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2018 (2) TMI 1085 - AT - Income TaxDeemed dividend u/s 2(22)(e) - capital subsidy/grant receipt - urrent accommodation adjustments accounts/trade advances - whether or not in the nature of loan or advance - Held that - The provision of S. 2(22)(e) along with its Explanations 2 as stood at the relevant point of time, shall only mean that the expression accumulated profits shall only include all the profits of the company up to the date of distribution which are normal revenue profits. The words used are plain, clear and unambiguous that only the profits of the company are to be considered for this purpose. The said provision nowhere indicates that capital subsidy/grant should also be included/ considered within the expression accumulated profits . The amount of capital subsidy of ₹ 36.87 lakh could not be considered as a accumulated profit and is out of the preview of the S. 2(22)(e). Accordingly, the ld. CIT(A) was not justified in holding that the amount of capital subsidy was a part of accumulated profited to be considered as deemed dividend under S. 2(22)(e). Therefore, for this reason also, the addition made of the deemed dividend to this extent was not justified. Thus the alternate plea of the assessee is allowed. Disallowance u/s 37(1) - assessee had advanced interest free to one Shri Neeraj Kumar, who is son in law of the assessee - Held that - In this case also, in absence of anything to the contrary, as per the settled legal position, a presumption can be drawn that advance given of ₹ 7,92,300/- to Shri Neeraj Kumar were out of the huge interest free capital of ₹ 40 lacs, which was many times more. In view of this, we do not agree with the observation of the ld. CIT(A) that the appellant failed to substantiate his claim by a fund flow statement. Thereapart, such interest free fund could be utilized by the assessee for any purpose whatsoever as held by the Hon ble jurisdiction High Court in the case of ACIT v/s Ram Kishan Verma (2012 (5) TMI 417 - ITAT, Jaipur) and in Hero Cycle P. Ltd vs. CIT (2015 (11) TMI 1314 - SUPREME COURT OF INDIA). Hence, the CIT(A) was not justified in confirming the disallowance and the same is directed to be deleted. Thus Ground No. 2 of the assessee is allowed.
Issues Involved:
1. Sustaining addition treating the amount as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. 2. Confirming disallowance of interest expenses. Detailed Analysis: Issue 1: Deemed Dividend under Section 2(22)(e) Facts and Contentions: - The assessee received ?14.47 crores from M/s Dhanvarsha Oil Mills Pvt. Ltd., where he held substantial interest. - The Assessing Officer (AO) treated this amount as a loan and added ?49,74,429 as deemed dividend under Section 2(22)(e). - The assessee argued that the transactions were trade advances in the regular course of business and not loans, hence Section 2(22)(e) should not apply. - The CIT(A) partly confirmed the AO’s action but reduced the addition to ?43,45,236 by excluding the current year’s profit of ?6,29,193. Legal Arguments: - To attract Section 2(22)(e), the payment must be in the nature of a loan or advance. - The assessee contended that the transactions were mutual, open, and current account adjustments, not loans or advances. - The assessee cited several cases including CIT vs. Raj Kumar and CIT v/s Creative Dyeing & Printing P Ltd. to support that trade advances do not fall under Section 2(22)(e). Tribunal’s Findings: - The Tribunal examined the ledger accounts and found that the transactions were in the nature of loans or advances. - However, it agreed with the alternative argument that capital subsidy/grant should not be included in accumulated profits for deemed dividend purposes. - The Tribunal cited the case of DCIT v/s Rajasthan Wires (P) Ltd., holding that capital receipts such as subsidies cannot be included in accumulated profits. - Consequently, the amount of ?36.87 lakh received as capital subsidy was excluded from the accumulated profits, reducing the deemed dividend addition. Issue 2: Disallowance of Interest Expenses Facts and Contentions: - The AO disallowed ?46,890 of interest expenses, asserting that the assessee had advanced ?7,32,000 interest-free to his son-in-law, which was not for business purposes. - The assessee claimed that the advance was made from his own capital, which was more than ?40 lakhs, and not from interest-bearing funds. Legal Arguments: - The assessee argued that when interest-free funds are larger than the interest-free advances, a presumption arises that the advances were made from interest-free funds. - The assessee relied on the Supreme Court’s decision in Hero Cycle P. Ltd vs. CIT and the Tribunal’s decision in ACIT v/s Ram Kishan Verma. Tribunal’s Findings: - The Tribunal noted that the assessee had sufficient interest-free funds (capital of ?40 lakhs and interest-free loans of ?95,71,170). - It held that a presumption arises that the interest-free advances were made from these interest-free funds. - The Tribunal cited Hero Cycle P. Ltd vs. CIT and ACIT v/s Ram Kishan Verma, supporting the assessee’s position. - The disallowance of interest expenses was deleted. Conclusion: The appeal was partly allowed. The Tribunal excluded the capital subsidy from the accumulated profits for deemed dividend purposes, reducing the addition under Section 2(22)(e). It also deleted the disallowance of interest expenses, holding that the advances were made from sufficient interest-free funds.
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