2015 (10) TMI 596 - AT - Income Tax

Disallowance of interest paid as non-business purpose expenditure - Held that - The partners have withdrawn their capital which were credited in the firm. There is no bar to withdraw their capital as they have withdrawn their capital out of the total capital invested in the firm. They have advanced these amounts to another firm i.e. M/s Raju Steel Industries on which they have charged interest and that interest income has been shown in the hands of these partners. Similarly the partner of M/s Raju Steel Industries has withdrawn some capital from their partnership firm and advanced the money to this partnership concern. This partnership concern has paid interest to them and the interest income has been shown in their respective hands. Therefore in our considered view there is no loss of revenue at all. The firm is paying interest and claiming deduction in profit and loss account on the other hand the lenders have shown the interest income in their hands and paying due tax on that income. The rate of tax is same therefore in our considered view disallowance of interest paid was not justified under Section 37(1). This is the business man who knows how to run his business activity. The assessee has run his business activities in a way which they like and was beneficial for them. If by any reason they have made some tax planning that tax planning is also in the four corner of law which is permissible. Therefore for this reason also disallowance of interest was not justified - Decided in favour of assessee. Deemed dividend - CIT(A treating that loan and interest accrued thereupon given on the assessee firm by OCAPL did not fall within the ambit of section 2(22)(e) - Held that - The deemed dividend can be assessed only in case of person who is a shareholder of lender company and not in the hands of the person other than the shareholder. See COMMISSIONER OF INCOME TAX Versus ANKITECH PVT LTD. & OTHERS 2011 (5) TMI 325 - DELHI HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenses under section 37(1) of the Act.
2. Application of section 2(22)(e) in relation to loans given by certain companies to the assessee firm.
3. Interpretation of deemed dividend provisions and its applicability.

Issue 1 - Disallowance of Interest Expenses under Section 37(1) of the Act:
The appeals filed by the Revenue challenged the treatment of interest expenses as allowable under section 37(1) of the Act. The assessee firm, engaged in trading of iron and steel, had faced disallowance of interest expenditure by the Assessing Officer. However, the learned CIT(A) and the Tribunal, Nagpur Bench, in the assessee's favor, held that disallowance was not justified. The Tribunal emphasized that if there was no nexus between interest-bearing loans and withdrawals made by partners, interest disallowance was not warranted under section 37(1). The Tribunal referred to previous judgments and upheld the decision in favor of the assessee, leading to the dismissal of the Revenue's appeal.

Issue 2 - Application of Section 2(22)(e) to Loans Given by Companies to the Assessee Firm:
The second issue pertained to loans and interest accrued given to the assessee firm by certain companies, triggering the application of section 2(22)(e) of the Act. The Assessing Officer contended that the assessee had substantial interest in the lending companies through a related private limited company, justifying the taxation of accumulated profits in the assessee's hands. However, the Tribunal, following previous decisions, ruled in favor of the assessee, holding that the deeming fiction of section 2(22)(e) applied only to shareholders and not to concerns where shareholders were partners. The Tribunal's decision was further supported by the Hon'ble Jurisdictional High Court's judgment, leading to the dismissal of the Revenue's appeal on this issue.

Issue 3 - Interpretation of Deemed Dividend Provisions:
The final issue revolved around the interpretation of deemed dividend provisions and their applicability. The Revenue cited judgments of the Hon'ble Delhi High Court in support of their position. However, the Tribunal, in line with previous decisions and the judgment of the Hon'ble Jurisdictional High Court, upheld the decision of the learned CIT(A) in dismissing the Revenue's claims. The Tribunal emphasized the necessity to follow the decisions of the Jurisdictional High Court and affirmed the findings of the CIT(A) based on the Co-ordinate Bench's order in the assessee's own case. Consequently, the Revenue's appeals were dismissed across all assessment years.

In conclusion, the judgment by the Appellate Tribunal ITAT Nagpur addressed multiple issues concerning interest expenses disallowance under section 37(1) of the Act, the application of section 2(22)(e) to loans given by companies to the assessee firm, and the interpretation of deemed dividend provisions. The Tribunal consistently ruled in favor of the assessee, citing previous decisions and the guidance of the Jurisdictional High Court, leading to the dismissal of the Revenue's appeals in all the assessment years under consideration.