2013 (9) TMI 265 - AT - Income Tax

Tribunal Decision: Assessee wins on ICDs, expenses remanded, bad debts upheld

M/s IFB AGRO INDUSTRIES LTD Versus JOINT COMMISSIONER OF INCOME TAX

The Tribunal ruled in favor of the assessee regarding the addition of Inter-corporate Deposits (ICD) as deemed dividends, citing distinctions between ICDs ... Deemed Dividend - Treatment of Intercorporate deposits as dividend u/s 2(22)(e) - Intercorporate deposits to be treated as loan or deposit – ‘Loan’ & ‘Advance’ and ‘Deposits’ – Held that:- Provisions of section 2(22)(e) of the Act refers to only ‘loans’ and ‘advances’ it does not talk of a ‘deposit’ - Provisions of section 2(22)(e) of the Act refers to only ‘loans’ and ‘advances’ it does not talk of a ‘deposit’ - View taken by the Ld. CIT(A) that the Intercorporate deposit is similar to the loan would no longer have legs to stand – Reliance has been placed upon the decision of the Special Bench of this Tribunal in the case of Housing & Urban Development Corporation Ltd. [2005 (11) TMI 199 - ITAT DELHI-E], wherein it has been held that loans and deposits are to be taken different and distinct - Intercorporate deposits cannot be treated as a loan falling within the purview of section 2(22)(e) of the Act. Allowability of expenses attributable to dividend income – Invocation of provisions of section 14A of the Income Tax Act – Held that:- Assessee had a share capital of Rs.8 cr. and had reserves and surplus at Rs.56 cr. It was the submission that the investments were only Rs.2,96,17,000/- - As per the decision of Godrej & Boycee Mfg. Co. Ltd., referred to [2010 (8) TMI 77 - BOMBAY HIGH COURT], there must be a proximate relationship between the expenditure and the income which does not form part of the total income – Issue restored to the file of A.O. for deciding as per the line of decision of the Hon’ble Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd. Issues Involved:1. Addition of Inter-corporate Deposit (ICD) as deemed dividend under Section 2(22)(e) of the Income Tax Act.2. Computation of expenses attributable to earning exempt dividend income under Section 14A/Rule 8D.3. Disallowance of loss due to foreign exchange rate fluctuation.4. Treatment of bad debts as business loss.5. Deletion of addition under Section 43B for unpaid PF and ESI.6. Deletion of addition for excessive and unjustified business expenditure.7. Deletion of addition for notional loss due to foreign exchange fluctuations.Detailed Analysis:1. Addition of Inter-corporate Deposit (ICD) as Deemed Dividend:The assessee contested the addition of Rs.11.20 crores received from M/s IFB Automotive Pvt. Ltd. as deemed dividend under Section 2(22)(e). The assessee argued that ICDs are distinct from loans and should not be treated as deemed dividends. The Tribunal agreed, citing the decision of the Bombay Bench in the case of Bombay Oil Industries Ltd., which held that ICDs are different from loans and advances and do not fall under the purview of deemed dividend. The Tribunal also referred to the decision of the Special Bench in Gujarat Gas & Financial Services Ltd., which distinguished between loans and deposits. Consequently, the addition of ICDs as deemed dividend was deleted.2. Computation of Expenses Attributable to Earning Exempt Dividend Income:The assessee challenged the computation of expenses attributable to earning exempt dividend income. The Tribunal restored the issue to the Assessing Officer (AO) for re-adjudication in line with the decision of the Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd., which requires a proximate relationship between the expenditure and the income that does not form part of the total income.3. Disallowance of Loss Due to Foreign Exchange Rate Fluctuation:The assessee contested the disallowance of Rs.10,84,000 arising from foreign exchange rate fluctuation. The Tribunal restored the issue to the AO for re-adjudication, taking into consideration the decision of the Supreme Court in CIT vs. Woodward Governor India (P) Ltd., which allows such losses if they are related to business transactions.4. Treatment of Bad Debts as Business Loss:The revenue challenged the CIT(A)'s decision to allow bad debts as a business loss. The Tribunal noted that the CIT(A) treated the amount as a business loss connected to the assessee's business dealings and not as a bad debt. Since the CIT(A) had verified the ledger accounts and found no defects, the Tribunal dismissed the revenue's appeal on this ground.5. Deletion of Addition Under Section 43B for Unpaid PF and ESI:The revenue contested the deletion of addition under Section 43B for unpaid PF and ESI. The Tribunal upheld the CIT(A)'s decision, which was based on the jurisdictional High Court's ruling in Arambag Hatcheries Ltd. and the Supreme Court's decision in Alom Extrusions Ltd., allowing deductions if payments are made before the due date of filing the income tax return.6. Deletion of Addition for Excessive and Unjustified Business Expenditure:The revenue challenged the deletion of addition for excessive and unjustified business expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the gross profit and net profit ratios were better than the previous year and no defects were found in the assessee's books of account. Therefore, no ad hoc disallowance was warranted.7. Deletion of Addition for Notional Loss Due to Foreign Exchange Fluctuations:The revenue's appeal on this issue was linked to the assessee's appeal on foreign exchange loss. Since the Tribunal restored the assessee's issue to the AO for re-adjudication, the revenue's appeal was also allowed for statistical purposes.Conclusion:Both the assessee's and revenue's appeals were partly allowed for statistical purposes, with several issues remanded to the AO for re-adjudication based on relevant judicial precedents.