2022 (4) TMI 173 - AT - Income Tax

Disallowance u/s 14A r.w.s. Rule 8D - HELD THAT - CIT(A) has rightly restricted the disallowance to the extent of exempt income earned by the assessee in view of the decision of Joint Investments P. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT . We find no infirmity in the order of the ld. CIT(A) and accordingly the ground raised by the Revenue is dismissed for both the assessment years. Disallowance made under section 57(iii) - HELD THAT - Assessee is engaged in the business of investment and finance and has obtained loan from Industrial Finance Corporation of India (IFCI) and was utilized fully to fund M/s. Aban Offshore Ltd. by way of loan and the interest income earned was fully offered to tax. Moreover the AO has not disputed the total interest expenditure incurred by the assessee. However the Assessing Officer has no justification by reducing the same from earning of except income by reckoning the direct interest expenditure for the purposes of section 14A - CIT(A) has held that the disallowance does not have any merit and accordingly directed the Assessing Officer to delete the addition. Under the above facts and circumstances we find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly the ground raised by the Revenue is dismissed for all the assessment year under appeal. Disallowance of deemed dividend income - HELD THAT - A similar view by relying on the ratio in the case of ACIT vs. Bhaumik Color P. Ltd 2008 (11) TMI 273 - ITAT BOMBAY-E in which it was held that the expression shareholder referred to in section 2(22)(e) of the Act refers to both a registered shareholder and the beneficial shareholder. And further that if a person is a registered shareholder but not a beneficial shareholder then the provisions of section 2(22)(e) of the Act would not apply and likewise if a person is a beneficial shareholder but a registered shareholder then also the provisions of section 2(22)(e) of the Act would not apply. While in the case at hand the ITAT noted that the assessee was not a shareholder at all and hence the provisions of section 2(22)(e) of the Act would not apply. DR could not controvert the above decisions of the Tribunal which were relied upon by the ld. CIT(A) - we are of the considered opinion that the ld. CIT(A) has rightly rejected the view taken by the AO in bringing the loans and advances received by the assessee as deemed dividend within the meaning of section 2(22)(e) of the Act. Thus the ground raised by the Revenue is dismissed for the assessment year 2012-13.

Summary

Issues Involved:
1. Restriction of disallowance under section 14A read with Rule 8D.
2. Deletion of disallowance under section 57(iii).
3. Disallowance of deemed dividend income under section 2(22)(e).

Issue-wise Detailed Analysis:

1. Restriction of Disallowance under Section 14A read with Rule 8D:
The Revenue challenged the restriction of disallowance made under section 14A read with Rule 8D for the assessment years 2010-11, 2011-12, and 2012-13. The assessee had earned significant dividend income, and the Assessing Officer made substantial disallowances by allocating proportionate interest paid on borrowed loans. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to the extent of the dividend income earned, referencing the Hon’ble Delhi High Court decision in the case of Joint Investments P. Ltd. v. CIT 372 ITR 694. The Tribunal found no infirmity in the CIT(A)’s order and upheld the restriction of disallowance to the amount of exempt income earned by the assessee.

2. Deletion of Disallowance under Section 57(iii):
The Revenue also contested the deletion of disallowance made under section 57(iii) of the Act. The assessee had advanced substantial sums to M/s. Aban Offshore Ltd. and earned significant interest income, which was fully offered to tax. The loan was funded by borrowing from IFCI Ltd., and the assessee incurred considerable interest expenditure. The Assessing Officer excluded the earning of exempt income from total direct interest expenses and computed the net interest income as income from other sources. On appeal, the CIT(A) directed the deletion of the addition, noting that the loan from IFCI was used to fund Aban Offshore Ltd., and the interest income was fully offered to tax. The Tribunal agreed with the CIT(A), finding no reason to interfere with the deletion of the addition, as the Assessing Officer had no justification for reducing the direct interest expenditure for the purposes of section 14A.

3. Disallowance of Deemed Dividend Income under Section 2(22)(e):
For the assessment years 2011-12 and 2012-13, the Revenue raised the issue of disallowance of deemed dividend income. The Assessing Officer added the loans received by the assessee from its group concerns as deemed dividend under section 2(22)(e) of the Act, citing common shareholders holding more than 10% of the shareholding. On appeal, the assessee argued that it was not a shareholder of the lending companies and that the loans were inter-corporate deposits advanced in the course of business. The CIT(A) observed that the deemed dividend would arise in the hands of the individual shareholders, not the assessee company, referencing CIT v. Printwave Services P Ltd 373 ITR 665 (Mad). The Tribunal upheld the CIT(A)’s decision, noting that the assessee was not a registered shareholder, and thus, no deemed dividend could be brought to tax under section 2(22)(e). The Tribunal also referenced similar decisions, including ACIT vs. Bhaumik Color P. Ltd 118 ITO 1 Mumbai Special Bench, supporting the view that the provisions of section 2(22)(e) would not apply to the assessee.

Conclusion:
All the appeals filed by the Revenue were dismissed, with the Tribunal confirming the orders of the CIT(A) on all issues. The Tribunal found no infirmity in the CIT(A)’s decisions regarding the restriction of disallowance under section 14A, deletion of disallowance under section 57(iii), and non-application of deemed dividend provisions under section 2(22)(e). The order was pronounced on 31st March 2022 at Chennai.