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The assessee challenged the disallowance of Rs. 4,32,847 out of a total disallowance of Rs. 43,79,995 made under Section 14A read with Rule 8D. The assessee argued that no borrowed funds were used for acquiring investments in shares and that no expenditure was incurred for earning exempt income. The AO had disallowed Rs. 43,79,995 based on Rule 8D, which included demat charges, interest expenses, and 0.5% of the average value of investments.
The CIT(A) reduced the disallowance to Rs. 4,32,847, noting that the assessee had sufficient non-interest-bearing funds to cover the investments. The CIT(A) also upheld the disallowance of other expenses under Rule 8D(2)(iii) but restricted the interest disallowance to the difference between the interest paid and interest earned.
The Tribunal agreed with the assessee that the demat charges of Rs. 3,266 should not be disallowed again under Section 14A as it would result in double addition. Regarding the interest expenses, the Tribunal noted that the assessee had sufficient non-interest-bearing funds to cover the investments, applying the legal principles from CIT vs Reliance Utilities and Power Ltd. and CIT vs HDFC Bank Ltd. Therefore, no disallowance of interest expenses was warranted under Rule 8D(2)(ii).
For disallowance under Rule 8D(2)(iii), the Tribunal held that only investments yielding tax-free income should be considered, following the decisions in DCIT vs REI Agro Ltd. and Cheminvest Ltd vs CIT. Consequently, the Tribunal allowed the assessee's appeal in part and dismissed the revenue's appeal on this issue.
2. Deemed Dividend under Section 2(22)(e) of the Income Tax Act, 1961:The assessee contested the addition of Rs. 12,08,616 as deemed dividend under Section 2(22)(e), arguing that the provisions were not applicable. The assessee had taken loans from TCI Bhoruka Projects Ltd. and Transcorp Enterprises Ltd., holding significant shares in both companies. The AO treated these loans as deemed dividends.
The CIT(A) restricted the deemed dividend addition to the extent of accumulated profits of TCI Bhoruka Projects Ltd. and deleted the addition related to Transcorp Enterprises Ltd., noting that the latter's principal business was money lending.
The Tribunal observed that TCI Bhoruka Projects Ltd. was listed on the Calcutta Stock Exchange, making it a company in which the public are substantially interested. Therefore, loans from such a company are outside the purview of Section 2(22)(e). Regarding Transcorp Enterprises Ltd., the Tribunal noted that a substantial part of its business was lending money, and the loans were given in the ordinary course of business. Thus, these loans were also outside the purview of Section 2(22)(e).
The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal and allowing the assessee's appeal on this issue.
Conclusion:In conclusion, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal. The disallowance under Section 14A was limited to Rs. 4,32,847, excluding demat charges and interest expenses due to sufficient non-interest-bearing funds. The deemed dividend additions under Section 2(22)(e) were deleted as the loans were from companies in which the public are substantially interested or were given in the ordinary course of business.
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