2013 (5) TMI 863 - AT - Income Tax

Tribunal allows appeal, directs netting off interest, deletes deemed dividend addition.

Shalimar Infonet (P.) Ltd. Versus Income-tax Officer,

The Tribunal allowed the assessee's appeal, directing the AO to net off the interest expenditure against the interest income and deleting the addition of ... Disallowance of O/D interest - net off this interest expenditure - Held that:- The basic purpose of making FDR was to show net worth of the assessee in the form of liquid assets for the purpose of allotment of plot. In fact there was initial arrangement between the assessee and the sister concern to share the gains if the plot was allotted. It is also disputed that ultimately no plot was allotted to the assessee, therefore it cannot be said that interest expenditure has been used for the purpose of acquisition of capital assets. In any case, we find that assessee has also received interest amounting to ₹ 15,39,228 out of FDR which has been returned by the assessee as its income. Therefore, the interest expenditure on obtaining OD against such FDR is clearly required to be netted off. Accordingly, we set aside the order of learned CIT(A) and direct the AO to net off this interest expenditure amounting to ₹ 13,63,428 against the interest income of ₹ 15,39,228. Deemed dividend addition under s. 2(22)(e) - Held that:- As observed that the arrangement by the assessee company with M/s Shalimar Estate (P) Ltd. was to share a plot which was being applied or to purchase another piece of land and money was given by M/s Shalimar Estates (P) Ltd. for definite l/3rd share of such plot or for purchase of another land, cannot be simply called a loan or advance, therefore, such payment would not be hit by s. 2(22)(e) of the Act. In these circumstances, we set aside the order of learned CIT(A) and delete the addition of deemed dividend. Issues Involved:1. Disallowance of Overdraft (O/D) interest resulting in an addition of Rs. 13,63,428.2. Applicability of Section 2(22)(e) on purchase imprest received from M/s Shalimar Estates (P) Ltd. amounting to Rs. 1,79,31,223.Detailed Analysis:1. Disallowance of Overdraft (O/D) Interest:The assessee claimed a financial expense of Rs. 13,69,527, out of which Rs. 13,63,428 was interest on an O/D account. The assessee argued that the interest was incurred for business purposes, specifically for meeting the financial requirements of applying for a plot in IT Park, Panchkula. The AO disallowed this interest, stating it was not for business purposes and could not be allowed under Sections 36(1)(iii) or 37(1) of the Income Tax Act. The AO also noted that the OD was used for acquiring a capital asset, suggesting it should be capitalized.On appeal, the CIT(A) upheld the AO's decision, stating that the plot application did not directly relate to the business expansion and thus could not be considered a business expense. The CIT(A) also referenced Accounting Standard AS-16, indicating that borrowing costs could only be capitalized if they were incurred for acquiring, constructing, or producing a qualifying asset, which was not the case here as no capital asset came into existence.Before the Tribunal, the assessee reiterated that the interest on the OD should be allowed as a business expense since the plot was not allotted, and no capital asset was acquired. The Tribunal found that the assessee had received interest income of Rs. 15,39,228 from the FDR made against the OD and directed the AO to net off the interest expenditure of Rs. 13,63,428 against this interest income. Thus, the Tribunal set aside the CIT(A)'s order and allowed the assessee's claim.2. Applicability of Section 2(22)(e) on Purchase Imprest:The AO noticed that the assessee received a loan of Rs. 6 crores from M/s Shalimar Estates (P) Ltd., with Rs. 1,93,94,909 outstanding at the year's end. The AO treated this amount as deemed dividend under Section 2(22)(e) and issued a show-cause notice. The assessee argued that the amount was a 'purchase imprest' for a specific purpose and not a loan or advance. The assessee also pointed out that it was not a shareholder of M/s Shalimar Estates (P) Ltd., referencing the Special Bench decision in Asstt. CIT v. Bhaumik Colour (P.) Ltd.The AO maintained that the provisions of Section 2(22)(e) were clear and unambiguous, and the amount was to be treated as deemed dividend. The AO also noted that the shareholders of the assessee company held substantial shares in M/s Shalimar Estates (P) Ltd., thus falling under the purview of Section 2(22)(e).On appeal, the CIT(A) upheld the AO's decision, stating that the transaction was a financial one and not related to the business of the assessee, thus confirming the addition.Before the Tribunal, the assessee argued that the transaction was for a specific commercial purpose, not a loan or advance. The Tribunal examined the facts and found that the money was given by M/s Shalimar Estates (P) Ltd. for a specific purpose, i.e., applying for a plot or purchasing land, and not as a loan or advance. The Tribunal referenced the Delhi High Court's decisions in Ambassador Travels (P) Ltd. and CIT v. Raj Kumar, which clarified that trade advances for commercial transactions do not fall under the ambit of Section 2(22)(e).The Tribunal concluded that the payment was not a loan or advance but a specific commercial transaction, thus not attracting the provisions of Section 2(22)(e). The Tribunal set aside the CIT(A)'s order and deleted the addition of deemed dividend.Conclusion:The Tribunal allowed the assessee's appeal, directing the AO to net off the interest expenditure against the interest income and deleting the addition of deemed dividend under Section 2(22)(e).