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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: Shri Saktijit Dey & Shri Rajesh Kumar
O R D E R Per Rajesh Kumar, Accountant Member:
The aforementioned appeals are cross-appeals filed by the Revenue and the assessee against the orders of the CIT(A)-I, Mumbai, for the A.Ys. 2005-06 and 2006-07.
2 Digvijay Investments Ltd
At the outset, we find that the appeals filed by the assessee for A.Y. 2005-06 and 2006-07 are delayed by 191 days. In this context, the learned AR of the assessee while referring to the affidavit filed in support of condonation of delay submitted that the assessee had sent Form No.36 along with relevant documents for filing in time on 08.07.2010 mindful of the fact that the last date for filing the appeal was 12.07.2010. However, the learned counsel submitted that he was busy looking after his aged parents, suffering from ill health /critical conditions and lost track of the appeal papers handed over to him by the assessee. The learned counsel contended before us that the delay in filing the appeal was attributable to the reasons which were beyond the control of the assessee, the same should not be taken to deprive the assessee from seeking justice.
The learned DR on the other hand strongly opposed the condonation of delay on the ground that the assessee has failed to make out any cogent/sufficient reasons for the condonation of delay and, therefore, the appeals of the assessee should be dismissed.
We have heard both the sides and perused the material on record as also the reasons cited for the delay in filing of appeal. The appeals of the assessee are delayed by 191 days, which has been submitted to be on account of critical health conditions of the counsel’s parents due to which the counsel failed to keep track of the appeal memorandum of the assessee which was to be filed in the ITAT . The assessee finally came to know about non filing of the appeal only when the notice of hearing of appeal before the learned CIT(A) for A.Y. 2007-08 was served upon him. Having examined the facts in total and weighing the same in the light of various judicial pronouncements, especially that of Hon'ble Apex Court in the case of N Balakrishnan vs. M Krishnamoorthy (AIR 1998 SC 3222) and that of National Thermal Power Company Ltd. vs. CIT 229 ITR 383 (SC), we are of the view
3 Digvijay Investments Ltd that the rules of limitation are not meant to destroy the right of the parties. They are meant to see that parties do not resort to dilatory tactics. The object of providing legal remedy is to repair the damage caused by reason of legal injury. The law of limitation fixes a life span for such legal remedy to redress the legal injury so suffered. The Hon'ble Supreme Court also noted that sufficient cause under section 5 of the Limitation Act should receive a liberal construction so as to advance substantial justice to the aggrieved parties. We, therefore, keeping in the view the ratio laid down by the Apex Court in both the above cases, are inclined to condone the delay and admit the appeals for adjudication in the foregoing paras.
We shall take up the appeals for A.Y. 2005-06
The assessee has raised the following grounds of appeal:
“Aggrieved by the order of the Assessing Officer (A.O) as confirmed by Commissioner of Income Tax (Appeals) [CIT (A) your appellant prefers an appeal against the same on following grounds, which, it. is prayed, may be considered without prejudice to one another.
On the facts and circumstances of the case and in law, the CIT(A) erred in disallowing interest of 2,28,62,962/- on alleged borrowed funds, u/s. 14A of the Act.
2. Without prejudice, on the facts and circumstances of the case and in law, the CIT(A) erred in not adding the aggregate disallowance of 2,33,48,048/- u/s. 14A, to the cost of the said shares.
3. On the facts and circumstances of the case and in law, the CIT(A) erred in recomputing the income u/s. 115JB of the Act.
4. On the facts and circumstances of the case and in law, the CIT(A) erred in levying interest u/s. 234B of the Act.” 6. At the outset, the learned counsel for the assessee submitted that ground nos. 2 and 4 are not pressed, hence, the same are dismissed as not 4 Digvijay Investments Ltd being pressed. Ground no.3 is consequential and, thus, requires no adjudication.
