Income Tax Appellate Tribunal - Mumbai
Prvin D. Mehta, Mumbai vs Dcit Rg 25(3), Mumbai on 30 June, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL " SMC" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM
ITA No.1899/Mum/2017
(A.Y:2010-11)
Pravin D. Mehta Dy. Commissioner of
4 t h floor, Om Plaza, Vasji Lalji Income Tax RG 25(3)
RD, Kandivali (W ) C-11, 3 r d Floor,
Mumbai-400 067 Vs. Praytyakshkar Bhvan, BKC
P AN No. AHMPM1124A Bandra (E)
PIN-400 067 Mumbai
PIN-400 051
Appellant .. Respondent
Assessee by .. Shri Dharmesh Shah, AR
Revenue by .. Shri Rakesh Ranjan, DR
Date of hearing .. 05-06-2017
Date of pronouncement .. 30-06-2017
ORDER
PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of CIT(A)-45, Mumbai, in appeal No. CIT(A)-45/ITO-33(2)(5)/ITA-100/2013-14 dated 09- 12-2016. The Assessment was framed by DCIT-25(3), Mumbai for the A.Y. 2010-11 vide order dated 09-03-2013 u/s 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act').
2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by AO of deemed dividend under section 2(22)(e) of the Act. For this assessee has raised following ground No.2: -
"2. The Ld. Commissioner of Income Tax (Appeals) has erred in law and facts in confirming addition of deemed dividend under section 2(22)(e) of the Act amounting to Rs.2,00,000/-."
3. Briefly stated facts are that the AO noticed from the accounts of the assessee that he has received a loan of Rs 2 lakh from India Advantage ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 Securities Pvt. Ltd. on 19-05-2009. The AO also noted that the assessee is holding shares to the extent of 67.93% of total equity in the concern from whom loan is taken. The AO show caused the assessee as to why the same should not be treated as deemed dividend within the meaning of section 2 (22)(e) of the Act and assessee in response to the same replied that advance was for temporary requirement just for three days and it was repaid. The AO did not accept the explanation of the assessee and added the sum of Rs 2 lakh as deemed dividend. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO. Aggrieved, now assessee is in appeal before Tribunal.
4. I have heard the rival contentions and gone through the facts and circumstances of the case. Before me, the learned Counsel for the assessee argued that the advances given by the company to the assessee was in regular course of business and he used to carry out trading in shares through this company. In order to enable the assessee to undertake it's share transactions, the said company had given short term advance. However, since it was no longer required, the same was immediately returned back to the company. In any case, the said company is also engaged in the business of lending of money and the activity of lending money is within the objects of the company which further substantiates that it was a normal trade advance given in the regular course of business. This therefore shows that the advance was given to further it's business with the assessee, who also happened to be the shareholder. Such a business advance cannot be regarded as dividend u/s 2(22)('e) f the Act. In this regard, the learned Counsel for the assessee referred to Point 13 of part B of Ill of the Memorandum of Association of the lender company viz. India Advantage Securities Ltd wherein it has been stated that lending and advancing money is part of objects of the company. Relevant extract is reproduced as under:
"13. To lend and advance money or give credit to such persons or companies and on such terms as may seem expedient, and in particular Page 2 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 to customers and other having dealings with the company, and to guarantee the performance of any contract or obligation and the payment of money of or by any persons or companies and generally to give guarantees and indemnities."
