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2016 (5) TMI 1530 - AT - Income TaxDeemed dividend u/s. 2(22) (e) - Whether assessee company has share holding and substantial interest in the financial aspects of the company? - HELD THAT - CIT- A has dealt based on the thorough financial analysis of the earlier years were the assessee is having regular business transactions on commercial expediency and dealt with subsidiary company and the payments, on terms of commercial transactions, The ld. Commissioner of Income Tax (Appeals) relied on the Tribunal decision on assessee s own case for the assessment year 2004-05 2010 (7) TMI 1171 - ITAT CHENNAI on the same issue. The contention of the Department before the Tribunal that the Revenue has not accepted the order of Tribunal and an appeal has already been filed in Madras High Court and the same is pending. This Tribunal is of the considered opinion that mere pendency of appeal before High Court cannot be a reason to take a different view. The order of Tribunal is binding on all the authorities in the State of Tamil Nadu and Union Territory of Pondicherry. The Commissioner of Income Tax (Appeals) has allowed the claim of the assessee. Diminution of value of investments - Whether assessee is not entitled for claim of diminution in value of investments as Revenue expenditure by debiting to profit and loss account which takes the characteristic of capital in nature? - HELD THAT - If debts are written off u/s.36(i)(vii) than it should be considered as Business loss. On the other hand, the investment is written off it should be treated as Capital loss. The ld. Commissioner of Income Tax (Appeals) has confused the facts and treated investment as debt in the normal course of business. We are not in a position to appreciate the reasons given by CIT(A) and also the facts brought on record by the lower authorities are not sufficient to adjudicate the disputed issue. Therefore, we set aside the order of Commissioner of Income Tax (Appeals) to the file of Assessing Officer for fresh consideration. Disallowance of administrative and interest expenses - no income has been generated by way of business operations - HELD THAT - Contention of assessee on the claim of expenditure that the ld. AO has not allowed any claim of expenditure though there was some activity in the company and the income being in the nature of rental income, income from capital gains and income from other sources and also raised grounds to allow claim of write off of investments made in the year 2005 as against the sale in current year and also for advances provided to subsidiary company by the assessee in the same year are not convincing and further on perusal of assessment records these contentions never raised in assessment proceedings as the AO passed the order on the claim of expenditure, rental income and capital gains only. The write off of investments and advances to subsidiary claim are not emanating from the assessment order. Therefore, we are not inclined to adjudicate the fresh disputed issue and remit the entire file to the Assessing Officer who shall verify and examine the claims. Advances are doubtful for recovery and claimed deduction u/s.37 - Assessee company being investment company and investments are made in subsidiary companies but due to loss in business operations of subsidiary companym this amount could not be recovered and investments has not yielded any profits and claimed write off and prayed for allowing the deduction - HELD THAT - AO and ld. CIT (Appeals) has highlightened only on the Annual accounts of the assessee company but not the balance sheet and profit and loss account of subsidiary company which incurred loss and which plays vital role in taking decision of write off and also there is no findings on the financial statements of the subsidiary company before the AO to disallow the claim. Considering the factual aspects, we are of the opinion that the matter has to be re-examined based on the financial feasibility and losses of subsidiary company in which assessee has made investments and advanced the money for working capital. Therefore, we remit the entire file to the Assessing Officer to decided a fresh and assessee should co-operative in providing the information. This ground of the assessee is allowed for statistical purpose. Interest expenditure on loans - AR contention of allowing total claim is only on the basis of investment in subsidiary company and CIT(A) has restricted the claim to 3% of outstanding balance as on balance sheet date which the assessee challenged - HELD THAT - Prime facie the company is a investment company, charging of interest on subsidiary company should be considered as good business principle. Otherwise the financial result will show distress implication on liquidity. AR submissions cannot be accepted without any bonafide evidence. CIT (Appeals) has restricted to 3% of charging of interest on closing balance, we are of the opinion considering the genuineness of transaction payments and usage of funds, the matter has to be examined on the financial implication of the company. Therefore, we set aside the issue for re-examination to the file of Assessing Officer and the ground of the assessee is allowed for statistical purpose.
Issues Involved:
1. Applicability of deemed dividend under section 2(22)(e) of the Income Tax Act. 2. Allowability of diminution in value of investments. 3. Deduction of administrative and interest expenses against rental income. 4. Write-off of investments and advances to subsidiary companies. 5. Disallowance of interest on borrowed funds advanced to sister concerns. Issue-wise Analysis: 1. Applicability of Deemed Dividend under Section 2(22)(e): The assessee company received ?3,00,00,000 from a subsidiary in which it held more than 10% shares, which the Assessing Officer treated as deemed dividend under section 2(22)(e). The assessee argued that the amount was a security deposit for a corporate guarantee given to the subsidiary, a business transaction, and interest was received on the loan. The Commissioner of Income Tax (Appeals) (CIT(A)) and ITAT found that the transaction was a business requirement and not a deemed dividend, citing previous Tribunal decisions in the assessee’s favor. The ITAT upheld the CIT(A)’s order, dismissing the Revenue’s appeal. 2. Allowability of Diminution in Value of Investments: The assessee claimed a deduction for diminution in value of investments in a subsidiary, which the Assessing Officer disallowed, treating it as a capital loss. The CIT(A) directed the Assessing Officer to verify whether the amount written off was reduced from the debtors on the balance sheet, aligning with the Supreme Court decision in TRF Limited. The ITAT remitted the issue back to the Assessing Officer for fresh consideration, noting insufficient facts to adjudicate the matter. 3. Deduction of Administrative and Interest Expenses Against Rental Income: For the assessment year 2009-2010, the Assessing Officer disallowed administrative and interest expenses, stating no business operations were carried out. The CIT(A) upheld this disallowance. The ITAT remitted the issue back to the Assessing Officer for verification, as the assessee claimed the expenses were related to investment activities and the write-off of share warrants. 4. Write-off of Investments and Advances to Subsidiary Companies: The assessee wrote off investments and advances to a defunct subsidiary, which the Assessing Officer disallowed, treating them as capital losses. The CIT(A) upheld this disallowance, stating no transfer of assets occurred. The ITAT remitted the issue back to the Assessing Officer for re-examination, emphasizing the need to consider the financial statements of the subsidiary company. 5. Disallowance of Interest on Borrowed Funds Advanced to Sister Concerns: The Assessing Officer disallowed interest on borrowed funds advanced to sister concerns without charging interest. The CIT(A) restricted the disallowance to 3% of the outstanding balance, considering commercial expediency. The ITAT remitted the issue back to the Assessing Officer for re-examination, noting the need for a detailed financial analysis. Conclusion: The ITAT upheld the CIT(A)’s order on the deemed dividend issue, dismissed the Revenue’s appeal, and remitted the issues of diminution in value of investments, administrative and interest expenses, and write-off of investments and advances to the Assessing Officer for fresh consideration. The ITAT emphasized the need for thorough financial analysis and verification of facts in these matters.
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