2016 (11) TMI 1599 - AT - Income Tax

Disallowance of deduction claimed for payment of interest u/s 36(1)(iii) on bank loan, - AO found certain loans/advances to have been given by the assessee to his family members and sister concerns/companies, without charging interest - CIT-A allowed claim - Held that - No error in the order of the ld. CIT(A) on this issue. The department has not been able to refute the categorical finding of fact recorded by the CIT(A) in the case of M/s Roger Exports, to the effect that the loans and advances were extended for business purpose of the assessee. Moreover, it also remains undisputed that the assessee had adequate interest free funds available for making the loans and advances in question - Decided in favour of assessee Deemed dividend addition u/s 2(22)(e) - amount was paid to M/s Roger Industries Ltd. for the individual benefit of the assessee - CIT(A) deleted the addition - Held that - As correctly taken into account by CIT(A), that no amount was received directly by the assessee from M/s Euro Safety Footwear Pvt. Ltd., wherein, the assessee was having more than 10% of shareholding. On the date of payment of ₹ 1 crore to M/s Roger Industries Ltd., i.e., 13.12.2007, the proprietorship concern stood already taken over by M/s Roger Industries Ltd. CIT(A) had specifically inquired of the AO, to show that the amount of ₹ 1 crore had been paid for the individual benefit of or on behalf of the assessee. Nothing to this effect was brought on record by the AO and the remand report of the AO is totally silent in this regard, but for making a bald assertion that the amount was paid to M/s Roger Industries Ltd. for the individual benefit of the assessee. CIT(A) has observed that later on in the remand report, the AO had himself stated that the amount taken by M/s Roger Industries Ltd. was utilized for payments made to cater for the need of M/s Roger Industries Ltd., i.e., for purchase of goods. On the basis of the above, it is seen that the ld. CIT(A) was well justified in holding that deemed dividend can be taxed only in the hands of the recipient, either being individual shareholder, or the concern in which the individual has a substantial interest, or if any payment is made on behalf of, or for the individual benefit of the individual shareholder, which is not the case herein. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest claimed under Section 36(1)(iii) of the Income Tax Act.
2. Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest Claimed under Section 36(1)(iii):

The Assessing Officer (AO) made an addition of ?4,31,369/- by disallowing the deduction claimed for payment of interest on bank loans under Section 36(1)(iii) of the Income Tax Act. The AO found that the assessee had given interest-free loans/advances to family members and sister concerns without charging interest while paying interest on bank loans. The AO computed the interest on these loans/advances and disallowed the interest claimed.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the loans/advances were given for business purposes. The CIT(A) observed that the loans to sister concerns were related to business transactions, and the advances to family members were either from earlier years or for business dealings. The CIT(A) also noted that the assessee had sufficient interest-free funds available.

The Tribunal upheld the CIT(A)'s decision, confirming that the loans and advances were for business purposes and that the assessee had adequate interest-free funds for making these loans/advances. The Tribunal found no error in the CIT(A)'s order and rejected the ground of appeal.

2. Addition of Deemed Dividend under Section 2(22)(e):

The AO received information that the assessee had received ?1 crore from M/s Euro Safety Footwear Pvt. Ltd., a sister concern, and invoked Section 2(22)(e) to treat it as deemed dividend. The AO made the addition on a protective basis, considering the amount as deemed dividend in the hands of the assessee.

The CIT(A) deleted the addition, holding that the provisions of Section 2(22)(e) could only be invoked in the hands of a registered shareholder. The CIT(A) observed that the transaction between the companies was a commercial trade transaction and not a loan or advance. The CIT(A) also noted that the AO had not provided any evidence to show that the amount was for the individual benefit of the assessee.

The Tribunal upheld the CIT(A)'s decision, noting that the amount was received by M/s Roger Industries Ltd. and not directly by the assessee. The Tribunal found that the transaction was for business purposes and not for the individual benefit of the assessee. The Tribunal confirmed that deemed dividend could only be taxed in the hands of the recipient, either the individual shareholder or the concern in which the individual has a substantial interest, which was not the case here.

Conclusion:

The appeal was dismissed, and the order of the CIT(A) was upheld on both issues. The Tribunal confirmed that the disallowance of interest under Section 36(1)(iii) was not justified as the loans/advances were for business purposes and the assessee had sufficient interest-free funds. The Tribunal also confirmed that the addition of deemed dividend under Section 2(22)(e) was not justified as the transaction was a commercial trade transaction and not a loan or advance for the individual benefit of the assessee.