The issue raised in ground no.1 is against the confirmation of disallowance of interest of ` 2,28,62,962/- by the CIT(A), as made by the Assessing Officer u/s. 14A, in respect of interest on borrowed funds utilised for the purpose of making investments yielding dividend income. The facts in brief are that the assessee received exempt income by way of dividend of ` 2,45,27,973/-. The Assessing Officer during the course of assessment proceedings had noticed that the assessee has suo moto disallowed an amount of ` 77,28,133/- u/s. 14A as expenses incurred in respect of exempt income and, accordingly, issued show cause notice to the assessee as to why the provisions of section 14A should not be invoked in this case. In reply thereto, the assessee submitted that interest paid on borrowed funds are deductible u/s. 36(1)(iii)/57(iii) and other expenses are incurred in relation to maintaining of corporate office of the assessee and, therefore, not incurred in connection with earning of exempt income. The Assessing Officer brushed aside the contention of the assessee. The Assessing Officer computed the disallowance u/s. 14A of ` 3,43,38,560/- comprising of ` 3,38,53,474/- on account of interest paid and ` 4,85,086/- on account of expenses on pro-rata basis.
In the appellate proceedings, the learned CIT(A) partly allowed the appeal of the assessee by confirming the disallowance to the extent of ` 2,33,48,048/- by observing as under:
“5.6 l have considered the submissions of the appellant, the assessment order of the Assessing Officer and the facts of the case of the appellant company. I agree with the preliminary contention of the AR that the same amount of interest of Rs. 77,28,1337- has been disallowed twice. Further, on perusal of the Appellate Order, in the case of the appellant under Appeal No.CIT(A)-I/IT 348/06-07/100 dated 24/07/2008, for AY 2004-05, submitted by the appellant, I find that the investment in shares of APPL has been made by resorting to 5 Digvijay Investments Ltd direct borrowing from ILF&S of Rs. 15 crores and Unsecured loans from various parties Rs. 20.80 crores at an average rate of interest of 10% p.a.; the balance Rs. 3.48 crores is out of own funds. On perusing the details of interest (page 7 of the paper book), I find that the interest paid to ILF&S during the year is Rs. 97,91,095/- and it being an admitted fact that the borrowings from ILF&S were made specifically for investing in shares of APPL, this interest amount needs to be disallowed u/s. 14A. As regards the Unsecured loans of Rs. 20.80 crores, though there may not be a direct nexus between such borrowing and the investment in shares of APPL, such borrowings are 'in relation to" the investment in shares of APPL and hence interest thereon @ 10% i.e. Rs.2.08 crores has to be disallowed.
5.7 Hence the total disallowance of interest u/s. 14A is Rs. 3,05,91,095/- of which the appellant having already suo moto disallowed Rs. 77,28,133/- has to be reduced. The AO has also disallowed expenses of Rs. 4,85,0867- on pro-rata basis, which disallowance is not unreasonable.
5.8 The contention of the AR that sub-sections (2) and (3) of section 14A are applicable only from AY 2007-08 and not retrospectively, are not acceptable as it has been held by the Hon'ble Income Tax Appellate Tribunal, Special Bench, Mumbai in ITO v. Daga Capital Management Ltd. that sub-sections (2) and (3) are procedural in nature and hence retrospective.”
The learned AR vehemently submitted before us that the total exempt income earned by the assessee during the year by way of dividend was ` 2,45,27,973/- and, therefore, the disallowance u/s. 14A r.w. Rule 8D may kindly be restricted to that extent as it is settled proposition of law that disallowance of expenses u/s 14A r.w. Rule 8D cannot exceed exempt income. In the present case, the AR submitted that the total disallowance was ` 3,10,76,181/- and after reducing the suo moto disallowance of ` 77,28,133/- the CIT(A) sustained the disallowance at ` 2,33,48,048/-. Thus, the learned AR submitted that the disallowance in the present case cannot exceed ` 2,45,27,973/- i.e. the amount of exempt dividend income and therefore, the assessee is entitled to relief of ` 65,48,208/-. The learned AR, in support of his arguments relied on the following decisions:
6 Digvijay Investments Ltd i)Indus Valley Investment v. DCIT ii) Sylvex Cable Co. Pvt. Ltd. vs. DCIT ITA No.8581/Mum/2011 iii) Pr. CIT vs. Zee News Ltd. ITA No.785 of 2015 (Bombay) iv) Joint Investments Pvt. Ltd. v. CIT 372 ITR 694 (Delhi) Finally, the learned AR prayed before the Bench that the appeal may kind be allowed.
The learned DR relied on the order of the Assessing Officer. He has also filed detailed written submissions and requested the Bench to consider the same and decide the issue in the light of the said written submissions.
