2022 (12) TMI 679 - AT - Income Tax

Disallowance of interest u/s. 36(i)(iii) - amount of interest on investment made in the assets not used for the business purpose is not allowable - AO estimated interest @12% p.a. attributable to such investment in land - AO held that the aforesaid amount of interest has been incurred towards purchase of capital asset being advance towards land and therefore the assessee is not entitled to deduction of such interest expenditure u/s 36(1)(iii) - HELD THAT - It is the case of the Revenue that interest expenditure has been incurred on investment made in assets and is in the nature of capital expenditure wrongly claimed as Revenue expenditure by the assessee. The assessee is, on the other hand, claims that (a) the interest free funds to the extent of Rs.5,52,50,000/- was available to meet the advance towards land, (b) the ITAT in Assessment Year 2007-08 has observed that Assessee is engaged in real estate activity as one of its business activity. We notice that the CIT(A) took note of the decision of the Tribunal rendered in Assessment Year 2007-08 and observed that the assessee is indeed engaged in the business of real estate and not merely in coal trading. As a consequence, it was observed that the interest expenses incurred on acquisition of real estate has to be treated as ordinary business activity and therefore the interest incurred on acquisition of real estate partakes the character of Revenue expenses and thus cannot be disallowed. We find that the CIT(A) has taken note of the object clause in the MOA as well as past and present state of affairs to come to a conclusion that acquisition of land is ordinary business activity in the business of real estate and therefore attendant interest expenses cannot be disallowed by treating it for non business purposes with reference to Section 36(1)(iii) - We do not see any error committed by the CIT(A) for returning such finding. Hence, we decline to interfere. Addition u/s 2(22)(e) - deemed dividend of income - CIT-A restricted the addition to the extent of General Reserve after excluding the Security Premium Reserve which has been regarded to be outside the ambit of expression accumulated profits under Section 2(22)(e) - HELD THAT - CIT(A) in essence, held that the security premium reserve cannot be regarded as part of accumulated profits u/s 2(22)(e) and when such security premium is excluded, the General Reserve available for the purposes of addition under Section 2(22)(e) only and thus sustained the addition to the extent accumulated profit excluding share premium reserve. We find the approach of the CIT(A) is in consonance with judicial precedent available in this regard as cited by the CIT(A). We thus see no infirmity in the action of the CIT(A). Hence, we decline to interfere.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The Revenue challenged the deletion of an addition of Rs. 56,88,000/- made by the Assessing Officer (AO) on account of disallowance of interest under Section 36(1)(iii) of the Income Tax Act. The AO had observed that the assessee paid Rs. 4,74,00,000/- as an advance for purchasing land and incurred interest costs claimed as revenue expenditure. The AO disallowed the interest, estimating it at 12% per annum, on the grounds that the investment in land was not used for business purposes.

The assessee argued that the company also deals in real estate, as established in previous assessments, and thus the investment was part of routine business. The CIT(A) noted that the assessee had made an advance for land purchase, and the disallowance was based on the incorrect assumption that the assessee was not engaged in real estate. The CIT(A) referred to the Memorandum of Association and previous tribunal decisions to establish that the company was indeed in the real estate business. Consequently, the CIT(A) deleted the disallowance, recognizing the interest as a revenue expense.

The Tribunal upheld the CIT(A)'s decision, noting that the acquisition of land was an ordinary business activity in real estate and the interest incurred should be treated as a revenue expense. The Tribunal found no error in the CIT(A)'s findings and declined to interfere, thereby dismissing the Revenue's ground of appeal.

2. Addition of Deemed Dividend under Section 2(22)(e):
The AO added Rs. 5,52,50,000/- as deemed dividend under Section 2(22)(e), based on a loan taken by the assessee from M/s Ajmala Stationery Pvt. Ltd. (ASPL), where the assessee held more than 10% voting power. The AO included the entire loan amount as deemed dividend, considering the reserves and surplus of ASPL.

The assessee contended that the reserves included a significant amount of share premium, which should not be considered as accumulated profits for deemed dividend purposes. The CIT(A) examined the balance sheets and other financial documents, concluding that the general reserves were only Rs. 2,86,084/-, with the rest being share premium. The CIT(A) held that share premium is a capital receipt and cannot be distributed as dividend under the Companies Act, thus excluding it from accumulated profits under Section 2(22)(e). Consequently, the addition was restricted to Rs. 2,86,084/-.

The Tribunal agreed with the CIT(A)'s approach, which was in line with judicial precedents. The Tribunal noted that share premium cannot be regarded as accumulated profits and upheld the CIT(A)'s decision to restrict the addition to the general reserves. The Tribunal found no infirmity in the CIT(A)'s action and dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The interest disallowance under Section 36(1)(iii) was deleted, recognizing the assessee's real estate business. The deemed dividend addition under Section 2(22)(e) was restricted to the general reserves, excluding the share premium. The Tribunal found the CIT(A)'s decisions consistent with legal precedents and declined to interfere.