2018 (1) TMI 11 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - assessee submitted that it was not a shareholder in M/s. J.K.M.Overseas (P) Ltd - Held that - Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that no addition of Deemed dividend u/s. 2(22)(e). See CIT Vs. Universal Medicare Pvt. Ltd.,(2010 (3) TMI 323 - BOMBAY HIGH COURT) and CIT Vs. Ankitech Pvt.Ltd. & others (2011 (5) TMI 325 - DELHI HIGH COURT) Disallowance u/s 14A - Held that - AO has not given the basis on which he arrived at the disallowance u/s 14A of the Act. In the absence of the basis of the disallowance by the AO we are of the view that the addition made by the AO was rightly deleted. Addition of receipt of undisclosed insurance commission - Held that - The information received by the AO was a general information and based on TDS returns filed by various persons at various places. The AO could not co-relate the details of the persons from whom the assessee is stated to have received commission. In such circumstances the very basis of the conclusion by the AO that the assessee received insurance commission is devoid of merit. In our view the CIT(A) rightly deleted the addition made by AO as it was not based on any material brought on record.

Issues Involved:
1. Deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D.
3. Addition of undisclosed insurance commission.

Detailed Analysis:

1. Deemed Dividend under Section 2(22)(e):
The primary issue in the appeal for A.Y. 2008-09 was whether the CIT(A) was justified in deleting the addition of ?1,61,91,000/- made by the AO as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee received a loan from M/s J.K.M.Overseas (P) Ltd., and the AO treated this loan as deemed dividend, invoking Section 2(22)(e). The AO's rationale was based on the fact that a common shareholder, Smt. Indu Modi, held significant shares in both companies. However, the CIT(A) deleted the addition, stating that the assessee was not a shareholder in M/s J.K.M.Overseas (P) Ltd., and hence, the deemed dividend cannot be taxed in the hands of a non-shareholder. This view was supported by the ITAT Kolkata in a previous case and upheld by the Hon’ble High Court of Calcutta and the Hon’ble Supreme Court in similar cases.

The Tribunal upheld the CIT(A)'s decision, emphasizing that for the application of Section 2(22)(e), the payment must be made to a shareholder who is the beneficial owner of shares holding not less than ten percent of the voting power. Since the assessee was not a shareholder in the lender company, the addition as deemed dividend was not justified.

For A.Y. 2011-12, the facts and issue were identical, involving a sum of ?1,17,50,000/-. The Tribunal applied the same reasoning and upheld the CIT(A)'s decision to delete the addition.

2. Disallowance under Section 14A read with Rule 8D:
For A.Y. 2011-12, the AO disallowed ?1,34,008/- under Section 14A read with Rule 8D, arguing that the assessee earned dividend income which should be exempt, and hence expenses related to earning this income should be disallowed. The assessee contended that no interest expenses were incurred in earning the dividend income and that the dividend income was offered for taxation, not claimed as exempt. The CIT(A) accepted this contention and deleted the disallowance, noting that Section 14A applies only when exempt income is claimed, which was not the case here.

The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide a basis for the disallowance and that the assessee did not incur any interest expenses or other expenses related to earning the tax-free income.

3. Addition of Undisclosed Insurance Commission:
The AO added ?20,191/- as undisclosed income based on ITS details, which suggested that the assessee received insurance commission. The assessee disputed this, stating that no such income was received. The CIT(A) deleted the addition, noting that the AO did not bring any material evidence to support the claim of undisclosed income.

The Tribunal upheld the CIT(A)'s decision, agreeing that the AO's conclusion was not based on any substantive evidence and was merely speculative.

Conclusion:
The Tribunal dismissed both appeals by the revenue, upholding the CIT(A)'s decisions on all issues. The key takeaways are the importance of substantive evidence in tax assessments and the proper application of legal provisions concerning deemed dividends and disallowance of expenses.

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