Accordingly to the learned Counsel the company has AO advanced funds to other entities in other years in the normal course of business. It is submitted that where the advances are given as trade advances, the same shall be excluded from the purview of u/s. 2(22)(e) of the Act. in this regard, reliance is placed on the decision of Hon'ble Delhi High Court in the case of CIT v. Raj Kumar [318 ITR 462] wherein it has been categorically held that even if trade advance is given to share/wider or a concern same would not fall within ambit of section 2(22)(3) of the Act. Relevant extracts of the said decision are reproduced as under:
"A close examination of the judgment of the Bombay High Court in the case of Nagindas M. Kapadia (supra) would show that the Court excluded from the ambit of 'dividend', monies which the assessee had received towards purchases. In our view both the CIT(A) and the Tribunal have correctly appreciated this aspect of the matter in the said judgment of the Bombay High Court. The relevant portion of the judgment of the Bombay High Court which sets out this aspect of the matter is already extracted by us in the narrative given by us hereinabove. We are also in agreement with the view of the Tribunal that the judgment of the Supreme Court in the cases of miss P. Sarada (supra) and Smt. Tarulata Shyam (supra) has no applicability to the present case. Both the judgments establish the principle that once the payment made to a Page 3 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 shareholder is deemed as dividend then the mere fact that it is repaid would not take it out of the ambit of the tax net. In the instant case, however, a discussion with respect to which has been made hereinabove, the issue is whether the payment received by the shareholder would at all fall within the four corners of provisions of section 2(22)(e) of the Act. Having held otherwise, the said judgments of the Supreme Court, iii our view; will have no applicability to the facts of the instant case.
12. In view of the above, the question of law as framed by us is answered in favour of the assessee and against the revenue. We hold that trade advance does not fall within the am bit of the provisions of section 2(22)(e) of the Act. Resultantly, the appeal is dismissed. There shall be, however, no order as to cost.'"
Reliance is next placed on the decision of Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT [338 ITR 538] wherein while interpreting the word 'by way of advance or loan' in s. 2(22)(e) of the Act, the Hon'ble Court held as under:
"The phrase 'by way of advance or loan' appearing to sub-clause (e) of section 2(22) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with. or without a right to participate in profits) holding not less than 10 per cent of the voting power; but if such Page 4 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder."
5. In view of the above facts, I am of the view that this is a trade advance in the normal course of business and cannot be hit by the provisions of section 2(22)(e) of the Act for assessing the same as deemed dividend. Accordingly, I delete the addition and allow this issue of assessee's appeal.
6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance by AO in respect to expense relatable to exempt income by involving the provisions of section 14A of the Act read with Rule 8D of the Rules. For this assessee has raised following ground No.3: -
"3. The Ld. Commissioner of Income Tax (Appeals) has erred in law and facts in confirming the disallowance under section 14A of the Act amounting to Rs.42,25,951/-"
7. Briefly, stated facts are that the assessee earned dividend of Rs 55,60,500/- and claimed the same as exempt. The AO apply the rule 8D made disallowance of expenditure relatable to exempted income at Rs 42,25,951/- by working out the same as under: -
Page 5 of 10 ITA No. 1899/Mum/2017Pravin D. Mehta; AY 10-11 "5.4 The disallowance is worked out as under: -
The amount of expenditure directly relatable to income which does not form part of total income, as per assessee's working =2,015/-
AxB/C= Rs.47,06,364 x Rs.16,40,84,722 =34,03,512/-
Rs.22,68,95,761/-
0.5% of B = 0.5% of Rs. 16,40,84,722/- =8,20,424/-
42,25,951/-"
Aggrieved, against the order of AO disallowing the expenses relatable to exempted income by invoking the formula prescribed under rule 8D of the Rules, assessee preferred the second appeal before CIT(A) who confirmed the action of the AO by observing in Para 7.2 and 7.3 of his appellate order as under: -
"7.2 I have gone through the assessment order and submissions made in this regard. It is noted that the AO had made addition under section 14A of Rs.42,25,951/- by applying Rule 8D. It was observed by the AO that the assessee had reported average balance of investment at Rs.16,40,84,722/-. The effect of this position of the above investments would imply that the assessee had received exempt income of Rs.55,60,500/- which was claimed exempt. Therefore, the provisions of section 14A would come to the fore. Thus, the capacity to earn in exempt income based on maintenance of level of investment would also come under the ambit of section 14A. Reliance is placed on CBDT Circular No.5/2014 dated 11th February, 2014 which categorically states Page 6 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 that disallowance u/s. 14A was possible even in cases where no income has been earned by the assessee that had been claimed exempt. In this regard it is noted that in the recent judgment in the case of Shankar Chemicals Works vs. DCIT [47 SOT 1211, the Hon'ble Ahmedabad Tribunal has held that, if any expenditure has been incurred for earning exempt income, same has to be disallowed even if there is no actual earning of any exempt income. If interest bearing borrowed funds are utilized for purpose of investment in shares and there is no receipt of dividend income or if there is only meager dividend income, even then whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A because the same has been incurred for earning exempt income. Hence, the actual earning of exempt income is not relevant. In the earlier period, when dividend income was not exempt, interest expenditure incurred on borrowed funds used for investment in shares was held to be fully allowable expenses, even, if, there was no actual receipt of dividend or insufficient/ meagre amount of dividend income.
