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2017 (9) TMI 1936 - AT - Income TaxAddition u/s 40A(2)(b) - fair market value of interest paid by the assessee on the loans obtained from the persons covered u/s.40A(2)(b) - according to the AO loans ought to have been taken at the interest rate of 12% and not the interest rate of 15 or 16% - assessee ought to have provided a security for the loans taken from the bank, These are unsecured loans. It has avoided a lot of formalities by taking loans from the associate concern - HELD THAT - The payment of interest at a little higher rate to the person even if covered u/s.40A(2)(b) cannot be termed as exorbitant when the fair market value of such interest cost is being considered. The assessee has paid interest commensurate with the interest rate prevailing in the open market. An order rendered in case of Vipul Y. Mehta 2010 (7) TMI 1051 - ITAT AHMEDABAD has been brought to our notice, wherein Tribunal has upheld the allowance of the interest rate @18% per annum to the relatives on unsecured loan. Considering all these aspects, we are of the view that ld. First Appellate Authority has appreciated the controversy in right perspective. Assessee has not extended any undue benefit to the persons covered u/s.40A(2)(b). Deemed dividend u/s.2(22)(e) - HELD THAT - If assessee is not a share holder of both the companies then Section 2(22)(e) of the Income Tax Act cannot be attracted or effected. As it has been held by the Hon'ble Delhi High Court, in the case of CIT vs. Ankitech (P.) Ltd 2011 (5) TMI 325 - DELHI HIGH COURT that the assessee should be a share holder in the lender company and such holding should be more than 10% of the voting rights, only then Section 2(22)(e) would be attracted. Therefore, this Ground of debarment is dismissed. Disallowance in respect of late payment to PF ESIC treating the same as income u/s.2(24)(x) r.w.s. 36(i)(vi) and not allowing the said payment as expenditure in computing total income - HELD THAT - CIT(A) has decided the matter against the assessee quoting the judgment of CIT(A) vs. Gujarat State Road Transport Corporation, in which it is held (supra) the section 36(1)(va) of the Income Tax Act, 1961 read with sub-clause(x) of clause 24 of section 2 was applied, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees' account in the relevant fund or funds on or before the due date mentioned in explanation to section 36(l)(va). Consequently, it is held that ribunal has erred in deleting respective disallowances being employees' contribution to PF Account / ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees' accounts in the relevant fund on or before the due date as per the explanation to section 36(l)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees' account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act. Section 36(1)(va) and section 43B(b) operate in different fields, i.e. former takes care of employee s contribution and later the employer s contributions. Therefore, an assessee is entitled to get benefit of deduction u/s.43B(b) as provided under the proviso thereto only with regard to portion of amount paid by the employer to contributory fund. So far as the employee s contribution is concerned, the assessee is entitled to get deduction of amounts as provided under section 36(1)(va) only if amounts so received from the employee is credited in specified account within due date as provided under relevant statue - Cross Objection of the assessee is also dismissed.
Issues Involved:
1. Deletion of addition of deemed dividend under Section 2(22)(e) of the Income Tax Act. 2. Deletion of addition under Section 40A(2)(b) of the Income Tax Act. 3. Treatment of late payment to PF and ESIC as income under Section 2(24)(x) read with Section 36(1)(va) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Deletion of Addition of Deemed Dividend under Section 2(22)(e): The CIT(A) deleted the addition of deemed dividend under Section 2(22)(e) despite the assessee having received the said dividend. The assessee argued that it is a public limited company and does not hold any shares in the companies from which it received loans. The loans were received from Cama Motors Pvt. Ltd. and R. J. Cama & Co. Pvt. Ltd. The assessee contended that the provisions of Section 2(22)(e) are not applicable as none of the shareholders holding more than 10% of the share capital of the lending companies hold 20% or more of the share capital of the assessee company. Additionally, the loans were in the ordinary course of business and thus excluded by virtue of sub-clause (ii) of Section 2(22)(e). The ITAT upheld the CIT(A)'s decision, noting that the assessee is not a shareholder in the lending companies, and therefore, Section 2(22)(e) cannot be applied. 2. Deletion of Addition under Section 40A(2)(b): The CIT(A) deleted the addition of ?6,40,515/- made under Section 40A(2)(b) on the grounds that the interest paid by the assessee to related parties was above the prevailing market rate. The assessee paid interest at rates of 15% and 16%, while the Assessing Officer allowed only 12%, disallowing the excess. The ITAT noted that the loans were unsecured and the interest rates were commensurate with market rates for similar unsecured loans. The ITAT referred to a precedent where interest at 18% was allowed on unsecured loans and concluded that the assessee had not extended any undue benefit to related parties. Therefore, the CIT(A)'s deletion of the disallowance was upheld. 3. Treatment of Late Payment to PF and ESIC as Income: The Assessing Officer treated the late payment of ?1,66,091/- towards PF and ESIC as income under Section 2(24)(x) read with Section 36(1)(va). The CIT(A) upheld this disallowance, citing the judgment in CIT vs. Gujarat State Road Transport Corporation, which held that deductions under Section 36(1)(va) are allowed only if the employee's contributions are credited to the relevant fund on or before the due date. The ITAT affirmed this view, distinguishing between Section 36(1)(va) for employee contributions and Section 43B(b) for employer contributions. The ITAT concluded that the assessee is entitled to deductions only if the employee contributions are credited within the due date specified by the relevant statute. Consequently, the assessee's cross-objection was dismissed. Conclusion: The appeal by the department was dismissed, and the cross-objection by the assessee was also dismissed. The ITAT upheld the CIT(A)'s decisions regarding the deletion of deemed dividend and disallowance under Section 40A(2)(b), and affirmed the treatment of late PF and ESIC payments as income under Section 2(24)(x) read with Section 36(1)(va).
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