2016 (1) TMI 1078 - AT - Income Tax

Tribunal rules in favor of assessee, dismissing Revenue's appeal on interest expenses & deemed dividend

The Tribunal allowed the assessee's appeal, dismissing the Revenue's appeal. It held that the interest expenses disallowed under Section 40A(2)(b) were ... Disallowance out of interest expenses @ 3% u/s 40A(2)(b) - Held that:- The decision of Hon’ble Gujarat High Court in the case of Principal CIT vs. Gujarat Gas financial Services Ltd. (2015 (7) TMI 743 - GUJARAT HIGH COURT) wherein it has been held that in a situation when the Assessing Officer found that assessee was using some space of the parent company and, therefore, initiated proceedings u/s 40A(2)(b) and deducted and remitted rent of space from services charges it was observed that as assessee company and parent company both were taxed at marginal rate and therefore it cannot be said that service charges paid to parent company are unreasonable so as to evade tax and, therefore Revenue could not point out that assessee evaded payment of tax and it was held that invocation of section 40A(2)(b) was not valid. Thus considering the relation transactions entered into by the assessee company with its director, K.K. Bansal and its sister concern Mahavir Rolling Mills were normal business transactions and did not reflect any intention of the assessee to will-fully evade tax by paying higher rate of interest and therefore, we delete the addition made by Assessing Officer - Decided in favour of assessee Deemed dividend u/s. 2(22)(e) - Held that:- As the assessee company is not a share holder in Mahavir Rolling Mills Pvt. Ltd., therefore, no addition could be made u/s 2(22)(e) of the Act, as deemed dividend and accordingly, we find no reason to interfere with the order of ld. CIT(A). We uphold the same - Decided in favour of assessee Issues Involved:1. Disallowance of interest expenses under Section 40A(2)(b) of the Income-tax Act, 1961.2. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of Interest Expenses under Section 40A(2)(b):The assessee, engaged in the ship-breaking business, filed its return of income for the Assessment Year 2007-08. The Assessing Officer (AO) made an addition of Rs. 14,02,522/- on account of excess interest claimed to be paid to a party covered under Section 40A(2)(b) of the Income-tax Act, 1961. The AO noted that the assessee paid interest at 15% to its director, Mr. K.K. Bansal, and charged 12% interest from its sister concern, Mahavir Rolling Mills Pvt. Ltd., resulting in a disallowance of 3% excess interest.The CIT(A) sustained the addition made under Section 40A(2)(b). The assessee argued that the transactions with Mr. K.K. Bansal and Mahavir Rolling Mills Pvt. Ltd. were regular and conducted in the ordinary course of business. The AR emphasized that the credit balance in Mr. K.K. Bansal's account significantly reduced, indicating no intention to claim excess interest. Additionally, Mahavir Rolling Mills Pvt. Ltd. had regular transactions with the assessee, and both entities were taxed at the maximum marginal rate, negating any tax evasion motive.The Tribunal found merit in the assessee's submissions, noting that the transactions were regular business dealings without any intention to evade taxes. The Tribunal referenced the Gujarat High Court decision in Principal CIT vs. Gujarat Gas Financial Services Ltd., which supported the view that transactions between entities taxed at the maximum marginal rate do not indicate tax evasion. Consequently, the Tribunal deleted the addition made by the AO and allowed the assessee's appeal.2. Deletion of Addition on Account of Deemed Dividend under Section 2(22)(e):The AO made an addition of Rs. 85,21,606/- as deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961, based on advances received by the assessee from Mahavir Rolling Mills Pvt. Ltd. The AO noted that Mr. K.K. Bansal held substantial shareholding in both companies and that Mahavir Rolling Mills Pvt. Ltd. had accumulated profits. The CIT(A) deleted the addition, relying on the Tribunal's decision in the assessee's own case for the Assessment Year 2005-06.The Tribunal upheld the CIT(A)'s decision, noting that the assessee company was not a shareholder in Mahavir Rolling Mills Pvt. Ltd., and thus, the provisions of Section 2(22)(e) could not be invoked. The Tribunal referenced the Special Bench decision in ACIT vs. Bhaumik Colour (P) Ltd., which held that deemed dividend could only be taxed in the hands of a shareholder and not a non-shareholder. Additionally, the Tribunal cited the Rajasthan High Court decision in CIT vs. Hotel Hilltop, which outlined the conditions for attracting Section 2(22)(e), emphasizing that the assessee must be a shareholder of the lending company.Since the assessee was not a shareholder in Mahavir Rolling Mills Pvt. Ltd., the Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the Revenue's appeal.Conclusion:The assessee's appeal was allowed, and the Revenue's appeal was dismissed. The Tribunal concluded that the transactions were regular business dealings without any intention of tax evasion and that deemed dividend provisions could not be applied as the assessee was not a shareholder in the lending company. The order was pronounced in the open court on 04/01/2016.