Tribunal Upholds Revenue's Appeals Dismissal (iii) (22)(e)

The Tribunal dismissed all appeals filed by the Revenue, upholding the CIT(A)'s decisions. The disallowance under section 14A was restricted to the amount of exempt income earned by the assessee. The deletion of disallowance under section 57(iii) was affirmed, as the interest income was fully offered to tax. The disallowance of deemed dividend income under section 2(22)(e) was rejected, as the assessee was not a registered shareholder of the lending companies. The Tribunal found no errors in the CIT(A)'s rulings, and the orders were confirmed on 31st March 2022 in Chennai.

---

---

Issues Involved:
1. Restriction of disallowance under section 14A read with Rule 8D.
2. Deletion of disallowance under section 57(iii).
3. Disallowance of deemed dividend income under section 2(22)(e).

Issue-wise Detailed Analysis:

1. Restriction of Disallowance under Section 14A read with Rule 8D:
The Revenue challenged the restriction of disallowance made under section 14A read with Rule 8D for the assessment years 2010-11, 2011-12, and 2012-13. The assessee had earned significant dividend income, and the Assessing Officer made substantial disallowances by allocating proportionate interest paid on borrowed loans. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to the extent of the dividend income earned, referencing the Hon’ble Delhi High Court decision in the case of Joint Investments P. Ltd. v. CIT 372 ITR 694. The Tribunal found no infirmity in the CIT(A)’s order and upheld the restriction of disallowance to the amount of exempt income earned by the assessee.

2. Deletion of Disallowance under Section 57(iii):
The Revenue also contested the deletion of disallowance made under section 57(iii) of the Act. The assessee had advanced substantial sums to M/s. Aban Offshore Ltd. and earned significant interest income, which was fully offered to tax. The loan was funded by borrowing from IFCI Ltd., and the assessee incurred considerable interest expenditure. The Assessing Officer excluded the earning of exempt income from total direct interest expenses and computed the net interest income as income from other sources. On appeal, the CIT(A) directed the deletion of the addition, noting that the loan from IFCI was used to fund Aban Offshore Ltd., and the interest income was fully offered to tax. The Tribunal agreed with the CIT(A), finding no reason to interfere with the deletion of the addition, as the Assessing Officer had no justification for reducing the direct interest expenditure for the purposes of section 14A.

3. Disallowance of Deemed Dividend Income under Section 2(22)(e):
For the assessment years 2011-12 and 2012-13, the Revenue raised the issue of disallowance of deemed dividend income. The Assessing Officer added the loans received by the assessee from its group concerns as deemed dividend under section 2(22)(e) of the Act, citing common shareholders holding more than 10% of the shareholding. On appeal, the assessee argued that it was not a shareholder of the lending companies and that the loans were inter-corporate deposits advanced in the course of business. The CIT(A) observed that the deemed dividend would arise in the hands of the individual shareholders, not the assessee company, referencing CIT v. Printwave Services P Ltd 373 ITR 665 (Mad). The Tribunal upheld the CIT(A)’s decision, noting that the assessee was not a registered shareholder, and thus, no deemed dividend could be brought to tax under section 2(22)(e). The Tribunal also referenced similar decisions, including ACIT vs. Bhaumik Color P. Ltd 118 ITO 1 Mumbai Special Bench, supporting the view that the provisions of section 2(22)(e) would not apply to the assessee.

Conclusion:
All the appeals filed by the Revenue were dismissed, with the Tribunal confirming the orders of the CIT(A) on all issues. The Tribunal found no infirmity in the CIT(A)’s decisions regarding the restriction of disallowance under section 14A, deletion of disallowance under section 57(iii), and non-application of deemed dividend provisions under section 2(22)(e). The order was pronounced on 31st March 2022 at Chennai.

---