2020 (2) TMI 1216 - AT - Income Tax

Appeal partly allowed on disallowance & deemed dividend issues, emphasizing interest-free funds presumption & correct profit computation. (22)(e)

Shri Sanjay Digambar Malve Versus The Asst. Commissioner of Income Tax, Circle – 1, Nashik.

The appeal was partly allowed, with significant relief granted on the issues of disallowance under Section 14A and the computation of deemed dividend ... Disallowance u/s 14A - availability of interest free funds as more than the investments - HELD THAT:- We find that Hon’ble Bombay High Court in the case of HDFC Vs. DCIT [2016 (3) TMI 755 - BOMBAY HIGH COURT] has held that when interest free funds available with the assessee are in excess of investments and then the investments are presumed to be out of interest free funds. Before us, Revenue has not placed any contrary binding decision in its support. In view of all these facts and following the decision of Hon’ble Bombay High Court in the case of HDFC Vs. DCIT (supra), we are of the view that no disallowance of interest under Rule 8D(2)(ii) is called for. Thus, the ground of the assessee is allowed. Deemed dividend u/s 2(22)(e) - HELD THAT:- Working of the deemed dividend u/s 2(22)(e) of the Act is to be worked out on the basis of the opening balance of the accumulated reserves of the lender company. Further, it is assessee’s contention that the higher amount of deemed dividend has been offered by the assessee due to mis-interpretation of the legal position. The aforesaid contention of the assessee has not been controverted by the Revenue. It is a settled proposition of law that no tax can be levied or recovered without authority of law for which reference can be made to the decision of Hon’ble Apex Court in the case of CIT Vs. Shelly Products [2003 (5) TMI 4 - SUPREME COURT] and Vijay Gupta Vs. CIT and another [2016 (3) TMI 977 - DELHI HIGH COURT] wherein it was observed that if an assessee by mistake or inadvertence or on account of ignorance included in his income any amount which is exempted from payment of income tax or is not income within the contemplation of law, the assessee may bring the same to the notice of the assessing authority which if satisfied may grant the assessee necessary relief and refund the tax paid in excess, if any. Considering the totality of the facts and in view of the aforesaid decisions, we are of the view that the deemed dividend u/s 2(22)(e) of the Act be worked out on the basis of the opening balance of KIPL as on 01.04.2012. We thus direct accordingly. Thus, the grounds of the assessee are allowed. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Addition under Section 2(22)(e) regarding deemed dividend.3. Additional legal claim regarding the computation of deemed dividend.4. Addition under Section 23 on account of deemed rent.Issue-Wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had investments amounting to Rs. 1.82 crores and claimed interest expenditure of Rs. 23,71,500/-. The AO was of the view that the assessee was utilizing interest-bearing funds to maintain investments and thus made a disallowance of Rs. 2,51,677/- under Section 14A read with Rule 8D. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance. However, the assessee contended that the interest-free funds available in the capital account were Rs. 7.78 crores, which exceeded the investments. Citing the Hon’ble Bombay High Court's decision in HDFC Vs. DCIT (383 ITR 529), the Tribunal held that no disallowance of interest under Rule 8D(2)(ii) is called for when interest-free funds exceed the investments. Thus, this ground was allowed in favor of the assessee.2. Addition under Section 2(22)(e) regarding deemed dividend:The AO observed that the assessee, being a major shareholder in M/s. Kamal Infrabuild Pvt. Ltd. (KIPL), received Rs. 83,77,846/- from KIPL. The AO treated Rs. 29,84,581/- as deemed dividend under Section 2(22)(e), considering the accumulated reserves of KIPL as on 31.03.2013. The assessee had already offered Rs. 25,96,585/- as deemed dividend, representing 87% of the accumulated profits. The AO added the differential amount of Rs. 3,87,996/- as deemed dividend. The CIT(A) upheld this addition. However, the Tribunal noted that the correct computation of deemed dividend should be based on the opening balance of accumulated reserves as on 01.04.2012, not the closing balance as on 31.03.2013. Citing the Hon’ble Gujarat High Court's decision in CIT Vs. M.B. Stock Holding Pvt. Ltd. (64 Taxmann.com 138) and the Pune Tribunal's decision in Smt. Chhaya Valmik Nikhade Vs. ACIT, the Tribunal directed that the deemed dividend be computed based on the opening balance of reserves, thus providing relief to the assessee.3. Additional legal claim regarding the computation of deemed dividend:The assessee argued that the higher amount of deemed dividend was offered due to misinterpretation of the legal provision and sought relief. The Tribunal acknowledged that no tax can be levied without the authority of law, referencing the Hon’ble Apex Court's decision in CIT Vs. Shelly Products and the Hon’ble Delhi High Court's decision in Vijay Gupta Vs. CIT. The Tribunal directed that the deemed dividend under Section 2(22)(e) be computed based on the opening balance of KIPL's reserves as on 01.04.2012, thereby allowing the assessee's grounds.4. Addition under Section 23 on account of deemed rent:The assessee initially contested the addition of Rs. 1,21,800/- under Section 23 for deemed rent of a flat owned in Pune. However, the assessee later chose not to press this ground, and it was dismissed as not pressed.Conclusion:The appeal was partly allowed, with significant relief granted on the issues of disallowance under Section 14A and the computation of deemed dividend under Section 2(22)(e). The Tribunal's directions emphasized the presumption of interest-free funds for investments and the correct basis for computing accumulated profits for deemed dividend.