We have heard rival submissions and perused the material available on record. The undisputed facts are that the assessee has earned income of ` 2,45,27,973/- by way of dividend income and made a suo moto disallowance at the time of filing of return of income to the tune of ` 77,28,133/-. The Assessing Officer was ,not convinced and satisfied with the disallowance as made by the assessee, invoked the provisions of section 14A read with Rule 8D and made a disallowance of ` 3,38,53,474/- on account of interest and ` 4,85,086/- towards common expenses. Thus, the total disallowance worked out at ` 3,43,38,560/-. The learned CIT(A) restricted the disallowance to ` 3,10,76,181/- by restricting the interest disallowance at ` 3,05,91,095/- whereas the disallowance in respect of other expenses were confirmed at ` 4,85,086/-. Now the learned AR has raised a plea before us that disallowance u/s. 14A read with Rule 8D cannot exceed the exempt income, which is correct legal position as on date as has been held by numerous judicial forums including the High Courts. The case of the assessee is squarely covered by the decision of the co-ordinate Benches and High Courts as stated hereinabove. We have also considered the written submissions filed by the learned DR and observed that in view of the well settled legal position that the disallowance cannot exceed the exempt
7 Digvijay Investments Ltd income, the case laws cited by the learned DR were not applicable to the present case. Thus, we are of the considered view that disallowance u/s. 14A read with Rule 8D cannot exceed the amount of exempt income. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to restrict the disallowance at ` 2,45,27,973/-. Resultantly, the assessee gets a relief of ` 65,48,208/-.
ITA 5709/Mum/2011 (Revenue’s appeal)
The Revenue has raised the following grounds of appeal:
1. "Whether on the facts and in the circumstances of the case, and in law, the CIT(A) erred in directing to grant relief of Rs. 32,62,379/- (Rs. 3,38,53,474 - Rs. 3,05,91,095) against disallowance u/s. 14A overlooking the fact that interest expenses was incurred for investment yielding exempt income.
2. The Ld. CIT(A) has further erred in deleting the addition of Rs. 69,00,000/- u/s. 2(22)(e) of the Act. 13. The issue in ground no.1 is against granting of relief to the tune of ` 32,62,379/- by the CIT(A) against the disallowance made by the Assessing Officer u/s.14A of the Act. We have already decided the said issue in assessee’s appeal in ITA 519/Mum/2011 directing the Assessing Officer to restrict the disallowance to the amount of exempt income. Resultantly, the ground raised by the Revenue is dismissed.
The second issue raised is against the deleted of addition of ` 69 lacs by the CIT(A) as made by the AO u/s. 2(22)(e) of the Act. The facts in brief are that during the course of assessment proceedings, the Assessing Officer on examination of Form 3CD found that the assessee has accepted loans from two parties during the previous year as per details here under:
M/s. Shree Krishna Agency Ltd. ` 46,00,000/- Sri Vithoba Investments Ltd. ` 23,00,000/-
8 Digvijay Investments Ltd The Assessing Officer further observed that the assessee held 40% of the share capital of Shree Krishna Agency Ltd. and 21% of Share capital in Vithoba Investments Ltd. Accordingly, he issued show cause notice to the assessee as to why the loan received during the year should not be considered as deemed dividend within the meaning of section 2(22)(e) of the Act. In reply to the said notice, the assessee submitted that the provisions of section 2(22)(e) were not applicable as the assessee has not given any loans to the companies in which it held shares. However, the explanation of the assessee did not find favour with the Assessing Officer and he treated the entire amount of loan received by the assessee to the tune of ` 69 lacs from the two entities as dividend by holding that the same constituted dividend within the meaning of section 2(22)(e) of the Act.
15. In the appellate proceedings, the learned CIT(A) deleted the disallowance after considering the written submissions of the assessee, which has been incorporated in para 6.2 of the appellate order. The learned CIT(A) observed and held as under:
6.2 The appellant has made detailed submissions para 15 to 25, of its written submissions as under:
15. The submissions of the appellant are that a perusal of section 2(22)(e) shows that it is applicable: � only to payments made by companies in which the public are not substantially interested � provided such payment is by way of advance or loan to a shareholder holding not less than 10% of voting power, � But only to the extent to which the paying company possesses accumulated profits.
An exception to Section 2(22)(e) is that, it is not applicable to advances or loans given by the paying company to a shareholder in the ordinary course of its business, where the lending of money is substantial part of the business of the lending company.
