2019 (9) TMI 1646 - AT - Income Tax

Disallowance u/s 14A and Rule 8D(2)(i), (ii) (iii) - sufficiency of own funds - HELD THAT - We find that the assessee has own fund much above amount made investments in shares even by excluding the capital reserve and revaluation reserve. Therefore it is obvious that the entire investment made by the assessee of Rs.64, 42, 600/- is from its own interest free funds. In such situation it will be incorrect to apply Rule 8D(2)(i) (ii) of the Rules in the case of the assessee because the assessee has not incurred any interest expenditure directly or indirectly with respect to its investment made for Rs.64, 42, 600/-. Therefore in the case of the assessee only Rule 8D(2)(iii) will be applicable and accordingly we hereby sustain the addition of Rs.32, 213/- and further direct the Ld.A.O to delete the addition of Rs. 4, 28, 272/- (Rs.4, 60, 482 Rs.32, 213) made by applying the Rule 8D(2)(i) (ii) of of the Rules. Deemed Dividend u/s 2(22)(e) - business commitments of the assessee and its sister concerns - HELD THAT - It is apparent that both the assessee and its sister company are dealers in automobiles of different nature and engaged in business with close proximity. The combined endurance to market the products in the same vicinity results in close commercial ties between the assessee company and its sister company. As a result both the companies were maintaining current accounts in order to achieve their respective business targets. Therefore it cannot be said that the interdependence for meeting several business commitments of the assessee and its sister concerns does not result in commercial nexus between the assessee company and its sister concerns. As pointed out by the Ld.AR some expenses were met by both the companies which were reimbursed by either company. These facts are not disputed. Moreover at the close of the financial year the current account maintained by the assessee with its sister concern showed nil balance. In this situation we are of the view that the decision of the Jurisdictional High Court in the case CIT vs. C. Subba Reddy would be most appropriate wherein it was held that when no benefit has accrued to assessee and credit was a result of business transaction and was neither in nature of loan or deposit hence provisions of Sections 2(22)(e) of the Act do not stand attracted. Further in the case of the assessee the circular No.19/2017 supra is also very relevant. Considering these aspects of the case we are of the considered view that provisions of Section 2(22)(e) of the Act will not be applicable in the case of the assessee. Therefore we hereby direct the Ld.AO to delete the addition made by invoking the provisions of Section 2(22)(e) - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of expenditure under Section 14A and Rule 8D
2. Addition under Section 2(22)(e) of the Act

Issue 1: Disallowance of expenditure under Section 14A and Rule 8D:
The assessee's appeal contested the Ld.CIT(A)'s decision to uphold the disallowance of expenditure amounting to Rs.4,60,482 under Section 14A and Rule 8D. The Ld.AO invoked these provisions due to the assessee's investments in shares and dividend income. The ITAT Chennai bench analyzed the case, noting the absence of proof that investments were made from non-interest bearing funds. The Ld.AR argued against the disallowance, stating no expenditure was incurred for the investments. The ITAT, after reviewing the financial details, concluded that as the investments were made from the assessee's own interest-free funds, only Rule 8D(2)(iii) was applicable. Accordingly, the ITAT sustained an addition of Rs.32,213 and directed the deletion of the remaining Rs.4,28,272 disallowance.

Issue 2: Addition under Section 2(22)(e) of the Act:
The second issue revolved around the addition of Rs.2,90,09,110 under Section 2(22)(e) of the Act. The Ld.AO applied this provision due to transactions between the assessee and M/s. Rajshree Automotive Pvt. Ltd., where both companies had the same Managing Director. The Ld.AR argued that the transactions were business-related, but the Ld.AO rejected this explanation. The ITAT analyzed the ledger accounts and commercial nexus between the companies. While the Ld.CIT(A) upheld the addition, the ITAT disagreed. It noted the business ties between the companies and the absence of benefit to the assessee, leading to a directive to delete the addition under Section 2(22)(e) of the Act.

In conclusion, the ITAT Chennai bench partially allowed the assessee's appeal, directing the deletion of the addition made under Section 2(22)(e) of the Act while sustaining a reduced disallowance under Section 14A and Rule 8D.