2016 (5) TMI 58 - AT - Income Tax

Deemed dividend u/s 2(22) - Loan / Advances received from public company cum NBFC - Held that - The assessee before the Assessing Officer and the learned Commissioner of Income-tax (Appeals) has submitted that both these companies are public limited companies and they have produced evidences to substantiate that the STLL is a listed company at the Delhi Stock Exchange and Jaipur Stock Exchange and also the shareholding pattern as on March 31, 2008. And that section 2(22)(e) is not applicable to loans or advances by non-banking finance companies (NBFC). In order to substantiate that STLL is NBFC, it was submitted that they are registered with the Reserve Bank of India since 1998 in category of loan investment company and engaged in the activities of shares sale, financing activities, loan syndication activities and hypothecation activities. It is a well-settled principle of law that deeming provision has to be interpreted strictly and it cannot be stretched to more than that for which the deeming provision can be literally interpreted. Nothing can be added or implied while interpreting a deeming provision. One can only look at the language used. Therefore, we concur with the learned Commissioner of Income-tax (Appeals) that the lender company, i.e., M/s. STLL is a public limited company and so the loan/advance/ICD given to the assessee does not fall in the ken of section 2(22)(e) and moreover, the lender company is a NBFC which is also excluded from the said deeming provision, therefore, we do not find any merit in this ground of appeal and we uphold the learned Commissioner of Income-tax (Appeals) s order and dismiss this ground. - Decided in favour of assessee. Disallowance of total interest - Held that - We find that the assessee-company had sufficient free funds and that the assessee had stated before the Assessing Officer that the borrowed funds have been used for business purposes only and not for the investment, could not be controverted by both the authorities below. The Assessing Officer erred in concluding that since the assessee-company is incurring interest expenditure so no surplus fund is available to the assessee-company is erroneous on the fact that the total shareholder fund without interest burden is to the tune of ₹ 34.46 crores and, therefore, thus we have no hesitation to delete the disallowance. See East India Pharmaceutical Works Ltd. v. CIT 1997 (3) TMI 5 - SUPREME Court - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,03,12,934 under section 2(22)(e) of the Income-tax Act, 1961.
2. Disallowance of total interest debited to profit and loss account of Rs. 16,15,903 due to share application money of Rs. 9.86 crores.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 1,03,12,934 under Section 2(22)(e):

The Revenue's appeal centered on the deletion of an addition of Rs. 1,03,12,934 by the Commissioner of Income-tax (Appeals), which was initially made by the Assessing Officer under section 2(22)(e) of the Income-tax Act, 1961. The Assessing Officer argued that the loan taken from M/s. Sindhu Trade Links Ltd. (STLL) should be treated as deemed dividend because the directors of the assessee-company were substantially interested in STLL, and there were common shareholders in both companies. The assessee contended that section 2(22)(e) was not applicable as STLL was a listed NBFC and a public company where the public was substantially interested.

The Assessing Officer countered this by stating that STLL was not a widely held public company as its shares were not traded, and the majority of shares were held by the Sindhu family. The Commissioner of Income-tax (Appeals) disagreed, stating that STLL met the criteria of a public company as defined in section 2(18) of the Act, and hence section 2(22)(e) was not applicable. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, emphasizing that STLL was a public limited company and an NBFC, thus falling outside the purview of section 2(22)(e). The Tribunal concluded that the loan/advance/ICD given to the assessee did not constitute deemed dividend under the said section.

2. Disallowance of Total Interest Debited to Profit and Loss Account of Rs. 16,15,903:

The assessee's appeal was against the confirmation of disallowance of interest amounting to Rs. 16,15,903 by the Assessing Officer, who argued that the assessee had given share application money of Rs. 9.86 crores, which did not earn any interest income, and the assessee had no surplus funds. The Assessing Officer observed that the assessee had advanced a significant amount as share application money without proving that the shares were allotted or that the money advanced would yield income. He concluded that the interest should be disallowed as the funds were diverted.

The Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the assessee had not taken steps to recover the share application money, indicating a diversion of funds. The Tribunal, however, found that the assessee had sufficient free funds amounting to Rs. 34.46 crores, and the share application money was only 28.63% of the total shareholder funds. Citing the Bombay High Court's judgment in CIT v. Reliance Utilities and Power Ltd., the Tribunal held that if interest-free funds were available, it could be presumed that investments were made from these funds. Consequently, the Tribunal deleted the disallowance of Rs. 16,15,903, allowing the assessee's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal regarding the addition under section 2(22)(e) and allowed the assessee's appeal concerning the disallowance of interest, providing a detailed analysis of the applicability of section 2(22)(e) and the availability of sufficient free funds for the assessee.