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Section 2(18) defines a "company in which the public are substantially interested". A perusal of clause (b) of the section 2(18) would show that a public limited company as defined under the Companies Act, 1956 fulfilling the conditions specified either in items (A) or (B) would be a company in which the public are substantially interested.
The conditions in (A) are that, shares of the company are listed on a recognised Stock Exchange. The conditions in clause (B) are satisfied, if at least 51% of the shares in the public limited company are held by: � The government or,
… of SVIL shows that its businesses is lending of money and hence, inter corporate deposit given by it to the appellant is in the ordinary course of its business. Therefore, the provisions of section 2(22)(e) are not applicable. Similarly, lending of money is also business of SKAL and it has given inter corporate deposit to the appellant in the ordinary course of its business.
In view of the .above submissions, the payments made by both the above companies to the appellant are covered by the exception to section 2(22)(e) of the Act. For this reason also, the inter corporate deposits received by the appellant from the said two companies are not covered undetf the provisions of section 2(22)(e) and hence, not taxable as dividend.
Without prejudice to the above alternative contentions, we further submit that section 2(22)(e) is applicable only to payments made in the nature of loans or advances; it does not apply to inter corporate deposits. Your Honours are aware that legally, they are distinct: We rely on the following decisions in support of our above contention: • Bombay Oil Industries Ltd. v. DCIT, Mumbai 28 SOT 383 (Mumbai) • Seamist Properties (P.) Ltd. v. Income-tax Officer 1 sot 142 (Mum.) Decisions enclosed.
Without prejudice to the above alternative submissions, the loan or advance is deemed dividend in the hands of the recipient only to the extent the lending company possesses "accumulated profits". The term accumulated profits has been explained in the 10 Digvijay Investments Ltd
explanation to the said section. We submit that, it is for the AO of the lending company, to determine its accumulated profits and only if it is determined that such company has accumulated profits, can the deemed dividend be brought to tax u/s 2(22)(e) in the hands of the appellant.
6.3 I have considered the assessment order as well as the appellant's submission. I have considered the AO's remand report dated 05/03/2010. I have also gone through with the section 2(22)(e), the extract of the same is reproduced as under:
"2(22)(e) 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) [made after the 31st day of May, 1987, 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 per cent 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. But dividend does not include - (i) a distribution made in accordance with sub(d)in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;
[(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day-of April, 1965];]
(ii) 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 ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the extent to which it is so set off;
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[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]
Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, i[but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place].
[Explanation 3.—For the purposes of this clause,— (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company;
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent;
6.4 A perusal of the section shows that it is not applicable to a company in which the public are substantially interested. Section 2(18), which defines "companies in which public are substantially interested" inter alia, states that, if not less than 50% of the share capital of a company is held by any company to which this clause applies, then such company will be "a company in which the public are substantially interested".
6.5 From the details filed by the appellant, it is clear that, more than 51% of the shareholding of SVIL is held by companies listed on the Calcutta
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Stock Exchange and hence hi terms of section 2(18), SVIL is a company in which the public are substantially interested. Similarly, it is an admitted fact that more than 51% of the shareholding of SKAL are held by listed companies / companies in which public are substantially interested and hence SKAL is also a company in which the public are substantially interested as defined u/s. 2(18).
6.6 Moreover, on perusal of the Balance Sheet and the details of unsecured loans of the appellant company, it is observed that the said sums of money have been received by the appellant as inter-corporate deposits. The AR has drawn my attention to the decision of the Hon'ble Income Tax Appellate Tribunal in Bombay Oil Industries Ltd. v. DCIT 28 SOT^83 (Mum.), wherein it is held that there is a clear distinction between the inter-corporate deposits vis-a-vis loans / advances and that therefore, the inter-corporate deposits do not come within the purview of deemed dividend u/s 2(22)(e) of the IT Act.
6.7 For the above reasons, I hold that the provisions of section 2(22)(e) are not applicable to the facts of the appellant's case. Since I have held that the provisions of section 2(22)(e) are not' applicable to the facts of appellant's case, the alternative contentions regarding the determination of "accumulated profits" and whether the moneys were lent "in the ordinary course of its business" of the lending companies is not adjudicated. This addition is therefore deleted and this ground of appeal is allowed.”
