2016 (10) TMI 1249 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - transfer of shares of UPL and UEL owned by the assessee-company to NCPL as gift - HELD THAT - it is not a case of distribution of accumulated profits to its shareholders. It is an undisputed fact that NCPL per se is not a shareholder in the assessee-company. - Transfer transaction of shares of UPL & UEL by the assessee-company to the NCPL constitutes the gift transaction and also they are outside the scope of section 2(22)(a) of the Act. Further, the CIT (A) is not justified legally to issue certain directions to the AO to apply the provisions of section 115-O of the Act in respect of NCPL as the same is not before the CIT (A). - Decided in favour of assessee. Disallowance u/s 14A - HELD THAT - In case, if interest free funds are found available, he presumption of use of interest free funds for investment in the dividend yielding shares is required to be honoured. We order AO accordingly. As such, no case is made out by the assessee that the Assessing Officer erroneously applied the provisions of clause-(iii) of Rule 8D(2) of the IT Rules, 1962. Therefore, the order of the CIT (A) on this issue stands. Thus, Ground no.1 raised by the assessee is allowed in the above mentioned manner. Addition in respect of transactions reported in AIR qua the interest income - HELD THAT - Addition made by the AO and confirmed by the CIT (A) is required to be deleted ads if in case of double taxation in both the AYs. Relevant facts and conclusions of the CIT (A) in this regard are given in paras 6.1 to 6.3 of the CIT (A) s order. As per the assessee, interest income accrued from the Bank of Baroda is ₹ 4,53,453/- and the same is credited to the P & L Account on the basis of the entries appearing in the bank statements. However, in Form No.26AS, an amount of ₹ 4,68,250/- was reflected. Assessee claims that as per the principle of mercantile system of accounting, which is consistently followed by the assessee, an excess amount was offered. Assessee further submitted that when the amount shown in Form No.26AS is lesser, in such cases the addition of ₹ 14,797/- is uncalled for. - Decided in favour of assessee. Disallowance in respect of advances written off - HELD THAT - Revenue disallowed the claim of the assessee for want of evidence that the said advances are given in ordinary course of business of hat merged companies. Para 7.3.2 of the CIT (A) order is relevant in this regard. herefore, we are of the opinion, the matter is required to be remanded to the file of he AO for fresh adjudication. We order accordingly and direct the AO to examine he issue in the light of the above said precedents and facts of the case. Further, in our view, the assessee is under obligation to explain the fulfilment of the conditions specified in the said conditions. Addition of purchases -Evidences provide before AO - Power of CIT(A) HELD THAT - It is an undisputed fact that the items purchased were already partly sold and partly shown in the closing stock account. Relevant documents and bank transactions are undisputed by the Assessing Officer. There is no direct evidence suggesting the hawala nature of the transactions. The GP related errors were also not identified. In these circumstances, we are of the opinion the directions of the CIT (A) who does not have power of setting aside the matter are unsustainable in principle. As such, here is no case of making additions by the AO on this account. Considering the above factual matrix of the case, we are of the opinion, ground no.2 raises by the assessee is required to be allowed.

Summary

Issues Involved:
1. Disallowance u/s 14A as per Rule 8D
2. Addition based on Annual Information Report (AIR)
3. Disallowance in respect of advances written off
4. Taxability u/s 115-O and applicability of section 2(22)(a)
5. Allegation of a colourable device concerning the gift of shares
6. Disallowance of purchases from M/s. K.C. Enterprises

Detailed Analysis:

1. Disallowance u/s 14A as per Rule 8D:
The assessee contested the disallowance made by the AO under section 14A of the Income Tax Act, which was computed as per Rule 8D of the IT Rules, 1962. The CIT(A) upheld the AO's action. The Tribunal found that while there was no dispute regarding the disallowance under Rule 8D(2)(i), the CIT(A) did not honor the legal proposition regarding the presumption of the use of interest-free funds for investment in dividend-yielding shares, as per the jurisdictional High Court's judgment in CIT vs. Reliance Utilities and Power Ltd (313 ITR 340). Thus, the Tribunal directed the AO to reconsider the matter, particularly honoring the presumption of the use of interest-free funds.

2. Addition based on Annual Information Report (AIR):
The CIT(A) upheld the AO's addition of interest income amounting to ?14,797 based on AIR information. The assessee contended that this income was already offered in the subsequent assessment year (AY 2011-12). The Tribunal agreed with the assessee's contention, finding that the addition lacked merit and directed its deletion to avoid double taxation.

3. Disallowance in respect of advances written off:
The assessee claimed a deduction for advances written off, amounting to ?5,00,000, under section 36(1)(vii) read with section 36(2). The CIT(A) upheld the AO's disallowance due to the lack of documentary evidence showing that the advances were made in the ordinary course of business. The Tribunal remanded the matter to the AO for fresh adjudication, directing the AO to examine the issue in light of the precedents and facts, and for the assessee to provide necessary evidence.

4. Taxability u/s 115-O and applicability of section 2(22)(a):
The CIT(A) held that the assessee's gift of shares of UPL and UEL to NCPL was an indirect distribution of accumulated profits to shareholders, invoking sections 2(22)(a) and 115-O. The Tribunal found that the CIT(A) exceeded his jurisdiction by directing the AO to levy dividend distribution tax under section 115-O. The Tribunal also noted that the assessee's transaction of gifting shares did not involve consideration and did not constitute a distribution of accumulated profits. The Tribunal held that the provisions of section 2(22)(a) were inapplicable and directed the deletion of the addition.

5. Allegation of a colourable device concerning the gift of shares:
The CIT(A) considered the gift of shares to be a colourable device to avoid tax, applying the Supreme Court's decision in McDowell & Co Ltd (154 ITR 148). The Tribunal, however, found that the transactions were genuine gifts and not a means to avoid tax. The Tribunal reiterated that the transfer of shares was a voluntary act without consideration, thus not constituting a colourable device.

6. Disallowance of purchases from M/s. K.C. Enterprises:
The CIT(A) restored the issue of disallowance of purchases from M/s. K.C. Enterprises to the AO for verification, despite lacking the power to set aside matters. The Tribunal found that the purchases were genuine, supported by bank transactions and relevant documents. The Tribunal held that the CIT(A)'s direction to the AO was unsustainable and deleted the addition.

Conclusion:
The Tribunal partly allowed the appeal ITA No.4663/M/2015 for statistical purposes and fully allowed the appeal ITA No.4676/M/2015. The Tribunal directed the AO to reconsider certain disallowances and deletions based on the evidence and legal precedents. The Tribunal emphasized the need for strict interpretation of deemed dividend provisions and recognized the genuine nature of the gift transactions and purchases involved.