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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI A. MOHAN ALANKAMONY
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A”, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER (AY: 2012-13) (AY: 2015-16) M/s. Mandava Holdings Vs. Income Tax Officer, Private Limited, Ward-16(2), Hyderabad – 500 034. Hyderabad. PAN: AAFCM 4964 M (Appellant) (Respondent) Assessee by: Shri A.V. Raghuram Revenue by: Shri Sunil Kumar Pandey, DR Date of hearing: 18/02/2021 Date of pronouncement: 25/02/2021 ORDER PER A. MOHAN ALANKAMONY, AM.:
Both these appeals are filed by the assessee against the orders of the Ld. CIT (A)-4, Hyderabad in appeal Nos. 0077 and0077/15-16/ITO, Wd-16(2)/CIT(A)—4, 2017-18 and 0127/17-18/DCIT, Cir-16(2), CIT(A)- 4/Hyd/2018-19 passed U/s. 143(3) r.w.s 250(6) of the Act for the AYs 2012-13 and 2015-16 respectively.
ITA No.313/Hyd/2018 (AY: 2012-13)
The assessee has raised three grounds in its appeal for the AY 2012-13 however, the crux of the issue is that “the ld. CIT (A) has erred in sustaining the order of the Ld. AO who had made addition of Rs. 1,01,88,510/- invoking the provisions of section 14A of the Act.
The assessee has raised two grounds in its appeal for the AY 2015- 16 however, the crux of the issue is that “the Ld. CIT (A) has erred in sustaining the addition made by the Ld. AO for Rs. 73,44,582/- invoking the provisions of section 2(22)(e) of the Act”.
Brief facts of the case are that the assessee is a private Limited Company filed its return of income for the AY 2012-13 on 28/09/2012 and for the AY 2015-16 on 31/10/2015. Subsequently, the return was taken up for scrutiny and the assessment was completed on 31/3/2015 and 16/12/2017 for the AY 2012-13 and 2015-16 respectively.
AY: 2012-13:
During the course of scrutiny assessment proceedings, it was observed by the Ld. AO that the assessee had made huge investment earning exempt income which stood at Rs. 91,38,00,460/- as on 31/3/2012. Since the assessee had claimed that no expenditure was incurred on the investment made the Ld. AO invoked the provisions of section 14A of the Act read with Rule 8D(2)(ii) of the Rules and made addition of Rs. 1,01,18,510/-. On appeal, the Ld. CIT (A) confirmed the order of the ld. AO by holding that the assessee had earned dividend income which is exempt from tax of Rs. 2,28,00,000/- during the relevant Assessment Year.
6. At the outset, the Ld. AR submitted before us that the entire investment was made in the assessee’s subsidiary companies out of its non-interest-bearing funds such as its equity share capital and reserves. The Ld. AR further submitted that in such circumstances there could not be any expenditure incurred by the assessee for making investment in its own subsidiary companies. It was therefore pleaded that the addition made and sustained by the Ld. Revenue Authorities invoking the provisions of section 14A of the Act may be deleted. The Ld. DR on the other hand, relied on the orders of the Ld. Revenue Authorities and argued in support of the same.
We have heard the rival submissions and carefully perused the materials on record. On perusing the statement of accounts of the assessee it is apparent that the aggregate of assessee’s equity shareholders fund and reserves is Rs. 984,01,38,406/- as against the investment made (earning exempt income) of Rs. 91,38,460/-. Therefore, it can be presumed that the entire investment made earning exempt income is from the assessee’s shareholder’s fund and reserves which is non-interest-bearing fund of the assessee. On the similar facts, this Bench of the Tribunal in the case of Adaequare Info Private Limited vs. DCIT (ITA Nos. 119, 120 and 121/Hyd/2018) vide order dated 16/02/2021 had held as under:
“5. We have heard the rival submissions and carefully perused the materials on record. Factually for making any investment in equity shares by any entity only the following categories of expenditure will be attributable: - (i) Interest on interest bearing funds that is utilised for the purpose of making such investment. (ii) Direct and indirect expenses attributable to the process of making such investment such as expenditure incurred for due diligence, managerial expenditure, clerical expense, stationary expenditure, and portfolio management expenditure.
There cannot be any other expenditure other than the expenditure mentioned herein above that can be incurred by an entity which will be attributable towards investments made in equity shares of other companies. In the case of the assessee, the assessee has invested in its own subsidiary companies out of its non-interest-bearing funds such as own share capital and reserves and this is not in dispute. Since in the case of the assessee the assessee company has utilised only its non-interest-bearing funds for making investment in its own subsidiary company, no interest cost can be attributable to the same because, there is no interest cost to the assessee as it can be treated that the assessee has withdrawn from its capital and reserves which are assesse’s interest free funds for making such investment. Further, for making investment in its own company there cannot be any cost attributable with respect to direct and indirect expenses towards the process of decision making, due diligence, managerial expenditure, and portfolio management expenditure because no such cost can arise for making investment in one’s own entity. Further, only meagre expenses can be attributable with respect to clerical and stationary expenses which is negligible and that is deserved to be ignored. Therefore, factually there cannot be any expenditure attributable to the investment made in sister company when the investment is out of its own interest free fund. When the above facts were pointed out to the Ld. DR, he could not controvert to the same however, he relied on the order of the Ld. AO. Considering these facts, We are of the view that if the assessee has made the entire investment out of its non-interest-bearing funds in its sister company, then provisions of section 14A of the Act will not be applicable. Therefore, in the interest of justice, We hereby remit the matter back to the file of the Ld. AO to examine whether the assessee has made the entire investment in its sister companies and out of its non-interest-bearing fund and if found so delete the addition made by invoking section 14A of the Act and if found otherwise, pass appropriate order in accordance with law and merit after affording proper opportunity to the assessee of being heard. We also make it clear that if the assessee’s equity share and reserves exceed the investment, it should be construed that the assessee had made the investment out of its own non-interest-bearing fund. It is Ordered accordingly.”
