2012 (10) TMI 756 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - disallowance of interest paid as borrowed funds has been advanced interest free for non-business purposes - Held that - As is evident on perusal of the assessment order that the assessee pleaded before the AO that the loan was taken in the ordinary course of business & the AO rejected the submissions of the assessee on the ground that unsecured loans carried interest and obligation to repay but the CIT(A) did not record any findings on this aspect nor is known as to whether or not any such plea as to whether or not funds were received in the ordinary course of business was taken before the CIT(A)- As it is well established that trading advances are not covered within the mischief of section 2(22)(e) it fair and appropriate to vacate the findings of learned CIT(A) and restore the matter to his file for deciding the issue afresh to pass a speaking order - in favour of assessee by way of remand. Interest u/s 36(1)(iii) - Disallowance as commercial expediency of advancing interest free loans to the sister concerns not established - Held that - If in the process of examination of claim for such a deduction it transpires that the assessee had diverted certain funds to associates without any interest there would be a very heavy onus on the assessee to be discharged before the AO to the effect that in spite of pending loans on which the assessee was incurring the liability to pay interest still there was justification for diversion of funds to associate or sister concerns for non-business purposes - as complete facts are not available nor the assessee furnished date(s) of interest free advances or dates of borrowings and nor furnished any material establishing commercial expediency in advancing aforesaid funds before the lower authorities and even before us nor the ld. CIT(A) recorded any findings on these aspects it is fair and appropriate to set aside the order of the CIT(A) and restore the issue back to his file for deciding the matter afresh - in favour of assessee by way of remand. Disallowance u/s 14A - certain investments in shares out of funds borrowed or from its own sources - Held that - As decided in Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - DELHI HIGH COURT even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income AO will have to verify the correctness of such claim & if AO is satisfied with the claim of the assessee with regard to the expenditure or no expenditure AO is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case the assessing officer is not on the basis of objective criteria and after giving the assessee a reasonable opportunity satisfied with the correctness of the claim of the assessee he shall have to reject the claim and state the reasons for doing so. Having done so AO will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income on the basis of a reasonable and acceptable method of apportionment - thus set aside the order of the CIT(A) and restore back for deciding afresh in the light of aforesaid judicial pronouncements of Maxopp Investment Ltd.- in favour of assessee by way of remand. Service charges - income from house property v/s business income - Held that - It is apparent that facilities are inseparable part of tenancy since one cannot be enjoy the facilities without the tenancy. The prime object of the assessee under the two agreements was to let out the premises to the bank with additional right of continuous supply of electricity and water besides facilities for junction box/cables for telephone for which rent was being paid month by month. In view of the foregoing especially when the assessee claimed that their claim had been accepted in the preceding years while there is no such finding in the impugned order nor the assessee placed any material suggesting that ensuring continuous supply of electricity water or facilities for junction box/cables for telephone to the tenants is business of the assessee it is fair and appropriate to set aside the order of the CIT(A) and restore the matter to his file for deciding the issue afresh - in favour of assessee by way of remand.

Summary

Issues Involved:
1. Deemed dividend under section 2(22)(e)
2. Disallowance of interest under section 36(1)(iii)
3. Disallowance under section 14A
4. Classification of service charges as "income from house property" or "business income"

Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The assessee's appeal against the addition of Rs.33,99,003 as deemed dividend was based on the argument that loans from M/s PSB Industries (India) Pvt. Ltd. and M/s Skipper Sales Pvt. Ltd. were for business purposes. The AO considered these loans as deemed dividends since the assessee held significant shares in these companies. The CIT(A) restricted the addition to Rs.33,99,003, corresponding to the reserves and surplus of PSB Industries, and deleted the addition for Skipper Sales due to lack of accumulated profits. The tribunal noted that neither the AO nor the CIT(A) properly assessed whether the loans were in the ordinary course of business and remanded the matter back to the CIT(A) for fresh adjudication, considering various judicial pronouncements.

2. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed Rs.6,67,910 of interest claimed under section 36(1)(iii) on the grounds that the assessee failed to establish commercial expediency for advancing interest-free loans to related concerns. The CIT(A) upheld this disallowance, noting that the assessee had both interest-bearing and interest-free loans but did not demonstrate that the interest-free loans were for business purposes. The tribunal observed that the assessee did not provide sufficient evidence or cash flow statements to establish the nexus between borrowed funds and interest-free advances. Consequently, the tribunal remanded the issue back to the CIT(A) for a fresh decision, requiring the assessee to furnish relevant details and accounts.

3. Disallowance under Section 14A:
The AO disallowed Rs.2,50,495 under section 14A, as the assessee had investments in shares but did not earn any exempt income or provide details of expenditure incurred. The CIT(A) upheld the AO's decision, referencing the ITAT Special Bench's ruling in Chem Invest Limited that disallowance under section 14A applies even if no exempt income is earned. The tribunal noted the lack of relevant accounts and details from the assessee and remanded the issue back to the CIT(A) for fresh adjudication, directing the assessee to furnish all relevant details and accounts of expenditure incurred in managing investments.

4. Classification of Service Charges as "Income from House Property" or "Business Income":
The AO assessed service charges of Rs.16,56,000 as "income from house property" instead of "business income," disallowing related expenses and depreciation. The CIT(A) upheld this classification, referencing the Supreme Court's decision in Shambu Investment (P) Ltd. The tribunal observed that the assessee did not provide sufficient evidence that ensuring continuous supply of electricity, water, or telephone facilities was a business activity. The tribunal remanded the issue back to the CIT(A) to clearly determine whether these activities constituted a business of the assessee, considering the principle of consistency and previous years' assessments.

General Observations:
The tribunal emphasized the importance of proper documentation and evidence to support claims, directing the CIT(A) to pass speaking orders and allow sufficient opportunity for both parties to present their cases. The appeal was partly allowed for statistical purposes, with several issues remanded for fresh adjudication.