee s business was squarely allowable as revenue expenditure and cannot be added at any stretch of imagination as capital expenditure.- Decided in favour of assessee. Filing fees paid to Registrar of Companies ROC towards increasing of authorized capital is not allowable as revenue expenditure. See Punjab State Industrial Development Corporation Vs. CIT reported in (1996 (12) TMI 6 - SUPREME Court) - Decided against assessee Legal & professional charges - Held that - We also find that the ld. AO had merely disallowed the said legal & professional expenses by treating the same as capital in nature without adducing any reason for the same. We hold that these expenses are required for obtaining clearances/licenses in connection with business activity of the assessee. Accordingly, it is squarely eligible for deduction. - Decided in favour of assessee Disallowance u/s 14A - Held that - We find that the assessee had incurred only long term capital loss after indexation and in order to invoke the provisions of section 14A of the Act, the existence of exempt income is sine qua non . The ld. AO has not disputed the long term capital loss claimed by the assessee and had allowed the same. Hence, in this scenario invoking the provisions of rule 8D(2)(iii) of IT Rules 1962 directly without recording the satisfaction in terms of rule 8D(1) is not warranted in accordance with law. - Decided in favour of assessee

Summary

Issues Involved:
1. Deemed Dividend under Section 2(22)(e) of the Income Tax Act.
2. Treatment of Rs. 23,00,717/- as Revenue Expenditure.
3. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The primary issue is whether the provisions of Section 2(22)(e) of the Income Tax Act can be invoked to treat Rs. 1,14,45,125/- as deemed dividend. The assessee company received an advance from M/s. ABP Pvt. Ltd. for investment in M/s. Kaleido Scope Entertainment Pvt. Ltd., which produced a Bollywood movie. The AO treated this advance as deemed dividend. However, the CIT(A) deleted this addition, and the revenue appealed.

The Tribunal noted that the assessee company is not a shareholder of M/s. ABP Pvt. Ltd., and the advance was for business purposes, falling under the exception of clause (ii) to Section 2(22)(e). It relied on the judgment in Universal Medicare (P) Ltd., which clarified that dividend must be taxed in the hands of the shareholder, not the recipient company. The Tribunal upheld the CIT(A)'s decision, confirming that the advance could not be categorized as deemed dividend.

2. Treatment of Rs. 23,00,717/- as Revenue Expenditure:
The second issue concerns whether Rs. 23,00,717/- incurred by the assessee should be treated as revenue expenditure. The expenses included brokerage, stamp duty, registration charges, filing fee, and legal & professional charges. The AO disallowed these expenses, treating them as capital in nature. However, the CIT(A) allowed them as revenue expenditure, relying on the decision in Hoechst Pharmaceuticals Ltd., which held that expenses related to leasing premises are revenue in nature.

The Tribunal agreed with the CIT(A) that expenses for brokerage, stamp duty, and registration charges for leasing office space are revenue expenditure. However, it reversed the CIT(A)'s decision on the filing fee, citing the Supreme Court ruling in Punjab State Industrial Development Corporation, which held that filing fees for increasing authorized capital are not revenue expenditure. The Tribunal upheld the CIT(A)'s decision on legal & professional charges, confirming they were necessary for obtaining business licenses and clearances.

3. Disallowance under Section 14A:
The final issue is whether the disallowance under Section 14A to the extent of Rs. 8,57,363/- was justified. The AO applied Rule 8D(2)(iii) to make the disallowance, but the CIT(A) deleted it. The Tribunal noted that the assessee incurred a long-term capital loss, and no exempt income was earned. It emphasized that the existence of exempt income is a prerequisite for invoking Section 14A. The Tribunal cited judgments in CIT vs Ashish Jhunjhullwala and CIT vs R.E.I. Agro Ltd., which required the AO to record dissatisfaction with the assessee's claim before applying Rule 8D.

The Tribunal confirmed the CIT(A)'s decision to delete the disallowance, as the AO had not recorded any dissatisfaction with the assessee's claim and there was no exempt income.

Conclusion:
The Tribunal dismissed the revenue's appeal on the deemed dividend and disallowance under Section 14A issues and partly allowed the appeal on the treatment of revenue expenditure, confirming the disallowance of the filing fee. The appeal was thus partly allowed.