2017 (11) TMI 1942 - AT - Income Tax

Disallowance of interest expenditure made u/s.14A - sufficiency of own funds - HELD THAT - As own funds available with the assessee is in excess value of mutual funds held by the assessee. Other investments made by the assessee consisted of fixed deposits made with the Bank and investment made in shares of Cooperative Bank income from both of which is not exempt. Since own funds available with the assessee is in far excess of value of investment made in mutual funds there is merit in the contentions of the assessee that the disallowance of interest expenditure is not called for in view of the decision of HDFC Bank Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT . Accordingly we set aside the order passed by the learned CIT(A) on this issue in all five years and direct the Assessing Officer to delete the disallowance of interest expenditure made u/s. 14A of the Act. For assessment year 2011-12 the AO is directed to compute the disallowance under Rule 8D(2)(iii) by adopting correct figures. Deemed dividend addition u/s. 2(22)(e) - AO noticed that the partners of the assessee-concern are also directors in a closely held company and the assessee company has borrowed funds from the above said closely held company - HELD THAT -Hon ble Supreme Court has since decided identical issue in the case of CIT Vs. Madhur Housing and Development Company 2017 (10) TMI 1279 - SUPREME COURT has held that addition of deemed dividend u/s. 2(22)(e) of the Act can be made only in the hands of shareholders meaning thereby the decision rendered by Hon ble Bombay high Court in the case of Impact containers P Ltd 2014 (9) TMI 88 - BOMBAY HIGH COURT has been upheld by Hon ble Supreme Court. Since the assessee is not a share holder of M/s Shirdi Chemicals P Ltd the assessing officer was not right in law in invoking the provisions of sec. 2(22)(e) of the Act in its hands. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance u/s. 14A of the Act for A.Ys. 2009-10 to 2013-14.
2. Relief granted in respect of deemed dividend assessed u/s. 2(22)(e) of the Act for A.Ys. 2010-11 to 2013-14.

Disallowance u/s. 14A of the Act:
The appeals filed by the assessee pertained to disallowance made u/s. 14A of the Act for A.Ys. 2009-10 to 2013-14. The Assessing Officer computed disallowance u/s. 14A due to exempt dividend and capital gains received by the assessee. The learned CIT(A) upheld the disallowance, leading to the appeals before the ITAT. The assessee argued that no disallowance should be made as it had sufficient own funds exceeding the value of investments in mutual funds. Citing the decision of the Bombay High Court in HDFC Bank Ltd. Vs. DCIT, the assessee contended against the disallowance of interest expenditure and administrative expenses. The ITAT, after considering the submissions and relevant data, found merit in the assessee's contentions. It was observed that the own funds of the assessee surpassed the value of mutual funds held, justifying the non-applicability of disallowance. The ITAT directed the Assessing Officer to delete the disallowance of interest expenditure u/s. 14A for all years and compute the disallowance under Rule 8D(2)(iii) correctly for A.Y. 2011-12.

Relief Granted in respect of Deemed Dividend:
The appeals by the Revenue focused on relief granted by the CIT(A) concerning deemed dividend assessed u/s. 2(22)(e) of the Act for A.Ys. 2010-11 to 2013-14. The Assessing Officer treated borrowings from a closely held company as deemed dividend due to the partners of the assessee-concern being directors in that company. The CIT(A) deleted the additions u/s. 2(22)(e) after the assessee contended that the advances were received in the course of business and it was not a shareholder of the closely held company. The Revenue challenged this decision, arguing that the matter was pending before the Supreme Court. The ITAT noted that the Supreme Court had upheld a similar decision in another case, ruling that deemed dividend u/s. 2(22)(e) could only apply to shareholders. As the assessee was not a shareholder of the company, the ITAT upheld the CIT(A)'s decision on legal grounds, resulting in the dismissal of the Revenue's appeals.

In conclusion, the ITAT partially allowed the appeals/cross-objections filed by the assessee and dismissed the appeals of the Revenue. The judgment was delivered on 21.11.2017 by the ITAT, Mumbai, with detailed analysis and reasoning provided for each issue involved in the case.