2015 (12) TMI 761 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - Held that - There is factual error in computing the deemed dividend. Surprisingly, there is no reference to the computation made by the assessee in the assessment order. In our considered opinion, without pointing out any flaw or error in the calculation made by the assessee, the AO should not have proceeded by calculating the deemed dividend of its own. Further, the AO has not given any basis as to how he has come to the accumulated profit of the respective companies. This issue cannot be decided on incorrect facts therefore, we restore this issue to the file of the AO. The AO is directed to decide the issue afresh in the light of the workings given by the assessee after giving a reasonable opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purpose. Disallowance u/s. 14A r.w. Rule 8D - Held that - The Hon ble High Court of Delhi in the case of Joint Investments Pvt. Ltd (2015 (3) TMI 155 - DELHI HIGH COURT) has held that the window for disallowance is indicated in Sec. 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. Thus we direct the AO to restrict the disallowance to ₹ 2,62,194/-.- Decided in favour of assessee for assessee in part.

Summary

Issues:
1. Addition on account of deemed dividend u/s. 2(22)(e) of the Act
2. Disallowance u/s. 14A r.w. Rule 8D

Deemed Dividend u/s. 2(22)(e) of the Act:
The appeal was against the addition of deemed dividend under Sec. 2(22)(e) of the Act. The assessee, a proprietor of a trading business, had taken loans from two companies. The AO applied Sec. 2(22)(e) based on the company's accumulated profits, resulting in an addition of &8377; 91,19,909. The assessee argued that the loans were given to the companies, hence no deemed dividend should apply. The ITAT found errors in the AO's computation and directed a fresh assessment, emphasizing the need for accurate calculations and providing a reasonable opportunity for the assessee to be heard.

Disallowance u/s. 14A r.w. Rule 8D:
The second issue concerned disallowance u/s. 14A r.w. Rule 8D due to the assessee not allocating expenses for earning exempt income. The AO computed a disallowance of &8377; 4,12,825. The ITAT, considering relevant case laws, restricted the disallowance to the exempt income of &8377; 2,62,194, emphasizing that the disallowance should not exceed the tax-exempt income. The decision was based on the principle that the disallowance under Sec. 14A should be limited to the expenditure related to tax-exempt income.

In conclusion, the ITAT allowed the appeal in part for statistical purposes, directing a reassessment of the deemed dividend addition and restricting the disallowance under Sec. 14A to the amount of exempt income. The judgment highlighted the importance of accurate computations and adherence to legal principles in tax assessments.