Accordingly, following the above decision of the Tribunal cited supra, in the case of the assessee also We hereby remit the matter back to the file of the Ld. AO with similar direction. It is ordered accordingly.
AY: 2015-16:
During the course of scrutiny assessment proceedings, it was observed by the Ld. AO that the assessee received an amount of Rs. 17,90,00,000/- in the form of inter-corporate deposit from its subsidiary company M/s. Marvel Infratech Pvt Ltd in which the assessee is having 100% shareholding. It was further observed that M/s. Marvel Infratech Pvt Ltd had accumulated profits of Rs. 73,44,582/-. Therefore, the Ld. AO invoked the provisions of section 2(22)(e) of the Act and made addition of Rs. 73,44,582/- in the hands of the assessee as the assessee is the benificial shareholder by relying in the decision of Sadhna Textile Mills (P) Ltd vs. CIT (1991) 188 ITR 318. The assessee had claimed before the ld. AO that its case falls under the exemptions specified in section 2(22)(e)(ii) of the Act however, the Ld. AO was of the view that a company can be held to be engaged in money lending business only if it has obtained license from RBI. Since the lending company is not an non-banking finance company as per the RBI norms, the Ld. AO. Opined that the case of the assessee company does not fall under the exemption specified in section 2(22)(e)(ii) of the Act. Therefore, the Ld. AO invoked the provisions of Section 2(22)(e) of the Act and made addition of Rs. 73,44,582/- in the hands of the assessee. On appeal, the Ld. CIT (A) confirmed the order of the Ld. AO by agreeing with his view by observing as follows:
“5.1. During the course of appellate proceedings, regarding the above addition, the appellant contended as under: The Assessing Officer failed to note the difference between the advance, loan and deposit in terms of section 2(22)(e) of the IT Act. The Assessing Officer further failed to note that the appellant has taken inter corporate deposits and said deposit will not come within the purview of deemed dividend U/s. 2(22)(e) of the IT Act. Deemed Dividend: Section 2(22)€ of the IT Act reads as under: ‘Dividend’ includes any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Hence, in order to attract the provision of section 2(22)(e) of the Act, it is necessary that the company should make payment on behalf of the shareholder or for the benefit of the individual shareholder as a loan or advance. In this regard, appellant relied upon the following case laws: • CIT vs. Sahara India Savings & Investment Corporation (2003) 185 CTR 136 (Allahabad High Court) • Oriental Insurance Co. Ltd vs. DCIT (2004) 82 TTJ 1084 (Delhi, ITAT) • Gujarat Gas Financial Services Ltd vs. ACIT (2008) 119 TTJ 73 (Ahm. SB). • Bombay Oil Industries Ltd vs. DCIT (2009) 28 SOT 383 (Mumbai, ITAT) 5.2. I have carefully considered the assessment order, facts of the case, case laws and submissions made by the appellant. The submissions of the appellant are rejected due to the reasons mentioned in the assessment order by the Assessing Officer. Therefore, I am in agreement with the Assessing Officer and the addition made by the Assessing Officer is confirmed.”
Before us, the ld. AR vehemently argued by stating that the loan received by the assessee company was in the ordinary course of the business of the lending subsidiary company which is its substantial activity. It was further submitted that the loan obtained by the assessee company was a genuine loan and the assessee company was paying substantial interest towards the same to the assessee’s subsidiary company whose business is predominantly money lending. It was therefore argued that the case of the assessee will fall in the exemption category provided U/s. 2(22)(e)(ii) of the Act. Hence, it was pleaded that the addition made by the Ld. AO which was further sustained by the Ld. CIT (A) may be deleted. The Ld. DR on the other hand relied on the orders of the Ld. Revenue Authorities.
We have heard the rival submissions and carefully perused the materials on record. For reference, provisions of section 2(22)(e)(ii) is extracted herein below:
“any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; 11.1. On perusing the order of the Ld. AO, we find that the Ld. AO has not examined the activity of the lending company viz., M/s. Marvel Infratech Private Limited and passed a speaking order on that regard. By virtue of the provision of Section 2(22)(e)(ii) of the Act it is obvious that if the provisions of section 2(22)(e) of the Act has to be invoked, it has to be first examined and ascertained whether the company advancing loan to its shareholder does not have substantial money lending business in the ordinary course of its business. Such examination by the Ld. Revenue Authorities is found to be lacking in the case of the assessee. Therefore, in the interest of justice, We hereby remit the entire matter back to the file of the Ld. AO for de-novo consideration.
In the result, both the appeals of the assessee are allowed for statistical purposes as indicated herein above.
Pronounced in the open Court on the Twenty Fifth of February, 2021.