2018 (12) TMI 1060 - AT - Income Tax

Deemed dividend u/s. 2(22)(e) - as per AO common directors in both the assessee company and MPPL from whom assessee borrowed sum of 4 crores - plea of the assessee that it was not a shareholder in MPPL - Held that - Since the Assessee in the present case is not a shareholder in the lender company we are of the view that the action of the revenue authorities in bring to tax a sum of 4 Crores as deemed dividend u/s.2(22)(e) of the Act cannot be sustained and the said addition is directed to be deleted.- Decided in favour of assessee. Disallowance u/s. 14A - as disallowance is concerned the same is only with regard to disallowance of other expenses under Rule 8D(2)(iii) - Held that - The argument advanced on this issue are general and vague. The computation has been done by the AO in accordance with the provisions of relevant Rule. No case has been made out by the assessee as to why the action of the revenue authorities in this regard are not correct. Hence this issue is decided against the assessee.

Issues Involved:
1. Taxation of ?4 crores as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act, 1961.
3. Charging of interest under Sections 234B and 234C of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxation of ?4 crores as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961:

The primary issue was whether a sum of ?4 crores borrowed by the assessee from M/s. Microfinish Pumps Pvt. Ltd. (MPPL) should be taxed as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee argued that it was not a shareholder in MPPL, and therefore, the provisions of Section 2(22)(e) could not be invoked. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this argument, noting that the directors of the assessee company held substantial shares in both companies, hence the sum should be treated as deemed dividend.

The Tribunal analyzed the provisions of Section 2(22)(e), which deems certain loans to be dividends if paid to a shareholder holding not less than ten percent of the voting power or to any concern in which such shareholder has a substantial interest. The Tribunal referred to the Special Bench decision in Bhaumik Color Labs and the Rajasthan High Court decision in CIT Vs. Hotel Hilltop, which held that deemed dividend can only be assessed in the hands of a shareholder of the lender company and not in the hands of a non-shareholder entity.

Since the assessee was not a shareholder in MPPL, the Tribunal concluded that the addition of ?4 crores as deemed dividend under Section 2(22)(e) could not be sustained and directed the deletion of the said addition.

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

The second issue was the disallowance under Section 14A of the Act, which pertains to expenses incurred in relation to income not includible in total income. The disallowance was specifically related to 'other expenses' under Rule 8D(2)(iii) of the Income-tax Rules, 1962. The Tribunal found that the assessee's arguments were general and vague, and the AO had computed the disallowance in accordance with the relevant rules. Consequently, this issue was decided against the assessee.

3. Charging of interest under Sections 234B and 234C of the Income Tax Act, 1961:

The final issue involved the charging of interest under Sections 234B and 234C of the Act. The Tribunal noted that these grounds were consequential and directed the AO to provide consequential relief.

Conclusion:

The appeal by the assessee was partly allowed. The Tribunal deleted the addition of ?4 crores as deemed dividend under Section 2(22)(e) but upheld the disallowance under Section 14A. The matter of interest under Sections 234B and 234C was directed to be addressed consequentially.

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