2021 (2) TMI 577 - AT - Income Tax

Addition u/s. 14A r.w.r. 8D - HELD THAT - It is undisputed fact that the assessee has not received any exempt income during the year under consideration. The Hon'ble Gujarat High Court in the case of the assessee itself vide CIT vs. Corrteck Engineering Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT has held that in absence of exempt income disallowance u/s. 14A is unwarranted. Taking into consideration we do not find any infirmity in the finding of ld. CIT(A). Therefore, this ground of appeal of the revenue is dismissed. Addition on interest expenses u/s. 36(1)(iii) - AO noticed that assessee company has given interest free advances to its related company - HELD THAT - As demonstrated from the account of the assessee that it was having interest free fund of ₹ 29,15,05,249/- as against interest free loan of ₹ 26,96,648/-. We have also considered the judicial pronouncements referred by the ld. counsel in the case of CIT vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT and RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT particularly on the issue that when assessee has substantial interest free funds disallowance u/s. 36(1) (iii) is unwarranted. In the light of the above facts and findings, we do not find any error in the decision of ld. CIT(A). Therefore, this ground of appeal of the revenue is dismissed. Deemed dividend u/s. 2(22)(e) - assessee company was a subsidiary of Corrteck Energy Ltd. and Crosstown Power India Pvt. Ltd. was a subsidiary of Corrteck International Pvt. Ltd - HELD THAT - The identical issue on similar fact has been adjudicated by the Co-ordinate Bench of the ITAT in the case of M/s. Precimetal Casts Pvt. Ltd. vs. ITO 2020 (12) TMI 1152 - ITAT AHMEDABAD after following the decision of Jurisdictional High Court in the case of MAHAVIR INDUCTOMELT PVT. LTD. 2017 (1) TMI 1159 - GUJARAT HIGH COURT holding that for the applicability of section 2(22)(e) it is required that the assessee company must be a share holder in the company from whom the loan or advances has been taken and it does not provide that any share holders in the assessee company who had taken any loan or advance from another company in which such share holder is also a share holder having substantial interest. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition under section 14A of the Income Tax Act.
2. Deletion of addition on interest expenses under section 36(1)(iii) of the Income Tax Act.
3. Deletion of addition as deemed dividend under section 2(22)(e) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Deletion of Addition under Section 14A of the Income Tax Act:
During the assessment, the Assessing Officer (AO) noticed that the assessee had made substantial investments in shares and claimed interest expenditure on loans but did not make any disallowance under section 14A read with Rule 8D of the Income Tax Rules. The assessee argued that since no exempt income was claimed, no disallowance under section 14A was warranted. The AO disagreed, citing that section 14A read with Rule 8D mandates disallowance even if no exempt income is earned. The CIT(A) allowed the assessee's appeal, following the Gujarat High Court's decision in a similar case involving the assessee for the assessment year 2009-10, which held that in the absence of exempt income, disallowance under section 14A is unwarranted. The Tribunal upheld the CIT(A)’s decision, dismissing the revenue’s appeal on this ground.

2. Deletion of Addition on Interest Expenses under Section 36(1)(iii) of the Income Tax Act:
The AO observed that the assessee had given interest-free advances to a related company, Crosstown Power Pvt. Ltd., and issued a show-cause notice regarding the disallowance of interest expenses. The assessee explained that a portion of the advances was given as a loan, while the rest were security deposits or capital advances. The AO disallowed interest expenses calculated at 12% on the loan amount. The CIT(A) allowed the appeal, referencing a Co-ordinate Bench decision of the ITAT for the assessment year 2009-10, which noted that the assessee had sufficient interest-free funds. The Tribunal confirmed that the assessee had substantial interest-free funds, citing multiple judicial pronouncements that supported the view that disallowance under section 36(1)(iii) is unwarranted when sufficient interest-free funds are available. Thus, the Tribunal upheld the CIT(A)’s decision, dismissing the revenue’s appeal on this ground.

3. Deletion of Addition as Deemed Dividend under Section 2(22)(e) of the Income Tax Act:
The AO noticed that the assessee had received funds from Corrteck International Pvt. Ltd. and Crosstown Power India Pvt. Ltd., treating these as deemed dividends under section 2(22)(e). The CIT(A) deleted the addition, referencing a Co-ordinate Bench decision for the assessment year 2009-10, which held that the assessee company was not a shareholder in the companies from which the loans were received. The Tribunal reviewed the material and judicial pronouncements, including decisions from the Gujarat High Court and ITAT, which clarified that section 2(22)(e) requires the recipient company to be a shareholder in the lending company. Since the assessee was not a shareholder in Corrteck International Pvt. Ltd. or Crosstown Power India Pvt. Ltd., the addition under section 2(22)(e) was unwarranted. The Tribunal upheld the CIT(A)’s decision, dismissing the revenue’s appeal on this ground.

Conclusion:
The Tribunal dismissed the revenue’s appeal, confirming the CIT(A)’s deletion of additions under sections 14A, 36(1)(iii), and 2(22)(e) of the Income Tax Act. The Tribunal relied on prior judicial decisions and the assessee’s financial records to conclude that the disallowances and additions made by the AO were unwarranted.