2017 (7) TMI 1361 - AT - Income Tax

Disallowance u/s. 14A - HELD THAT - Assessee has enclosed as a part of his paper-book details of term loans and cash credit accounts, on which the bulk of the interest, disallowed proportionately u/s. 14A, is paid. Where the same has been applied for the stated purpose, i.e., as per the agreement, for financing the capital and the working capital assets of the business, the same stands utilized for business purposes and, accordingly, no disallowance u/s. 14A, i.e., to any extent, could arise. That is, in the absence of the AO credibly rebutting the same. The onus to substantiate its claims though would be on the assessee. The matter is, accordingly, restored to the file of the AO to adjudicate afresh in accordance with law. Deemed dividend u/s. 2(22)(e) - HELD THAT - There is a substantial increase in the volume of the credit, the entire of which (₹ 31.26 cr.) is being claimed as in relation to the trade, and it is this claim which in effect is to be substantiated. We have already noted the AO's doubt in the matter, considering the out go of the assessee s funds toward investment, so that the two facts/incidents are apparently corroborative. Equally relevant is the quantum increase in the credit, so that whether the same corresponds with the increase in trade may be relevant. The matter arising for determination is factual, i.e., given the law as explained, being the extent to which the transactions of inflow and outflow of funds represent moneys received or paid in discharge of or toward commercial transactions. Clearly, the entire opening credit (₹ 318.38 lacs) shall have to be regarded as a trade credit as no part of it has been regarded as loan or advance in the preceding year. The matter is accordingly restored back to the file of the AO for casting the account, retaining its chronological order, into moneys flows and commercial transactions, and considering the same along with the assessee s explanation, for his factual findings in the matter per a speaking order and decision in accordance with the law. No restraint is placed, we may clarify, on either side by us inasmuch as the issue is essentially factual so that all relevant material/objection could be taken into account. Appeals by the assessee and the Revenue are partly allowed.

Summary

Issues Involved:
1. Correct computation of disallowance under Section 14A.
2. Treatment of deemed dividend under Section 2(22)(e).

Detailed Analysis:

1. Correct Computation of Disallowance under Section 14A:

The primary issue in the assessee’s appeal concerns the correct computation of disallowance under Section 14A of the Income Tax Act, 1961. The Revenue had computed the disallowance by applying Rule 8D, resulting in disallowances of ?509.57 lakhs and ?591.25 lakhs for AYs 2008-09 and 2010-11 respectively. The assessee argued, relying on various High Court decisions and the Finance Bill memorandum, that only investments in shares that actually yielded dividend income should be considered for disallowance computation.

The Tribunal noted that Rule 8D is a statutory method for estimating disallowance and cannot be altered unless the rule itself is challenged, which the assessee did not do. The Tribunal emphasized that the rule includes all investments that could potentially yield tax-exempt income, not just those that did yield such income in a particular year. This approach ensures that the expenditure incurred in relation to tax-exempt income is reasonably estimated, considering the entire investment portfolio. The Tribunal rejected the assessee's argument, stating that the expenditure incurred is with reference to the entire investment, irrespective of which part of the portfolio yields income during a particular period.

However, the Tribunal acknowledged the assessee's claim regarding the interest on term loans and cash credit accounts used for business purposes. It directed the Assessing Officer (AO) to verify these claims and exclude such interest from the disallowance computation if substantiated.

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

The second issue, raised in the Revenue’s appeal for AY 2010-11, pertains to the treatment of a sum of ?28.60 crores received by the assessee from a related company. The AO had treated ?20 crores of this amount as deemed dividend under Section 2(22)(e), as the assessee could not prove that the amount was received in the normal course of business. The CIT(A) deleted this addition, following a similar decision for AY 2008-09.

The Tribunal noted that business transactions are outside the ambit of Section 2(22)(e), which applies to loans and advances. It emphasized that a loan or advance must be distinguished from trade advances, which are part of commercial transactions. The Tribunal observed that the CIT(A) had not provided specific findings of fact to support the deletion of the addition and had merely followed the decision for a previous year.

The Tribunal directed the AO to re-examine the transactions for the year, categorizing them into commercial transactions and fund transfers. It instructed the AO to verify whether the credits during the year represented loans or advances or were part of business transactions. The Tribunal highlighted the need to consider the chronological flow of funds and the conduct of the parties to determine the nature of the transactions. It restored the matter to the AO for a detailed factual examination and a speaking order.

Conclusion:

The Tribunal partly allowed both the assessee’s and the Revenue’s appeals. It upheld the Revenue’s method of computing disallowance under Section 14A but directed verification of the assessee’s claims regarding interest on business loans. For the deemed dividend issue, it remanded the matter to the AO for a detailed factual examination to determine the nature of the transactions.