16. The learned DR submitted before the Bench that the assessee has accepted loans and deposits from two corporates in which share of the assessee exceeds 10% and, therefore, the case of the assessee clearly falls under the provisions of section 2(22)(e) of the Income tax Act and the AO has rightly made the addition to the income of the assessee. He further submitted that the plea of inter corporate deposits by the assessee was taken for the first time before the CIT(A) for which no opportunity was allowed to the Revenue by way of calling a remand report from the AO. The learned DR also submitted that the case of the assessee does not fall in the exception as provided in section 2(22)(e) in respect of a company in which the public is substantially interest and that the order of the CIT(A) deserved to be reversed and that of the AO be restored.
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17. The learned AR on the other hand submitted before us that all the lenders are listed in the stock exchange and, therefore, the provisions of section 2(22)(e) of the Act are not applicable. He also contested that the CIT(A) has called for the remand report from the AO, which has been stated by the CIT(A) in the appellate order itself. Finally the learned AR submitted that the order of the CIT(A) is well-reasoned and based on detailed finding of facts and as per law in respect of the fact that the provisions of section 2(22)(e) are not applicable to the company in which public is substantially interested. The learned AR also contended that the advances taken are in the nature of inter-corporate deposits and provisions of section 2(22)(e) of the Act are not applicable. Finally, he also prayed before the Bench that the order of the CIT(A) may kindly be affirmed.
We have heard the rival submissions and perused the material available on record. The undisputed facts are that the assessee has accepted loans from two companies viz. M/s. Shree Krishna Agency Ltd.(SKAL) ` 46,00,000/- and Sri Vithoba Investments Ltd.(SVIL) ` 23,00,000/-. A perusal of section 2(22)(e) of the Act reveals that the provisions are not applicable where the money is advanced by a company in which public have substantial interest. A perusal of the appellate order by the learned CIT(A) reveals that both the lenders SKAL & SVIL are companies in which 51% of the shares are held by companies which are listed in the Kolkata Stock Exchange and, therefore, these companies are also deemed public companies in which public is substantially interested. Thus, both the companies are companies in which public are substantially interested as defined u/s. 2(18) of the Income tax Act. Moreover, the first appellate authority has given a very comprehensive finding in this context that the companies from which the assessee has taken loans were companies in which public were substantially interested. Besides, CIT(A) has also held that the said money was received by the assessee as inter-corporate deposit. The learned CIT(A) has relied on the decision of co-
14 Digvijay Investments Ltd ordinate Bench of Mumbai Tribunal in the case of Bombay Oil Industries Ltd. vs. DCIT 28 SOT 383 (Mum), wherein a clear distinction has been drawn between inter-corporate deposit viz. Loans/advances and it has been clearly held that inter-corporate deposit do not come under the purview of deemed dividend defined u/s. 2(22)(e) of the Act. In view of these facts and circumstances, we are of the considered view that the order passed by the CIT(A) is well reasoned and as per law, hence does not require any interference on our part and accordingly, we are inclined to uphold the same. Ground raised by the Revenue is dismissed.
In the result the appeal is dismissed.
ITA 520/Mum/2011 (Assessee’s appeal):
The issue raised is identical to the one as decided by us in . Therefore, our finding in the said appeal would mutatis mutandis apply to this appeal also. Accordingly, the ground raised by the assessee is partly allowed with a direction to the AO to restrict the disallowance to the amount of exempt income.
ITA 5708/Mum/2011 (Revenue’s appeal):
The issue involved in ground nos. 1 to 3 is as regards deletion of disallowance u/s. 14A. We have already decided the issue while dealing with the assessee’s appeal in above. In view of our finding therein, the ground nos 1-3 raised by the Revenue are dismissed.
14. Ground no.4 is regarding the deletion of addition of ` 45 lacs by the CIT(A) as made by the AO u/s. 2(22)(e) of the Act. We have already dealt with identical issue in ground no. 2 of above, wherein we have confirmed the order of the CIT(A) on this issue. Therefore our finding on this ground would mutatis mutandis apply to this appeal also. Resultantly, the order of the CIT(A) is confirmed on the issue.
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As a result, the appeal is dismissed.
In the result, Revenue’s appeals are dismissed and the assessee’s appeals are partly allowed.
Order pronounced in the open court on this day of 24th May 2018.