2018 (2) TMI 2043 - AT - Income Tax

Disallowance of interest on secured loan and deducting the same from capital work-in-progress by AO - HELD THAT - We find that the AO has not properly examined the nexus between inflow and outflow of liquidity. Therefore, we set aside the order of the CIT(A) and restore the matter to the file of the AO to examine the contentions of the appellant delineated and pass a de novo order, after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. As the matter has been set aside, the appellant may file the documents submitted before us as additional evidence before the AO. Thus the 1st ground of appeal is allowed for statistical purposes. Deemed dividend u/s 2(22)(e) - unsecured loans - HELD THAT - As decided in NATIONAL TRAVEL SERVICES VERSUS COMMISSIONER OF INCOME TAX, DELHI, VIII 2018 (1) TMI 1159 - SUPREME COURT whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause which is to get over the two judgments of this Court referred to hereinabove. This is why shareholder now, post amendment, has only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. We are prima facie of the view that the Ankitech judgment 2011 (5) TMI 325 - DELHI HIGH COURT itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether the facts of the present case would fit the second limb of the amended definition clause, we place these appeals before the Hon'ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question. Disallowance of interest on unsecured loan and deducting the same from capital WIP - HELD THAT - We find that the AO has not properly examined the nexus between inflow and outflow of liquidity. Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to examine the contentions of the appellant delineated and pass a de novo order, after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. As the matter has been set aside, the appellant may file the documents submitted before us as additional evidence before the AO. Thus the 1st ground of appeal is allowed for statistical purposes.

Summary

Issues Involved:

1. Disallowance of interest on secured loans and its deduction from capital work-in-progress.
2. Treatment of unsecured loans as deemed dividend under section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Secured Loans and its Deduction from Capital Work-in-Progress:

The appellant, a private limited company engaged in real estate development, filed its return of income for AY 2005-06. The Assessing Officer (AO) observed that the appellant had capitalized bank interest of ?56,79,022/- as Work-In-Progress (WIP). Upon further examination, the AO found that the appellant had borrowed interest-bearing funds amounting to ?13,79,80,794/- and had given interest-free loans and advances totaling ?8,14,77,341/- to its sister concerns and other related parties. The AO disallowed a proportionate amount of interest of ?33,53,450/-, allowing only the balance amount of ?26,25,572/- to be capitalized.

The appellant contested this disallowance before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's decision. The appellant argued that the AO had not properly examined the nexus between the inflow and outflow of liquidity and that the interest expense should be assessed based on commercial expediency. The Tribunal found merit in the appellant's argument and set aside the order of the CIT(A), directing the AO to re-examine the nexus and pass a de novo order after giving the appellant a reasonable opportunity to present relevant documents and evidence. Thus, this ground of appeal was allowed for statistical purposes.

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

The AO, upon verifying the shareholding pattern, found that a significant shareholder held substantial shares in both the appellant company and the lending companies. Based on CBDT Circular No. 495 and an ITAT order, the AO added ?11,25,669/- as deemed dividend under section 2(22)(e) of the Income Tax Act. The CIT(A) restricted this addition to the accumulated reserve of ?10,60,296/-.

The appellant argued that loans or advances should be taxed as 'deemed dividend' only in the hands of a registered shareholder of the lending entity, relying on the decisions in CIT v. Ankitech (P.) Ltd. and CIT v. G.T.Z. Securities Ltd. The Tribunal, referencing a recent Supreme Court judgment in National Travel Services v. CIT, directed the AO to await the Supreme Court's final decision on the matter and follow it accordingly.

For AY 2008-09, a similar issue arose where the AO disallowed interest of ?43,62,479/- debited to the P&L account. The CIT(A) upheld this disallowance. The Tribunal, finding that the AO had not properly examined the nexus between inflow and outflow of liquidity, set aside the CIT(A)'s order and directed a de novo examination by the AO.

Regarding the treatment of unsecured loans as deemed dividend for AY 2008-09, the AO added ?63,29,188/- as deemed dividend under section 2(22)(e), which the CIT(A) restricted to ?62,51,154/-. The appellant's reliance on the Ankitech case was noted, and the Tribunal's decision for AY 2005-06 was applied mutatis mutandis for AY 2008-09.

Conclusion:

The appeals for AY 2005-06 and AY 2008-09 were partly allowed, with directions for re-examination of the nexus between inflow and outflow of liquidity and awaiting the Supreme Court's decision on the deemed dividend issue.