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2017 (6) TMI 293 - AT - Income TaxAddition u/s 2(22)(e) - determination of shareholding of the assessee - Held that - We are of the view that the Assessee was a registered and beneficial shareholder of shares of M/S.Mega Resources Ltd., that conferred voting rights of only 1.7%. It is only this share holding that has to be considered for applying the first limb of Section 2(22)(e) and the shareholding of the Assessee s subsidiary M/S.Hooghly Mills Projects Ltd., should not be considered and it is irrelevant. The question in the present case is not even as to whether the Assessee is a beneficial shareholder of the shares held by M/S.Hoogly Mills Projects Ltd. We therefore uphold the order of CIT(A) and dismiss ground no.1 raised by the revenue. Disallowance of expenses incurred in earning exempt income u/s 14A - Held that - As far as the disallowance u/r 8D(2)(iii) is concerned, we are of the view that the CIT(A) s direction to direct the AO to consider, while working out the average value of investments, only investments that yielded tax free income is correct and is line with the decision of the ITAT, Kolkata Benches in the case of REI Agro Ltd. Vs DCIT 2013 (9) TMI 156 - ITAT KOLKATA which has since been approved by the Hon ble Calcutta High Court. We therefore confirm the order of the CIT(A) and dismiss Gr.No.2 raised by the revenue.
Issues Involved:
1. Deletion of addition of ?10,20,00,000 made by the AO under Section 2(22)(e) of the Income Tax Act, 1961. 2. Disallowance of expenses incurred in earning exempt income under Section 14A of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Deletion of Addition under Section 2(22)(e): The Revenue appealed against the order of CIT(A) which deleted the addition of ?10,20,00,000 made by the AO under Section 2(22)(e) of the Income Tax Act, 1961. The AO had treated the loan received by the assessee from M/s. Mega Resources Ltd. as deemed dividend, based on the assessee's shareholding pattern. The AO concluded that the assessee, along with its subsidiary M/s. Hooghly Mills Projects Ltd., held more than 10% of the voting power in M/s. Mega Resources Ltd., thus attracting the provisions of Section 2(22)(e). The CIT(A) disagreed with the AO's approach, stating that only the shares held directly by the assessee should be considered, which amounted to 1.7% of the voting power, not meeting the 10% threshold required under Section 2(22)(e). The CIT(A) emphasized that the AO had no basis to include the subsidiary's shareholding in the computation. The CIT(A) cited the case of Bhaumik Colour (P) Ltd, where it was held that Section 2(22)(e) should be strictly interpreted and only the beneficial ownership of shares should be considered. The Tribunal upheld the CIT(A)'s decision, noting that the AO had incorrectly applied the first limb of Section 2(22)(e) and that the shareholding of the subsidiary should not be included. The Tribunal referenced the Special Bench decision in Bhaumik Colour Labs Pvt. Ltd., which clarified that the term "shareholder" refers to a registered and beneficial shareholder. The Tribunal dismissed the Revenue's appeal, confirming that the assessee's direct shareholding of 1.7% did not attract the provisions of Section 2(22)(e). 2. Disallowance of Expenses under Section 14A: The second issue concerned the disallowance of expenses incurred in earning exempt income under Section 14A, specifically under Rule 8D(2)(iii). The AO had disallowed ?11,08,667, calculated as 0.5% of the average investments. The assessee contended that only ?20,000 of other expenses were incurred in earning the dividend income and had already been reduced in its total income computation. The CIT(A) directed the AO to consider only those investments that yielded tax-free dividend income for the calculation of disallowance under Rule 8D(2)(iii), relying on the decision in REI Agro Ltd. The Tribunal agreed with the CIT(A)'s direction, noting that this approach was consistent with the ITAT Kolkata Bench's decision in REI Agro Ltd., which had been approved by the Hon'ble Calcutta High Court. The Tribunal dismissed the Revenue's appeal on this ground, confirming the CIT(A)'s order to restrict the disallowance to investments that yielded tax-free income during the year. Conclusion: The appeal by the Revenue was dismissed in its entirety. The Tribunal upheld the CIT(A)'s decisions on both issues: the deletion of the addition under Section 2(22)(e) and the direction to restrict the disallowance under Section 14A to investments that yielded tax-free income. The order was pronounced in court on 02.06.2017.
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