2020 (2) TMI 1699 - HC - Income Tax

Maintainability of appeal against ITAT - low tax effect - Addition u/s 2(22)(e) and 14A deleted - AO treated the loan received from Member(s)/Share-holder(s)/Director(s) holding more than 10% of shares therein, as deemed dividends and made additions under the head income from other sources and also disallowance u/s 14A - HELD THAT - From the perusal of the order of the Tribunal, it is not forth coming that any notification, order, instruction or circular was dealt with/ relied upon by the Tribunal what to talk about the same being held illegal or ultra vires. Even otherwise, the Tribunal has no jurisdiction to declare a circular ultra vires. In our considered view, the case does not fall in the exception clause. The appeal is dismissed. The substantial questions claimed are kept open.

Summary

Issues:
1. Interpretation of the definition of "dividends" under section 2(22)(e) of the Income Tax Act, 1961.
2. Treatment of loans received by a company from its members/shareholders/directors.
3. Disallowance under Section 14A of the Income Tax Act.
4. Application of CBDT Circular No. 5 of 2014 and legislative intent.
5. Principles of apportionment in cases of no exempt income.
6. Judicial precedence and applicability of decisions in specific cases.

Analysis:
1. The first issue revolves around the interpretation of the definition of "dividends" under section 2(22)(e) of the Income Tax Act. The Tribunal held that loans advanced by a company to its members/shareholders/directors, not in the usual course of business, do not fall under the definition of "dividends." The appellant contested this interpretation, arguing it contradicts the clear language of the provision.

2. The second issue concerns the treatment of loans received by the assessee from a company, with a portion used for miscellaneous expenses. The Tribunal rejected the Commissioner's finding that such transactions relate to the usual course of business. The appellant challenged this decision, questioning the lack of reasons provided by the Tribunal for overturning the Commissioner's order.

3. Disallowance under Section 14A of the Income Tax Act forms the third issue. The Tribunal did not uphold the disallowance of a specific amount under this section, citing that the disallowance cannot exceed exempt income. The appellant argued against this decision, highlighting the absence of such a restriction in the Act or relevant rules.

4. The fourth issue involves the application of CBDT Circular No. 5 of 2014 and legislative intent. The Tribunal's decision was challenged for not considering expenses related to earning exempt income for disallowance, irrespective of actual income earned during the financial year. The appellant emphasized the legislative intent expressed in the circular and relevant judicial precedents.

5. The fifth issue addresses the principles of apportionment in cases where there is no exempt income. The Tribunal's decision not to make disallowances under Section 14A in the absence of exempt income was challenged. The appellant pointed out the Supreme Court's endorsement of apportionment principles, despite the absence of exempt income.

6. The final issue involves judicial precedence and the applicability of decisions in specific cases. The Tribunal's reliance on certain High Court decisions was contested, with the appellant arguing that the facts of those cases were distinguishable. The appellant emphasized the need to follow the principles of apportionment laid down by the Supreme Court in relevant judgments.

In conclusion, the High Court dismissed the appeal, stating that the case did not fall under the exception clause of a relevant CBDT circular. However, the substantial questions claimed were kept open for future consideration. The judgment provides a detailed analysis of various legal and factual aspects, addressing significant issues related to income tax assessment and applicability of relevant provisions and circulars.