2018 (1) TMI 76 - AT - Income Tax

Disallowance u/s 14A - Held that - The assessee had enough own funds which was more than the investments which yielded tax free income there can be no disallowance of interest expenses in terms of Rule 8D(2)(ii) of the Rule. As held by the Hon ble Delhi High Court in the case of Cheminvest Ltd vs CIT (2015 (9) TMI 238 - DELHI HIGH COURT) that when there is no exempt income then there can be no question of disallowance u/s 14A of the Act. In the light of the judicial pronouncements, we are of the view that the plea of the assessee to exclude investments which had not yielded any exempt dividend income during the previous year while working out the average value of investments for the purpose of applying Rule 8D(2)(iii) of the Rules, should be accepted. We hold and direct accordingly. Deemed dividend addition u/s 2(22) - Held that - Though trading in shares of the assessee company remains suspended for non payment of fees to the stock exchange, the fact remains that the assesee s shares have not been delisted in Calcutta Stock Exchange. In these circumstances it has been construed that TCI Borukha Projects Ltd is a company in which public or substantially interested and therefore the payment of loan or advance by TCI Borukha Projects Ltd., even to a beneficiary shareholder having not less than 10% of the voting power is outside the provision of section 2(22)(e) of the Act. Therefore we hold that no part of the loan given by TCI Boruka Projects Ltd., can be taxed as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee. As far as loans or advance by Transcorp Enterprises Ltd is concerned it is clear from page 119 of the paper book Vol.I which we have extracted in the earlier part of this order that substantial part of the business of this company is lending of money. It is not disputed that the lending of money to the assessee is in the ordinary course of the business of Transcorp Enterprises Ltd. In such circumstances no part of the advance or loan can be construed as deemed dividend within the meaning of section 2(22)(e) of the Act. We therefore are of the view that CIT(A) was fully justified in giving relief to the assessee in this regard.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

The assessee challenged the disallowance of ?4,32,847 out of a total disallowance of ?43,79,995 made under Section 14A read with Rule 8D. The assessee argued that no borrowed funds were used for acquiring investments in shares and that no expenditure was incurred for earning exempt income. The AO had disallowed ?43,79,995 based on Rule 8D, which included demat charges, interest expenses, and 0.5% of the average value of investments.

The CIT(A) reduced the disallowance to ?4,32,847, noting that the assessee had sufficient non-interest-bearing funds to cover the investments. The CIT(A) also upheld the disallowance of other expenses under Rule 8D(2)(iii) but restricted the interest disallowance to the difference between the interest paid and interest earned.

The Tribunal agreed with the assessee that the demat charges of ?3,266 should not be disallowed again under Section 14A as it would result in double addition. Regarding the interest expenses, the Tribunal noted that the assessee had sufficient non-interest-bearing funds to cover the investments, applying the legal principles from CIT vs Reliance Utilities and Power Ltd. and CIT vs HDFC Bank Ltd. Therefore, no disallowance of interest expenses was warranted under Rule 8D(2)(ii).

For disallowance under Rule 8D(2)(iii), the Tribunal held that only investments yielding tax-free income should be considered, following the decisions in DCIT vs REI Agro Ltd. and Cheminvest Ltd vs CIT. Consequently, the Tribunal allowed the assessee's appeal in part and dismissed the revenue's appeal on this issue.

2. Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961:

The assessee contested the addition of ?12,08,616 as deemed dividend under Section 2(22)(e), arguing that the provisions were not applicable. The assessee had taken loans from TCI Bhoruka Projects Ltd. and Transcorp Enterprises Ltd., holding significant shares in both companies. The AO treated these loans as deemed dividends.

The CIT(A) restricted the deemed dividend addition to the extent of accumulated profits of TCI Bhoruka Projects Ltd. and deleted the addition related to Transcorp Enterprises Ltd., noting that the latter's principal business was money lending.

The Tribunal observed that TCI Bhoruka Projects Ltd. was listed on the Calcutta Stock Exchange, making it a company in which the public are substantially interested. Therefore, loans from such a company are outside the purview of Section 2(22)(e). Regarding Transcorp Enterprises Ltd., the Tribunal noted that a substantial part of its business was lending money, and the loans were given in the ordinary course of business. Thus, these loans were also outside the purview of Section 2(22)(e).

The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal and allowing the assessee's appeal on this issue.

Conclusion:

In conclusion, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal. The disallowance under Section 14A was limited to ?4,32,847, excluding demat charges and interest expenses due to sufficient non-interest-bearing funds. The deemed dividend additions under Section 2(22)(e) were deleted as the loans were from companies in which the public are substantially interested or were given in the ordinary course of business.