2020 (10) TMI 774 - AT - Income Tax

Deemed dividend u/s 2(22)(e) - money received from the lending companies - ICDs between the common group companies - HELD THAT - Funds were diverted from its group companies to another group company, the assessee, for importing the products for trading purposes in order to realize higher profits and the funds were received on short term basis depending on the business requirements. The said money borrowed was repaid during the year itself and nothing was outstanding at the year end. Thus we can reasonably presume that these funds were moved from one company to another which are under the same management and the purpose is to deploy the funds more efficiently and profitably and thus there exists a business and commercial expediency for the same. We find merit in the contentions of the Ld. A.R. that these transactions being in the nature of current account between the group concerns which can not be treated as loans or advances to be treated as deemed dividend under section 2(22)(e) of the Act. ICDs between the common group companies can not be equated with the loans and advances for the purpose of deemed dividend under section 2(22)(e) of the Act. We further note that the money was not at all diverted for the benefit of shareholders by the assessee company but in fact used for its business. Money advanced by two sister concerns to the assessee company which was repaid during the year along with interest @ 12.5% per annum and used for the purpose of business of the assessee is not a loan/deposit to be treated as deemed dividend. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of ?1,04,00,000 as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance of interest expenditure of ?3,57,651.
3. Disallowance under section 14A rule 8D of ?2,13,012.
4. Protective vs. substantive addition in the hands of the assessee and shareholders.

Detailed Analysis:

1. Addition of ?1,04,00,000 as Deemed Dividend under Section 2(22)(e):
The primary issue was whether the amounts received by the assessee from sister concerns should be treated as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) added ?1,04,00,000 as deemed dividend, noting that the assessee received loans from sister concerns with common shareholders. The CIT(A) confirmed the addition but on a substantive basis in the hands of the assessee and on a protective basis in the hands of the shareholders.

The Tribunal, however, found that the transactions were out of commercial expediency and were repaid within the same year with interest. It was held that these transactions were in the nature of current accounts between sister concerns and could not be treated as loans or advances under section 2(22)(e). The Tribunal relied on various case laws and CBDT Circular No. 19/2017, which clarified that trade advances in the nature of commercial transactions would not fall within the ambit of "loans/advances." Consequently, the addition was deleted.

2. Disallowance of Interest Expenditure of ?3,57,651:
The AO disallowed ?3,57,651 out of the total interest expenditure claimed by the assessee, attributing it to interest-free advances. The CIT(A) confirmed the disallowance, noting that the assessee had admitted the interest attribution.

The Tribunal observed that the assessee's own funds were significantly higher than the interest-free advances. Citing the Bombay High Court's decision in "CIT vs. Reliance Utilities and Power Ltd.," it was held that if the assessee's own funds are sufficient to cover the investments, it can be presumed that the investments were made out of own funds. Therefore, the disallowance was deleted.

3. Disallowance under Section 14A Rule 8D of ?2,13,012:
The AO made a disallowance of ?2,13,012 under section 14A read with Rule 8D, attributing it to investments in tax-free income-yielding securities. The CIT(A) upheld this disallowance.

The Tribunal noted that the assessee's own funds were more than the investments made in tax-free securities. Following the jurisdictional Bombay High Court's decision in "CIT vs. HDFC Bank Ltd.," it was held that the interest disallowance was wrongly sustained. The Tribunal also deleted the disallowance of ?49,675, being 0.5% of average investments, as the assessee had not claimed any expenses in the profit and loss account attributable to earning exempt income.

4. Protective vs. Substantive Addition:
The CIT(A) had sustained the addition of deemed dividend on a substantive basis in the hands of the assessee and on a protective basis in the hands of the shareholders. The Tribunal, having deleted the substantive addition in the hands of the assessee, directed the AO to delete the protective addition in the hands of the shareholders as well.

Conclusion:
The Tribunal allowed the appeals of the assessees, deleting the additions made under section 2(22)(e) as deemed dividend, the disallowance of interest expenditure, and the disallowance under section 14A rule 8D. The protective addition in the hands of the shareholders was also deleted following the deletion of the substantive addition in the hands of the assessee.