2020 (3) TMI 466 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - preference share application money received from Banneret Trading Pvt. Ltd. - Sham transaction or not - Lending of money in the course of business activity - HELD THAT - Undisputedly and factually, the assessee is not a registered shareholder of M/s. BTPL and therefore the condition as envisaged in the provisions of section 2(22)(e) of the Act are not satisfied. Further, the assessee is also not a beneficial shareholder in M/s. BTPL and therefore there is a merit in the contentions of the assessee that the preference share application money received by the assessee can not be treated as deemed dividend in the hands of the assessee as the basic condition as envisaged by section 2(22)(e) of the Act is not satisfied. In our opinion, the assessee has to be registered as well as beneficial shareholder of the lender company in order to attract the provisions of section 2(22)(e) of the Act as held by the Hon ble Apex Court in the case of CIT vs. Madhur Housing and Development Company 2017 (10) TMI 1279 - SUPREME COURT We are not in agreement with the conclusion of the lower authorities that the transaction by M/s. BTPL to assessee was sham. Therefore, we are inclined to hold that the provisions of section 2(22)(e) of the Act are not applicable in the present case and accordingly, we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made under section 2(22)(e) of the Act. The ground no. 1 is allowed. Unexplained cash credit under section 68 - HELD THAT - The assessee has taken preference share application money of ₹ 90.00 crores from M/s. BTPL who in turn borrowed this money from M/s. CISPL ₹ 71.00 Crores as loan and from M/s. Merind Ltd ₹ 19.00 as share application money which is also a group company. Thus identity of these companies are very much established as the assessee has filed all the necessary evidences before the authorities below as regards the genuineness of the transactions. We are of the view that since the source of money is not in doubt and even the source of source has been explained thus the transactions in this case are genuine and there is no reason to treat the same as non genuine. As regards creditworthiness of the investor i.e. M/s. BTPL, we have no doubt as the money is advanced out of borrowed fund from M/s. CISPL and M/s. Merind Ltd. In our opinion, all these three ingredients of section 68 are fully satisfied. Moreover, the money has transferred through banking channel and thus all the evidences are on record. The case of the assessee is also supported by the decision of the Apex Court in the case of CIT vs. Lovely Exports Pvt. Ltd. 2008 (1) TMI 575 - SC ORDER wherein the Hon ble Court observed that once the assessee has given names and identity of the shareholders, the onus upon it gets discharged and no addition can be made in the hands of the assessee and the onus shifts to the department and if the department thought it to be appropriate, the Act permitted the tax department to proceed against such shareholder and even to reopen the individual if necessary in accordance with statutory powers under section 147 Addition u/s 14A - HELD THAT - First plea is that since the entire expenses were disallowed in the computation of income so the issue becomes academic and no further disallowance is called for. Secondly the disallowance cannot exceed the exempt income . We find merits in the contentions of the assessee the issue is squarely covered the decision of the Bombay High Court in the case of Pr CIT Vs Ballarpur Industries Ltd. 2016 (10) TMI 1039 - BOMBAY HIGH COURT , Pr. CIT Vs Caraf Builders Construction (P) Ltd. 2018 (12) TMI 410 - DELHI HIGH COURT which has considered the decision of Hon ble Apex Court in the case of Maxopp Investments Ltd Vs CIT 2018 (3) TMI 805 - SUPREME COURT . After considering the ratio in the various decisions as discussed above we are inclined to set aside the order of ld. CIT(A) on this issue and direct the AO to restrict the disallowance to the amount of exempt income at ₹ 7,02,745/-.

Summary

Issues Involved:
1. Addition of preference share application money as deemed dividend under section 2(22)(e) of the Income Tax Act.
2. Addition of preference share application money as unexplained cash credit under section 68 of the Income Tax Act.
3. Disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Issue-Wise Detailed Analysis:

1. Addition of Preference Share Application Money as Deemed Dividend under Section 2(22)(e):

The primary issue was whether the preference share application money received by the assessee from Banneret Trading Pvt. Ltd. (BTPL) amounting to ?90 crores could be treated as deemed dividend under section 2(22)(e) of the Income Tax Act. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] held that the transaction was a colorable device to avoid tax, as the funds were indirectly transferred from Carol Info Services Limited (CISPL) to the assessee through BTPL, a paper company with no substantial business activities. It was argued that the funds received as preference share application money were akin to unsecured loans, thus attracting the provisions of section 2(22)(e).

The Tribunal, however, disagreed with the lower authorities, emphasizing that the assessee was neither a registered nor a beneficial shareholder of BTPL. Citing the Supreme Court decision in CIT vs. Madhur Housing and Development Company, the Tribunal held that for section 2(22)(e) to apply, the assessee must be both a registered and beneficial shareholder of the lending company. The Tribunal also noted that BTPL had accumulated losses, not profits, further negating the applicability of section 2(22)(e). Consequently, the addition of ?90 crores as deemed dividend was deleted.

2. Addition of Preference Share Application Money as Unexplained Cash Credit under Section 68:

The AO alternatively treated the preference share application money as unexplained cash credit under section 68, arguing that the assessee failed to prove the identity, creditworthiness, and genuineness of the transaction. The CIT(A) did not adjudicate this ground, having upheld the addition under section 2(22)(e).

The Tribunal found that the assessee had provided sufficient evidence to establish the identity, creditworthiness, and genuineness of BTPL, CISPL, and Merind Ltd., including board resolutions, financial statements, and confirmations. The Tribunal concluded that the assessee had discharged its burden under section 68, and the addition as unexplained cash credit was unwarranted. Thus, the addition under section 68 was also deleted.

3. Disallowance under Section 14A Read with Rule 8D:

The assessee challenged the disallowance under section 14A read with Rule 8D, arguing that it should be limited to the amount of exempt income earned during the year, which was ?7,02,745. The AO had made a disallowance of ?8,09,27,595, leading to a net addition of ?1,70,51,001 after considering the assessee's suo-moto disallowance of ?7,71,04,511.

The Tribunal agreed with the assessee, citing the Bombay High Court decision in Pr CIT vs. Ballarpur Industries Ltd., which held that disallowance under section 14A cannot exceed the amount of exempt income. Consequently, the Tribunal directed the AO to restrict the disallowance to ?7,02,745, aligning with the exempt income earned by the assessee. The corresponding appeal by the Revenue on this issue was dismissed.

Conclusion:

The Tribunal allowed the assessee's appeal, deleting the additions made under sections 2(22)(e) and 68, and restricted the disallowance under section 14A to the amount of exempt income. The Revenue's appeal was dismissed.