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of <h1>Tax Tribunal Decision: Key Points on Interest, Dividends, Capital Gains, and Deemed Dividend</h1> <h3>BAKLIWAL FINANCIAL SERVICES (I) PVT LTD Versus DEPUTY COMMISSIONER OF INCOME TAX RANGE-4(1), MUMBAI</h3> BAKLIWAL FINANCIAL SERVICES (I) PVT LTD Versus DEPUTY COMMISSIONER OF INCOME TAX RANGE-4(1), MUMBAI - TMI Issues Involved:1. Disallowance of interest under Section 36(1)(iii).2. Disallowance under Section 14A read with Rule 8D.3. Treatment of shares received in demutualization.4. Disallowance under Section 40(a)(ia).5. Deemed dividend under Section 2(22)(e).Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii):The assessee contested the CIT(A)'s decision to enhance income by disallowing interest paid to the bank and Mr. C.U. Shah. The CIT(A) had disallowed Rs. 46,84,997/- under Section 36(1)(iii) in addition to the disallowance under Section 14A. The Tribunal noted that the assessee had sufficient interest-free funds to cover the interest-free advances to sister concerns. The Tribunal sustained the disallowance of Rs. 26 lakhs paid to Mr. C.U. Shah due to a direct nexus with borrowed funds but allowed the assessee's contention on other interest payments, directing the AO to restrict the disallowance to Rs. 26 lakhs only.2. Disallowance under Section 14A read with Rule 8D:For AY 2007-08, the CIT(A) restricted the disallowance under Section 14A to 5% of the dividend income, which the Tribunal found reasonable and upheld. For AY 2008-09, the Tribunal noted that the AO did not record satisfaction under Section 14A(2) and that shares were held as stock-in-trade, not investments. The Tribunal restricted the disallowance to 5% of the dividend income, directing the AO to work out the disallowance accordingly.3. Treatment of Shares Received in Demutualization:The assessee's appeal for AY 2008-09 included a ground regarding the treatment of shares received in demutualization as capital gains instead of business income. The Tribunal rejected the additional ground claiming the written-down value of the Stock Exchange Card as a loss, noting that the conversion to shares occurred in AY 2006-07, and any loss should have been claimed then.4. Disallowance under Section 40(a)(ia):The CIT(A) had disallowed Rs. 29,80,382/- under Section 40(a)(ia) for transaction charges, treating them as lease-line charges, Vsat charges, or data processing charges. The Tribunal admitted additional evidence showing these were D-mat charges paid to the bank, not transaction charges to the Stock Exchange. The issue was restored to the AO for fresh examination to determine if disallowance under Section 40(a)(ia) was warranted.5. Deemed Dividend under Section 2(22)(e):The AO had treated advances to sister concerns as deemed dividend under Section 2(22)(e), adding Rs. 6,59,75,767/-. The CIT(A) deleted this addition, noting that the assessee company was not the registered shareholder of the lender company. The Tribunal upheld the CIT(A)'s decision, citing that deemed dividend can only be assessed in the hands of the registered shareholder, not the recipient concern.Conclusion:- Appeals by the assessee in ITA Nos. 4885/Mum/2011 and 2991/Mum/2012 were partly allowed.- Revenue appeals in ITA Nos. 4658/Mum/2011 and 2345/Mum/2012 were dismissed.
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