Tax Tribunal Deletes Deemed Dividend, Disallows Interest Expenditure

The Tribunal allowed the appeals, deleting additions made under section 2(22)(e) as deemed dividend, disallowance of interest expenditure, and disallowance under section 14A rule 8D. The protective addition in the shareholders' hands was also deleted after the substantive addition in the assessee's hands was removed.

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Issues Involved:
1. Addition of Rs. 1,04,00,000 as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance of interest expenditure of Rs. 3,57,651.
3. Disallowance under section 14A rule 8D of Rs. 2,13,012.
4. Protective vs. substantive addition in the hands of the assessee and shareholders.

Detailed Analysis:

1. Addition of Rs. 1,04,00,000 as Deemed Dividend under Section 2(22)(e):
The primary issue was whether the amounts received by the assessee from sister concerns should be treated as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Assessing Officer (AO) added Rs. 1,04,00,000 as deemed dividend, noting that the assessee received loans from sister concerns with common shareholders. The CIT(A) confirmed the addition but on a substantive basis in the hands of the assessee and on a protective basis in the hands of the shareholders.

The Tribunal, however, found that the transactions were out of commercial expediency and were repaid within the same year with interest. It was held that these transactions were in the nature of current accounts between sister concerns and could not be treated as loans or advances under section 2(22)(e). The Tribunal relied on various case laws and CBDT Circular No. 19/2017, which clarified that trade advances in the nature of commercial transactions would not fall within the ambit of "loans/advances." Consequently, the addition was deleted.

2. Disallowance of Interest Expenditure of Rs. 3,57,651:
The AO disallowed Rs. 3,57,651 out of the total interest expenditure claimed by the assessee, attributing it to interest-free advances. The CIT(A) confirmed the disallowance, noting that the assessee had admitted the interest attribution.

The Tribunal observed that the assessee's own funds were significantly higher than the interest-free advances. Citing the Bombay High Court's decision in "CIT vs. Reliance Utilities and Power Ltd.," it was held that if the assessee's own funds are sufficient to cover the investments, it can be presumed that the investments were made out of own funds. Therefore, the disallowance was deleted.

3. Disallowance under Section 14A Rule 8D of Rs. 2,13,012:
The AO made a disallowance of Rs. 2,13,012 under section 14A read with Rule 8D, attributing it to investments in tax-free income-yielding securities. The CIT(A) upheld this disallowance.

The Tribunal noted that the assessee's own funds were more than the investments made in tax-free securities. Following the jurisdictional Bombay High Court's decision in "CIT vs. HDFC Bank Ltd.," it was held that the interest disallowance was wrongly sustained. The Tribunal also deleted the disallowance of Rs. 49,675, being 0.5% of average investments, as the assessee had not claimed any expenses in the profit and loss account attributable to earning exempt income.

4. Protective vs. Substantive Addition:
The CIT(A) had sustained the addition of deemed dividend on a substantive basis in the hands of the assessee and on a protective basis in the hands of the shareholders. The Tribunal, having deleted the substantive addition in the hands of the assessee, directed the AO to delete the protective addition in the hands of the shareholders as well.

Conclusion:
The Tribunal allowed the appeals of the assessees, deleting the additions made under section 2(22)(e) as deemed dividend, the disallowance of interest expenditure, and the disallowance under section 14A rule 8D. The protective addition in the hands of the shareholders was also deleted following the deletion of the substantive addition in the hands of the assessee.

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