TaxTMI 
TaxTMI 
TaxTMI 
2020 (8) TMI 799
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....Disallowance of fees paid to ROC Rs. 2,26,500/- ii) Disallowance u/s 14A Rs. 22,22,893/- iii) Deemed Dividend u/s 2(22)(e) Rs. 2,90,27,890/- iv) Addition of credits u/s 68 Rs. 72,00,000/- 2.1 Aggrieved, the assessee approached the Ld. First Appellate Authority challenging the additions and disallowances. The Ld. CIT (A) partly allowed the assessee's appeal by deleting the disallowance u/s 14A but upheld the addition pertaining to payment of fees to ROC, addition pertaining to deemed dividend and addition u/s 68. The Ld. CIT (A) also upheld the action of the AO in making the disallowance of Rs. 26,22,677/- on account of expenditure claimed in the profit and loss account on the ground that no business activities have been carried out during the year under consideration. 2.2 Aggrieved, the assessee is now before the ITAT and has challenged the action of the Ld. CIT (A) in upholding the additions disallowance by raising the following grounds of appeal: 1. "That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AR in making disallowance of Rs. 2,26,500/- on account of ROC fees. 2. That havi....
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.... bad in law and against the facts and circumstance of the case. 8. That having regard to the facts and circumstances of the ease, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234B and 234D of Income Tax Act, 1961. 9. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other." 3.0 The Ld. AR submitted that as far as addition of Rs. 2,26,500/- pertaining to fees paid to ROC is concerned this includes an amount of Rs. 5,500/- which was paid as fees for filing the annual return with the ROC. It was submitted that this could not have been disallowed under any circumstances. With respect to the remaining amount, the Ld. AR submitted that the same was not being pressed. 3.1 With respect to ground No. 2 pertaining to disallowance of Rs. 26,22,677/- confirmed by the Ld. CIT (A) on the ground that since there was no business activity, expenses could not be allowed, it was submitted that once the business is set up, expenditure is allowed and merely because no revenue might have been earned in a particular ....
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....AR, was that the entire transactions related to the business of the company and were entered into the normal course of business. It was submitted that as the assessee company is an investment company, the provisions of section 2(22)(e) of the Act were not attracted. In this regard also reliance was placed on numerous judicial precedents which have been incorporated in the written submissions and are produced elsewhere in this order. The Ld. AR emphasised that although these facts were pleaded before the lower authorities, they were not even considered while making the impugned addition. 3.3 Arguing on ground Nos. 5, 6 and 7 relating to the addition of Rs. 72,00,000/-being amount of loan from M/s. Mega Trading Corporation added back u/s 68 of the Act, the Ld. AR submitted that M/s. Mega Trading Corporation is assessed to tax and during the course of assessment proceedings, confirmation from this company was filed along with the copy of the bank statement. It was submitted that even the company had responded to the notice issued u/s 133(6) of the Act and had replied directly to the AO confirming the transaction. The Ld. AR also submitted that the impugned amount of Rs. 72,00,000/- w....
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....not be disallowed, more so, when such expenses are of administrative character. PB 18-25 is the copy of acknowledgment of return, computation of income, balance sheet and profit & loss account of the assessee company for the A.Y. 2014-15 to show that the business was set up, investments were made and expenses incurred in running the business. PB 29-32 is the assessee's letter to Ld. A.O. submitting inter alia about the nature of business of the assessee company. PB 67-73 is the copy of assessee's letter to Ld. A.O. submitting at PB 68-69 a detailed note as to why claimed expenses cannot be disallowed. It has been held in the following judicial decisions that once business is set up expenses are allowable: - - Western India Vegetable Products Ltd. vs. CIT, 26 ITR 151 (Born.) - CIT vs. Sarabhai Management Corporation Ltd, 192 ITR 151 (SC) - CIT vs. Western India Seafood Pvt. Ltd, 199 ITR 777 (Guj.) - CIT vs. E-Funds International India, 162 Taxman I(Det.) - Styler India Pvt. Ltd. vs. JCIT, 116 TTJ 333 (TM)(ITAT-Pune). Without prejudice to above, it has been held in the following judicial decisions that even if there is no business, expenses incurred for re....
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....unt of loans received to the extent of accumulated profit of these companies as deemed dividend namely M/s Goyal Engineering Polymers P. Ltd. (GEPPL) of Rs. 13,00,000/-, M/s Gurgaon Poly Plastic Ltd. (GPPL) of Rs. 43,15,216/-, M/s Poly Plastic Automotive India P. Ltd. (PAIPL) of Rs. 2,34,12,674/-, which comes to Rs. 2,90,27,890/-. Ld. A.O. has disused this issue at page 5-10 of the assessment order, whereas Ld. CIT (A) has discussed this issue at page 47-48 of the appeal order. Assessee raised several Issues during assessment proceeding and appeal proceeding & submitted that impugned amounts do not constitute deemed dividend but those issues were not adverted to by any of the authorities. Issues raised by assessee were as follows: - 1. There cannot be any deemed dividend in respect of any loan raised by a holding company from its subsidiary company by relying upon the following judicial precedent. Farida Holdings (P.) Ltd. v. DCIT, [2012] 51 SOT 452 (Chennai) Addition-Transactions carried out in ordinary course of business-Deemed dividends u/s. 2(22)(e)-Taxability-Assessee is the holding company exercising administrative control over 11 hundred percent owned subsidiaries-As....
