2020 (12) TMI 117 - AT - Income Tax

Disallowance of interest expenditure u/s 36(1)(iii) - assessee has given interest free loans to related concerns - assessee has contended that the interest free funds available with it has been used to make interest free loans to the subsidiaries - HELD THAT - Since the interest free funds available with the assessee is more than the interest free loans given to subsidiaries, it should have to be presumed that the loans have been given out of interest free funds - As relying on Brindavan Beverages (P) Ltd 2016 (10) TMI 1242 - KARNATAKA HIGH COURT we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. Deemed dividend u/s 2(22)(e) - assessee has received loan of ₹ 8,99,11,142/- from its subsidiary named M/s Assetz Property Services P Ltd, in which the assessee held 99.99% of shares - HELD THAT - The expression accumulated profits would refer to the Reserves and Surplus accumulated over the years as per the accounts prepared under the Companies Act. - the term accumulated profits has been defined under Explanation 2 to sec.2(22)(e) of the Act. As the said definition does not provide for exclusion of any amount from the accumulated profits . Reversal of Deferred tax liability is nullifying the effect of provision created earlier, meaning thereby, the net monetary effect would be nil, when it is reversed - no adjustment need be made in the year of reversal. Accordingly, the accumulated profit amount determined by the AO is justified and accordingly we hold that the AO was justified in assessing the same as deemed dividend u/s 2(22)(e) - Accordingly, we reverse the order passed by Ld CIT(A) on this issue. Addition u/s 14A - HELD THAT - Expression does not form part of the total income in Section 14A of the Act envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income-tax Act, 1961.
2. Addition of deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.
3. Disallowance under Section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii):

The assessee contested the disallowance of interest expenditure under Section 36(1)(iii). The AO observed that the assessee had taken interest-bearing loans amounting to ?29.16 crores and given interest-free loans to related concerns amounting to ?10.26 crores, while claiming interest expenditure of ?1,54,10,932/-. The AO disallowed a portion of the interest expenditure, arguing that the loans to subsidiaries were not for business purposes and that the interest-bearing loans were diverted to subsidiaries. The CIT(A) upheld the AO's decision, stating that the interest-free advances from customers could have been used for other purposes, and the interest-bearing loans were likely diverted to subsidiaries.

The tribunal, however, noted that the interest-free advances from customers amounted to ?16.96 crores, which exceeded the interest-free loans to subsidiaries of ?10.26 crores. Citing the decision in CIT vs. HDFC Bank Ltd, it was presumed that the interest-free loans were made from the interest-free funds available. Therefore, the tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance.

2. Addition of Deemed Dividend under Section 2(22)(e):

The AO added ?4,42,41,971/- as deemed dividend under Section 2(22)(e), noting that the assessee received a loan of ?8,99,11,142/- from its subsidiary, which had sufficient reserves. The assessee argued that the transactions were part of a running account and were for business purposes, relying on decisions from the Karnataka High Court and the Calcutta High Court. The CIT(A) provided partial relief, reducing the deemed dividend to ?11,49,646/- by setting off the repaid amounts.

The tribunal reversed the CIT(A)'s decision, referencing the Supreme Court's ruling in Miss P Sarada vs. CIT, which held that repayment does not alter the fact of receiving a dividend. The tribunal also rejected the assessee's argument to exclude the deferred tax liability reversal from accumulated profits, stating that the definition of "accumulated profits" under Explanation 2 to Section 2(22)(e) does not allow such exclusions. Consequently, the tribunal upheld the AO's determination of ?4,42,41,971/- as deemed dividend.

3. Disallowance under Section 14A:

The AO disallowed ?44,89,934/- under Section 14A, noting that the assessee made investments but did not disallow any amount under Section 14A r.w.r 8D. The assessee contended that no dividend income was earned during the year, hence no disallowance was warranted, citing decisions from the coordinate bench and the Allahabad High Court. The CIT(A) accepted the assessee's contention and deleted the disallowance.

The tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's ruling in Cheminvest Ltd vs. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. The tribunal also noted that the Supreme Court dismissed the revenue's appeal in the Chettinad Logistics (P) Ltd case, reinforcing the principle that Section 14A disallowance is not applicable in the absence of exempt income.

Conclusion:

The tribunal allowed the assessee's appeal on the disallowance of interest expenses and upheld the AO's addition of deemed dividend. It also upheld the CIT(A)'s deletion of disallowance under Section 14A. The appeals filed by both the assessee and the revenue were partly allowed.