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2012 (9) TMI 406 - HC - Income TaxAdditions on Deemed dividend - Inter Corporate Deposits (ICDs) - addition made by AO was deleted by ITAT - Held that - The Tribunal has examined all the facts relevant to the case and have correctly reached the conclusion that none of the shareholders of respondentassessee or the respondentassessee itself is a shareholder of Company from whom Loan is taken. Similarly, neither Company imparting loan nor its shareholders are holding any shares in the respondentassessee. Further, Section 2(22)(e) does not provide that having a common Director in two companies would make Section 2(22) (e) applicable. Thus Section 2(22)(e) is not applicable in respect of the loan advanced to the respondent-assessee - in favour of assessee. Disallowance of the proportionate interest on the interest free loans given to the subsidiary companies - ITAT deleted it - Held that - As decided in CIT v. Reliance Utilities and Power Limited 2009 (1) TMI 4 - HIGH COURT BOMBAY where interest free funds are available with an assesee sufficient to meet its investments and at the same time loans are taken, then a presumption would arise that the investment has been made out of interest free funds available with the company and not out of loans taken - in favour of assessee.
Issues:
1. Interpretation of Section 2(22)(e) of the Income Tax Act regarding inter corporate deposits. 2. Determination of deemed dividend under Section 2(22)(e) for unsecured loans. 3. Applicability of Section 2(22)(e) in case of common directors in two companies. 4. Disallowance of proportionate interest on interest-free loans given to subsidiary companies. Issue 1: Interpretation of Section 2(22)(e) regarding inter corporate deposits The appeal questioned whether inter corporate deposits fall under Section 2(22)(e) of the Act. The Tribunal found that the respondent did not hold shares in the lending companies, nor did the lending companies hold shares in the respondent. Thus, the basic requirement for Section 2(22)(e) was not met, leading to the conclusion that the provision was inapplicable to the situation. Issue 2: Determination of deemed dividend for unsecured loans The Assessing Officer added unsecured loans as deemed dividends under Section 2(22)(e) for the assessment year 2002-2003. The Commissioner of Income Tax upheld this decision, but the Tribunal remanded the case for reexamination. It was found that the loans did not meet the criteria for deemed dividend due to the lack of shareholding connections between the parties involved. Issue 3: Applicability of Section 2(22)(e) in case of common directors The Revenue argued that the loans should be treated as deemed dividends under Section 2(22)(e) since they were, in fact, loans and advances. However, the Senior Counsel for the respondent contended that the lack of shareholding connections between the parties precluded the application of Section 2(22)(e). The Tribunal's decision was based on the absence of shareholding relationships, dismissing the Revenue's arguments. Issue 4: Disallowance of proportionate interest on interest-free loans to subsidiaries Regarding the disallowance of proportionate interest on interest-free loans to subsidiary companies, both parties agreed that the Supreme Court's decision in CIT v. Reliance Utilities and Power Limited applied. The Court held that when interest-free funds are available to meet investments, a presumption arises that investments were made from those funds rather than loans. As the interest-free funds were sufficient to cover the investments, the question was answered in favor of the respondent. In conclusion, the appeal was dismissed, with the Court finding that the questions raised did not present substantial legal issues.
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