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....ess. In this regard it is respectfully submitted that the impugned amount received by the assessee were in business nature and were undertaken in regular course of business as the assessee company is in nature of investment company. In the following judicial precedents, it has been held that advances/ loans received in ordinary course of business cannot attract the provisions of section 2(22)( e) - DCIT v. Lakra Brothers-l06-TTJ-250(CHD' A') Debt/advances in the regular course of business- Advances made during the ordinary course of business for business expediencies do not constitute 'loan' for purposes ofs.2(22)(e) and cannot be taxed as deemed dividend - CIT vs. Creative Dyeing & Printing (P) Ltd. 30 DTR 143(Delhi) Advance for commercial purpose-Amount advanced to the assessee company by another company having common directors not being a loan but an advance for business transaction which is to be adjusted against the moneys payable by the latter to the assessee company in the subsequent years, same did not fall within the definition of deemed dividend under s. 2(22)(e) - CIT vs Malayala Manorama Company Ltd., 301 CTR 552 (Kerala High Court) Deemed ....
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.... 50 per cent shareholding in the assessee and has common directors with the assessee-Transaction in question was a business transaction which would benefit both assessee company and PE Ltd.-Admittedly, the amount is to be adjusted against the moneys payable by PE Ltd. to the assessee company in the subsequent years-Contention of the Revenue that since PE Ltd. is not into the business of money lending, the payments made by it to the assessee company would be covered by s.2(22)(e)(ii) and consequently payments even for business transactions would be deemed dividend is not acceptable-Once it is held that business transactions do not fall within s. 2(22)( e), there is no need to go further to s. 2(22)(e)(ii)--Therefore, amount advanced for the business transaction by PE Ltd. to the assessee company did not fall within the definition of deemed dividend under s. 2(22)( e) PB 84 is the copy of resolution passed by PAIPL resolving to give intercorporate deposits to the assessee company. PB 79- 83 is the copy of reply filed by the assessee to Ld. AO explain that amount was received by the assessee were in the nature of inter corporate deposits. Thus, based on the above stated decision....
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....ngineering Polymers Pvt. Ltd. in the books of assessee PB 132 is the copy of ledger a/c of assessee III the books of M/s Goyal Engineering Polymers Pvt. Ltd. PB 131 is the copy of ledger a/c of M/s Goyal Polypastics Pvt. Ltd. in the books of assessee Further, as per explanation 2 to section 2(22) "accumulated profits" for the purpose of sub-clause (e) shall include all profits of the company upto date of distribution or payment. Thus, it is a matter of law that in the absence of any contrary evidence on record, accumulated profits shall be deemed to accrue on day to day basis. Therefore, Ld. AO are errored in law in considering accumulated profits computed as on 31.03.2014 for judging the quantum of deemed dividend u/s 2(22)( e). PB 74-78 is the copy of assessee's letter to Ld. A.O. submitting inter alia about the amalgamation of M/s Rakshat, M/s Gunjan & M/s Jahanvi with the assessee company and filing copy of amalgamation order, a detailed note on deemed dividend submitting that no deemed dividend can be there in the hands of holding company advance of subsidiary company and rely upon Chennai Bench of Tribunal decisions in the case Farida Holding P. Ltd. vs. DCIT. Thu....
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.... availed by it from related parties is in the nature of Inter- Corporate Deposits (ICDs). ICDs are short term borrowings which are availed by corporates in need of funds from other corporates which have surplus funds. The period of such loans ranges from a week to generally six months. The rate of interest for such loans are more than the prevailing market rates since such loans are unsecured loans without a collateral and hence the risk involved for the lender is higher than the normal loans with some kind of security linked to them. Further, in case of fixed rate ICDs with call/put option, the option is exercisable after a pre-specified lock-in period. The ICDs are to be sanctioned by way of a Board resolution and the terms of such sanction have to be very clear and precise since the loan is being granted without a collateral or security. The terms of granting of the loan have to be clearly spelled out including the amount of loan, the period for which such loan is being granted, the rate of interest payable and the period after which the call/put option can be exercised by the lender. Not only this, the amount payable within one year has also to be clearly spelled out. The e....
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.... nothing more than self-serving nomenclatures. Under these circumstances, if the concession on the plea of ICDs citing examples of transactions between unrelated parties is allowed, it would spell death knell for provisions such as section 2(22)(e) which have been specifically brought into the Act in order to curb the very menace which the appellant has resorted to. This is not the intent of the Legislature and can also never be the intent of any interpretation to which these provisions may be subjected to. Related party transactions such as these cannot be given the same benefit which may be considered for unrelated parties dealing at arm's length on purely commercial terms . 2. The assessee has submitted certain case laws for the perusal of the Ld. CIT (A) and also now before the Hon'ble ITAT. It is submitted that as rightly pointed out by the Ld. CIT (A) in his order, the judgments quoted by the assessee are discuss the requirement of taxability in the hands of the shareholders which fact is undisputed in the present case. For example i) CIT vs. Visisth Chay Vyapar Limited (Page 26 of CIT order) - the facts and the context was totally different as the matter pertai....
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.... to fee for filing of annual return with the ROC. We agree with the contention of the Ld. AR that this amount cannot be disallowed. Therefore, we delete the amount of Rs. 5,500/- and since the remaining amount is not pressed, we confirm the remaining amount of Rs. 2,21,000/-. Thus, this ground stands partly allowed. 5.2 Ground No. 2 pertains to disallowance of Rs. 26,22,677/- on account of expenditure claimed in the profit and loss account on the ground that there was no business activity. It has been argued by the Ld. AR that out of this amount, amount of Rs. 2,26,500/- is a double disallowance which is covered by ground No. 1. It has been further argued that the business of the assessee was duly set up and merely because there was no expenditure earned by the assessee during the year under consideration, the expenditure could not be disallowed as the expenses were in the nature of administrative expenses. Our attention has been drawn to various pages in the paper book wherein the details of these expenses have been given. The Ld. AR has also relied on numerous judicial precedents in support of his contention. Having gone through the records, we are in agreement with the contenti....