2016 (10) TMI 918 - AT - Income Tax

Deemed dividends u/s. 2(22)(e) - loans and advances - claim of the assessee is that it is an Inter-Corporate Deposits - Held that - The authorized share capital of ₹ 2 crores is fully paid up. When the authorized capital has been fully subscribed and paid up, we fail to understand how can the assessee accept share application money of ₹ 1,55,20,000/- when it cannot allot shares of even one rupee to anyone. There is no documentary evidence on record to suggest that the assessee has applied for the increase in its authorized share capital. When the subscribed and paid up share capital has fully exhausted, the authorized share capital of the assessee company claiming to have received share application money of ₹ 1.55 crores is nothing but eyewash and afterthought just to manipulate the facts. The theory of share application money can be demolished simply by these facts on record. The assessee blows hot and cold in the same breath. On the one hand it is claiming the impugned amount as share application money and when this story is demolished, it is taking an alternative plea on Inter-Corporate Deposits (ICD). There is nothing on record to suggest that the two companies are authorized for Inter-Corporate Deposits. Since there is no demonstrative evidence on record by which it can be proved that the impugned amount is Inter-Corporate Deposits, the claim of the assessee cannot be accepted. - Decided against assessee. Disallowance of Insurance Premium - Held that - There is no denying that the Insurance Premium has been paid on the life of the Directors of the Company. The claim of the assessee that such Insurance Premium is nothing but perquisite is not acceptable. Since there is nothing on record which could suggest that such perquisite is part of the service agreement with the Directors. Moreover, there is no commercial expediency to take Insurance on the life of Directors unless the premium is paid towards Keyman Insurance Policy. The assessee has also failed to produce any documentary evidence to prove that the said amount has been treated as a perquisite in the hands of the Directors. Considering all these facts in totality, we decline to interfere with the findings of the ld. CIT(A). The second grievance of the assessee is also dismissed. Disallowance made u/s. 14A read with Rule 8D - Held that - There is no denying that during the year under consideration the assessee has earned exempt income in the form of dividends and Long Term Capital Gains. It is also an admitted fact that the assessee has engaged a Portfolio Manager for doing transaction on its behalf. The Portfolio Management Fees, Demat charges and Security Transaction Tax have already been disallowed by the assessee. It is also an admitted fact that the assessee has paid substantial interest on its borrowings. The Assessee must have also incurred some administrative expenses. Provisions of Section 14A read with Rule 8D squarely apply on the facts of the case. The disallowance computed by the A.O. are as per the provisions of the Act; therefore, calls for no interference with the findings of the ld. CIT(A)

Summary

Issues Involved:
1. Addition on account of loans treated as deemed dividends under Section 2(22)(e) of the Income Tax Act.
2. Disallowance of insurance premium paid on the life of the Director.
3. Addition made under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition on Account of Loans Treated as Deemed Dividends under Section 2(22)(e):
The primary issue revolves around the addition of ?1,55,20,000 treated as deemed dividend under Section 2(22)(e) of the Income Tax Act. The Assessing Officer (A.O.) discovered that the assessee-company received unsecured loans amounting to ?1,55,20,000 from Arcata Trade Link Pvt. Ltd. (ATLPL), where the assessee holds 26.81% shares and ATLPL has accumulated profits of ?3,22,97,892. The A.O. issued a show cause notice to the assessee to explain why the amount should not be treated as deemed dividend. The assessee contended that the amount was share application money, not a loan, supported by a Board resolution of ATLPL. However, the A.O. rejected this claim, noting that the amount was shown as an unsecured loan in the balance sheet and ledger account, and no documentary evidence was provided to support the share application money claim. The A.O. also dismissed the claim that the transaction was an Inter-Corporate Deposit (ICD). The CIT(A) upheld the A.O.'s decision, emphasizing that the transactions were repeatedly recorded as loans and advances, and the share application money claim was an afterthought. The Tribunal agreed with the lower authorities, noting that the authorized share capital was fully subscribed and paid up, making the share application money claim untenable. The alternative ICD claim was also rejected due to a lack of evidence. Thus, the addition of ?1,55,20,000 as deemed dividend was confirmed.

2. Disallowance of Insurance Premium Paid on the Life of the Director:
The second issue pertains to the disallowance of ?5,25,578 paid as insurance premium on the life of the Director. The A.O. found that the insurance policies were in the personal names of the Directors and considered the expenditure personal, disallowing it under Section 37 of the Act. The assessee argued that the insurance premiums were perquisites and thus allowable. However, the A.O. rejected this claim, noting that the premiums were not paid under a Keyman Insurance Policy and were not part of the Directors' employment terms. The CIT(A) upheld the disallowance, stating that the premiums were for the Directors' personal benefit and not for the company's benefit. The Tribunal concurred, noting the absence of any commercial expediency or documentary evidence to support the perquisite claim. Thus, the disallowance of the insurance premium was confirmed.

3. Addition Made under Section 14A:
The third issue involves the disallowance of ?2,39,857 under Section 14A read with Rule 8D of the Income Tax Act. The A.O. noted that the assessee earned exempt income in the form of dividends and Long Term Capital Gains and incurred substantial interest and administrative expenses. The assessee had already disallowed Portfolio Management Fees, Demat charges, and Security Transaction Tax. However, the A.O. computed the disallowance as per Rule 8D, which was upheld by the CIT(A). The Tribunal agreed, noting that the provisions of Section 14A read with Rule 8D applied to the case, and the disallowance was computed correctly. Thus, the addition under Section 14A was confirmed.

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, confirming the additions and disallowances made by the A.O. and upheld by the CIT(A). The judgment emphasizes the importance of documentary evidence and the proper classification of transactions in financial statements.