2018 (12) TMI 522 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - CIT-A allowed partial relief - Held that - Assessee could not have advanced the loan of ₹ 3,00,00,000/-, if she was not closely related to one of the partners. No doubt, ld. Authorised Representative argued that such loan given to Sm. Priya Racherl did not individually benefit any partners or firm and hence Section 2(22) (e) of the Act would not apply. However, we are of the opinion that such a narrow definition to the word individual benefit cannot be given. The benefit will include direct or indirect things. Partner whose friend s wife received the advance had indirectly benefited from the advance received by the assessee from M/s. Symbiotic Infotech P. Ltd. We are therefore of the opinion that ld. Commissioner of Income Tax (Appeals) fell in error in giving relief of ₹ 3,00,00,000/- to the assessee. We dismiss the grounds 6 to 10 of the assessee and allow the appeal of the Revenue. Disallowance of interest expenditure - interest relatable to term loan having been fully utilized for acquiring immovable property in the name of assessee firm for its business purposes - Held that - It is not disputed that there was a net overdrawing of ₹ 1,70,69,208/- in partners accounts, if considered together, as on date of obtaining the loan viz 12.11.2011. It may be true that the loan was immediately put to use for the purpose of acquiring property. However, if the partners had not overdrawn by ₹ 1,70,69,208/-, assessee could have saved atleast the interest on such amount. In other words, we cannot say that there was full utilization of loans taken by the assessee for the purpose of its business. As already mentioned by us, assessee itself had admitted before ld. CIT (Appeals) that cash credit account was not used for the purpose of business. In such circumstances, we are of the opinion that CIT (A) was justified in sustaining Addition - decided against assessee.

Summary

Issues Involved:
1. Disallowance of interest.
2. Addition under Section 2(22)(e) of the Income Tax Act, 1961 as deemed dividend.

Detailed Analysis:

1. Disallowance of Interest:

The assessee had incurred interest expenditure of ?30,92,489/- against a loan of ?4,03,07,862/- from M/s. Indian Bank. The Assessing Officer noted that the partners' capital accounts reflected a debit balance of ?6,07,29,805/-, suggesting that business funds were used for personal purposes. Consequently, the Assessing Officer calculated interest on ?6,07,29,805/- at ?72,87,577/- but restricted the disallowance to ?30,92,489/- claimed as interest.

The assessee appealed, arguing that the term loan was fully utilized for acquiring immovable property for business purposes and should be allowed under Section 36(1)(iii) of the Act. The Commissioner of Income Tax (Appeals) noted that the partners had separate capital and current accounts, and the aggregate balance was negative. The Commissioner concluded that the assessee need not have borrowed ?1,70,69,208/- if there was no net debit balance in the partners' accounts. Thus, interest on ?2,37,10,792/- was allowed, and the balance disallowance of ?17,87,519/- was sustained.

The Tribunal upheld the Commissioner’s decision, agreeing that the loan amount was not fully utilized for business purposes due to the partners' overdrawn accounts. The disallowance of ?17,87,519/- was justified and sustained.

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

The assessee, engaged in providing software services, received an advance of ?7,54,00,000/- from M/s. Symbiotic Infotech P. Ltd., whose shareholders were the same as the partners of the assessee firm. The Assessing Officer treated this advance as deemed dividend under Section 2(22)(e) of the Act, as the partners had substantial interest in both entities. The assessee argued that the advances were trading advances and not covered under Section 2(22)(e). Additionally, ?3,00,00,000/- was advanced to a third party, Smt. Priya Rachel, and later returned, which should not be considered as deemed dividend.

The Commissioner of Income Tax (Appeals) partially agreed, excluding ?3,00,00,000/- from the deemed dividend calculation, as it was returned and not used for the partners' benefit. However, the remaining ?4,54,00,000/- was upheld as deemed dividend.

The Tribunal reviewed the case and noted the similarity to the Supreme Court's decision in National Travel Services vs. CIT, which supported the Revenue's stance. The Tribunal disagreed with the exclusion of ?3,00,00,000/-, emphasizing that the loan to Smt. Priya Rachel indirectly benefited the partners. Therefore, the entire advance of ?7,54,00,000/- was considered deemed dividend, reversing the partial relief granted by the Commissioner.

Conclusion:

The Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal. The disallowance of ?17,87,519/- in interest was sustained, and the entire advance of ?7,54,00,000/- was treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.