The logic was that the entire expenditure has been incurred for earning taxable dividend income and hence, it is allowable, even if there is nil or small amount of dividend income. This aspect has been approved by various courts and hence, the same judgement supports this view also that even in case of 'nil' or small amount of dividend income, the entire interest Page 7 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 expenditure incurred for making investment in shares is to be considered as expenditure incurred for earning exempt income and the same has to be disallowed under section 14A.
7.3 7.3 It is noted that the Assessing Officer made disallowance u/s 14A of Rs.42,25,951/-. The working of the disallowance of u/s 14A made by the Assessing Officer is iii accordance with Rule SD and in light of CBDT Circular No.5/2014 dated 11th February, 2014 which categorically states that disallowance u/s. 14A was possible even in cases where no income has been earned by the assessee that had been claimed exempt is found to be rightly made and the assessee's plea for application of other method is summarily rejected."
Aggrieved, assessee is in second appeal before Tribunal on this issue.
8. I have heard the rival contentions and gone through the facts and circumstances of the case. I find from the facts of the case that the assessee has made total investment of Rs. 19,13,55,032/- as on 31-03- 2010 from time to time in shares and securities and PPF Account. The assessee is having interest free funds to the extent of Rs. 18,52,20,334/- i.e. its own surplus funds and AO has not pointed out any nexus that the interest bearing funds are invested in purchase of shares. In the absence of the same it is presumed that the assessee's own surplus funds in the shape of capital account and loans and advances free of interest are invested in purchase of shares. Accordingly, I am of the view that this issue is covered in favour of assessee partly, in view of the decision of Hon'ble Bombay High court in the case of CIT vs. HDFC Bank (2014)366 ITR 505 (Bom) in respect to disallowance of interest. In regard to disallowance of interest AO is directed to recompute the disallowance to Page 8 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 the extent of the balance funds invested in purchase of shares and securities apart from own funds.
9. In respect to disallowance of average value of investment i.e. 0.5 % under rule 8D(2)(iii) of the rules, the disallowance made by the AO is at Rs. 8,20,424/-. The assessee claimed that the investment is a strategic investment which has not been explained by the assessee before me except a claim made and even CIT(A) has not dealt with this issue despite the issue raised by assessee before him. In such circumstances, I am of the view let this issue be examined by the AO whether there is any strategic investment made by the assessee and moreover if the investment made by the assessee whether give exempted income which is computed under rule 8D(2)(iii) or not. In the light of this observation, I restore this issue back to the file of the AO for fresh adjudication.
10. In the result, the appeal of assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 30-06-2017.
Sd/-
(MAHAVIR SINGH) JUDICIAL MEMBER Mumbai, Dated: 30-06-2017 Sudip Sarkar /Sr.PS Page 9 of 10 ITA No. 1899/Mum/2017 Pravin D. Mehta; AY 10-11 Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. //True Copy// BY ORDER, Assistant Registrar ITAT, MUMBAI Page 10 of 10