2020 (9) TMI 488 - AT - Income Tax

Disallowance of 18% notional interest calculation on Advance given against property in the Real Estate business of Appellant Company - no agreement or receipt etc was furnished to evidence the advance against property - HELD THAT - Assessee failed to substantiate its claim that the loan/advance was meant for real estate business i.e. purchasing the property. On record there is no agreement to purchase nor any receipt showing that the advance was meant for buying the property. In fact, in none of the cases, the purchase of property got materialized. AR submitted that the assessee company had advanced ₹ 6.37 crores towards purchase of property out of which ₹ 17 lacs had been paid in A.Y. 2007-08. These advances were received back in the subsequent assessment years (A.Y. 2009-10 and 2010-11) as the deal could not be materialized and the amount advanced towards it was received back. This aspect was not looked into by the AO as well as the CIT(A) and needs to be looked into in its entirety. Therefore, it will be appropriate to remand back this issue to the file of the AO for proper adjudication. Ground Nos. 1 and 2 are partly allowed for statistical purpose. Disallowance u/s 14A r.w.s. Rule 8D - proximate cause between exempt income and expenses incurred to earn such income - HELD THAT - AR submitted that the assessee has earned exempt income to the tune of ₹ 2,86,370/- whereas the Assessing Officer has made disallowance amounting to ₹ 10,58,926/-. The CIT(A) as well as Assessing Officer has not looked into the aspect of actual exempt income and the investment at large. Therefore, this issue also needs to be verified in its entirety. Addition on account of deemed dividend u/s 2(22)(e) - HELD THAT - Section 2(22)(e) of the Act is not applicable in cases of companies in which public are substantially interested and the assessee company is a Public Limited Company and therefore, provisions of Section 2(22)(e) cannot be applied. Admittedly, the assessee company is registered with stock exchange and fulfill all the conditions of Section 2(18) which is definition of company in which public is substantially interested. Thus, the submissions of the Ld. AR are acceptable and are supported by the decisions of the Tribunal in cases of DCIT vs. M/s Sindu Realtors Pvt. Ltd. 2016 (5) TMI 58 - ITAT DELHI . In this case also Section 2(22)(e) of the Act is not applicable and as rightly deleted the addition by the CIT(A). Further, the Assessing Officer has also failed to substantiate as to how the amount in question is in the shape of a loan/advance received by the assessee company. Ground No. 1 of the Revenue s appeal is dismissed. Interest disallowance on share application money investment - CIT-A deleted the addition holding that making investments in the shape of share application money was a normal business activity of the assessee and therefore, it cannot be held that it was not for business purposes - HELD THAT - As observed by the CIT(A) that given share application money to the same company in A.Y. 2006-07 also, but no notional disallowance was made by the Assessing Officer in that assessment year. CIT(A) was right in deleting the said addition as similar share application money was given in earlier assessment year and no such disallowance of interest has been made therein. The Revenue cannot without any reasonable cause change its stand for the present assessment year. Therefore, when there is no change in the facts of the present case, then no disallowance in the present assessment year can be made. Ground No. 2 of the Revenue s appeal is dismissed. Interest income on accrual basis - HELD THAT - Assessing Officer made an addition in respect of un-matured interest charges treating the same as interest income for the year under consideration. The CIT(A) deleted the said addition holding that the said addition was made by the Assessing Officer without properly appreciating the facts of the present case and accounting principles adopted by the assessee. But the CIT(A) has not looked into the material on record which needs to be verified. Therefore, this issue needs to be verified by the Assessing Officer in its entirety. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 3 of Revenue s appeal is partly allowed for statistical purpose. Unexplained investment in property - HELD THAT - In fact the amount has been shown much below the stamp duty amount. The Assessing Officer held that as per the registered documents the market value of land is higher and stamp duty has been paid on the higher value which proves the rate of land in that are at the relevant period. But from the perusal of the Assessment order it cannot be seen that the Assessing Officer has brought out any evidence to substantiate that any amount more than what has been recorded in the sale deed was paid by the assessee and in the absence of any such evidence, no addition can be made merely on the basis of presumption. CIT(A) rightly deleted this addition and there is no need to interfere with the findings of the CIT(A).

Summary

Issues Involved:
1. Disallowance of interest on advance towards property purchase.
2. Disallowance under Section 14A read with Rule 8D.
3. Addition under Section 2(22)(e) of the Income Tax Act.
4. Deletion of interest disallowance on share application money investment.
5. Deletion of interest income on accrual basis.
6. Deletion of addition on account of unexplained investment in property.

Detailed Analysis:

1. Disallowance of Interest on Advance Towards Property Purchase:
The assessee, a Non-Banking Financial Company (NBFC), advanced ?6.37 crores for property purchase, which was later refunded as the deal did not materialize. The Assessing Officer (AO) disallowed ?1,14,66,000/- as interest, not considering it as a business expense. The CIT(A) reduced the disallowance to ?12,87,839/-, calculating interest proportionately. The tribunal remanded the issue back to the AO for reconsideration, emphasizing the need to verify the business purpose and availability of interest-free funds.

2. Disallowance Under Section 14A Read with Rule 8D:
The AO disallowed ?10,58,926/- under Section 14A, without recording satisfaction or reasoning, which the CIT(A) upheld. The assessee argued the presence of sufficient interest-free funds and the lack of direct nexus between expenses and exempt income. The tribunal noted the need for proper verification and remanded the issue back to the AO for reassessment, stressing the importance of examining actual investments and exempt income.

3. Addition Under Section 2(22)(e) of the Income Tax Act:
The AO added ?1,57,01,866/- as deemed dividend under Section 2(22)(e), considering advances to associate companies as loans. The CIT(A) deleted the addition, noting the lack of evidence supporting the AO's presumption. The tribunal upheld the CIT(A)'s decision, emphasizing that the assessee was not a shareholder in the recipient companies and thus, Section 2(22)(e) was not applicable.

4. Deletion of Interest Disallowance on Share Application Money Investment:
The AO disallowed ?3,60,000/- as notional interest on ?20,00,000/- given as share application money, treating it as an interest-free loan. The CIT(A) deleted the disallowance, recognizing the investment as a normal business activity. The tribunal upheld the CIT(A)'s decision, noting the consistency in treatment across assessment years and the presence of sufficient interest-free funds.

5. Deletion of Interest Income on Accrual Basis:
The AO added ?25,84,841/- as interest income on accrual basis, considering it as un-matured interest charges. The CIT(A) deleted the addition, citing improper appreciation of facts and accounting principles by the AO. The tribunal remanded the issue back to the AO for thorough verification, ensuring adherence to the principles of natural justice.

6. Deletion of Addition on Account of Unexplained Investment in Property:
The AO added ?28,44,800/- as unexplained investment based on the difference between declared purchase value and stamp duty value. The CIT(A) deleted the addition, referencing similar decisions in earlier years favoring the assessee. The tribunal upheld the CIT(A)'s decision, noting the absence of evidence supporting the AO's presumption of higher purchase consideration.

Conclusion:
The tribunal remanded several issues back to the AO for reassessment, emphasizing the need for proper verification and adherence to principles of natural justice. The decisions highlight the importance of substantiating claims with evidence and maintaining consistency in tax treatment across assessment years.