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2018 (9) TMI 798 - HC - Income TaxDeemed dividend u/s 2(22)(e) - Held that - The test of substantiality, in our opinion, is not confined to what the RBI declares it to be, generally. There can be NDFC and NBFC i.e. an entity which may carry out more than one financial non-banking activity. In the present case too these companies carry on more than one non-banking financial activity up to 3 or 4. In such event, the 50% test to benchmark whether the amounts fall within or outside the 2nd proviso to Section 2(22)(e) of the Act would fail. - decided against revenue Payment of provident fund and employees state insurance dues deposited by the Assessee within the grace period would qualify for deduction u/s 43B - Held that - Having regard to the specific provisions of the Employees Provident Funds Act and ESI Act as well as the concerned notifications which granted a grace period of 5 days (which appears to have been late withdrawn recently on 08.01.2016), we are of the opinion that the ITAT s decision in this case was not correct. The assessee undoubtedly was entitled to claim the benefit and properly treat such amounts as having been duly deposited, which were in fact deposited within the period prescribed (i.e. 15 5 days in the case of EPF and 21 days any other grace period in terms of the extent notification). As far as the amounts constituting deductions from employees salaries towards their contributions, which were made beyond such stipulated period, obviously the assessee was not entitled to claim the deduction from its returns. Revenue s appeal is partly allowed. AO is directed to examine the contributions made with reference to the dates when they were actually made and grant relief to such of them which qualified for such relief in terms of the prevailing provisions and notifications. We also clarify that the assessee would be entitled to deduction in terms of Section 36(1)(va). Disallowance of revenue expenditure - expenditure incurred by the assessee for the construction of a hotel in Sri Nagar - Held that - In appeal the CIT noticed that the assessee had conceded to a ratio of 75% 25%, as constituting the capital and Revenue streams and confirmed such treatment. The Revenue appealed against this decision to the ITAT which dismissed it, by a separate order of 02.06.2006. That order was the subject matter of an appeal (by the Revenue) being Commissioner of Income Tax vs. Bharat Hotels Limited 2015 (8) TMI 718 - DELHI HIGH COURT the ITAT s decision was upheld. As a consequence, the question of law is answered in favour of the assessee and against the Revenue (which has appealed against the rejection in the appeal filed by the assessee). Noting the expenditure on account of salary (which the assessee claimed was expenditure towards salary which was claimed as a deduction and the interest paid for loans, that were used for creating infrastructure in Mumbai and Goa; the ITAT had granted complete relief to the assessee. This Court finds no infirmity with the treatment of salaries as Revenue expenditure. As far as the interest expenditure goes, this Court notices that the period in question is covered by the provisions of Section 36(1)(iii) as it stood prior to its amendment in 2003. In respect of that provision, the law as it existed at the relevant time i.e. in A.Y. 2000-01, was governed by India Cements Ltd. vs. Commissioner of Income Tax 1965 (12) TMI 22 - SUPREME COURT which held that there can be no distinction between expenditure of one kind or the other, when it came to borrowed funds and the treatment of interest thereon. - Decided in favour of the assessee.
Issues:
1. Whether the Income Tax Appellate Tribunal correctly deleted the addition of ?1.2 crores as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961? 2. Whether the payment of provident fund and employees state insurance dues deposited within the grace period qualifies for deduction under Section 43B of the Income Tax Act, 1961? 3. Whether the Income Tax Appellate Tribunal correctly deleted the disallowance of ?74,01,771/- as revenue expenditure? Issue 1: The case involved the taxation of an amount as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) added ?1.2 crores as deemed dividend for the relevant Assessment Year. The Income Tax Appellate Tribunal (ITAT) disagreed with the AO's findings, considering the activities of the lending companies and the substantiality of money lending in their businesses. The High Court upheld the ITAT's decision, emphasizing the need to assess substantiality based on various factors beyond RBI definitions, citing the Bombay High Court's judgment in Commissioner of Income Tax vs. Parle Plastics Ltd. Issue 2: The issue revolved around the deduction of provident fund and employees state insurance dues under Section 43B of the Income Tax Act. The AO disallowed certain amounts, but the ITAT granted relief based on the deposits made within the prescribed timelines. The High Court held that the ITAT's decision was incorrect, stating that deductions could only be claimed for amounts deposited within the specified periods as per the Employees' Provident Funds Act and Employees State Insurance Act. The Court partially allowed the Revenue's appeal, directing the AO to re-examine contributions for eligibility based on the relevant provisions and notifications. Issue 3: Regarding the disallowance of expenditures, the AO sought to disallow three amounts, including expenditure on hotel construction, salaries, and interest on loans. The ITAT had granted complete relief to the assessee on these amounts. The High Court upheld the ITAT's decision, ruling in favor of the assessee on the treatment of salaries as revenue expenditure and interest expenditure based on the law applicable during the relevant assessment year. The Court answered the question of law against the Revenue and in favor of the assessee, except for the relief granted in Issue 2, ultimately dismissing the appeal.
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