Loading judgment…
Facts
The assessee appealed against the CIT(A)'s order confirming additions of Rs. 69 lakhs under section 2(22)(e) and Rs. 21.25 lakhs under section 14A. The additions related to deemed dividends from private limited companies and disallowance of expenses for exempt income. The assessee claimed these transactions were commercial and not loans or advances, and that no expenses were incurred for exempt income.
Held
The Tribunal noted that the assessee had not furnished relevant documents to support their claims before the lower authorities. For the addition under section 2(22)(e), the Tribunal, in the interest of natural justice, granted one more opportunity to the assessee to present documents, setting aside the CIT(A)'s order and restoring it for fresh adjudication. For the addition under section 14A, the Tribunal also felt the issue required fresh examination by the CIT(A).
Key Issues
Whether the transactions were in the nature of loans or advances attracting deemed dividend provisions, and whether expenses for earning exempt income were disallowable.
Sections Cited
2(22)(e), 14A, Rule 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: JUSTICE (RETD.) SHRI C.V. BHADANG & SHRI B.R. BASKARAN
The assessee has filed this appeal challenging the order dated 12-04-2024 passed by the Ld. Commissioner of Income Tax (Appeals)- NFAC, Delhi [Ld.CIT(A)] and it relates to the Assessment Year (AY.) 2013-14. The assessee is aggrieved by the decision of the Ld.CIT(A) in confirming the addition of Rs. 69 lakhs made u/s. 2(22)(e) and also Rs. 21.25 lakhs made u/s. 14A of the Income Tax Act, 1961 („the Act‟).
The assessee is engaged in the business of retail trading in garments. Besides the above, the assessee is also a partner in a few partnership firms and also Director in few private limited companies.
The first issue relates to the addition of deemed dividend made by the AO u/s.2(22)(e)of the Act. The AO noticed that the assessee is one of the Directors in the following private limited companies:- a) M/s. Tansha Comfort Residency Pvt. Ltd. (TCRPL) b) M/s. Tansha Hospitality Pvt. Ltd. (THPL) c) M/s. Tansha Projects Pvt. Ltd. (TPPL)
The AO noticed that the assessee is holding more than 10% of the voting rights in all the above said three companies. Further it was noticed that the company TCRPL has also held shares in THPL.
During the year under consideration, TCRPL sold the shares held by it in THPL to the third company mentioned above, i.e., TPPL. The total sale consideration for sale of shares was determined at Rs. 96.75 lakhs, out of which it received a sum of Rs. 61.75 lakhs during this year. Balance amount of Rs.35.00 lakhs was shown as receivable as on 31-03-2013 in the books of M/s. TCRPL. The AO took the view that the above said amount of Rs.35.00 lakhs is in the nature of loans and advances given by M/s. TCRPL to M/s. TPPL.
Under the provisions of sec 2(22)(e) of the Act, any payment by a closely held company of any sum by way of advance or loan to a shareholder, being a person who is beneficial owner of shares holding not less than 10% of voting power or to a concern in which such shareholder is a member, shall be treated as “deemed dividend” to the extent of accumulated profits possessed by the paying company. Since the assessee is holding more than 10% of voting rights in the above said companies, the AO took the view that the provisions of sec. 2(22)(e) is attracted in the hands of the assessee. Accordingly, the AO assessed the above said amount of Rs.35.00 lakhs as deemed dividend in the hands of the assessee.
The AO also noticed that the assessee is a partner in M/s. Kalpataru Enterprises, holding share in profit of 50%. He noticed that M/s. TCRPL has taken certain shop premises on lease from M/s. Kalpataru Enterprises. In connection thereto, the above said company had paid a rent deposit of Rs. 35 lakhs to M/s. Kalpataru Enterprises. However, the AO took the same as payment of loan by TCRPL to the above said partnership firm. The AO considered an amount was Rs.34,94,249/- (out of Rs.35.00 lakhs referred above) and assessed the same as deemed dividend u/s.2(22)(e) of the Act.
Before the Ld.CIT(A), the assessee explained the nature of transactions and accordingly contended that these transactions are business transactions carried out in the normal course of carrying on business and they cannot be characterized as loans or advances within the meaning of 2(22)(e) of the Act. Accordingly, it was submitted that the provisions of sec.2(22)(e) are not attracted to these transactions. Hence, the Ld.CIT(A) called for evidences in the form of documents, agreements etc., to support the contentions of the assessee. However, the assessee did not furnish any documents that were called for by the Ld.CIT(A). Hence, the Ld.CIT(A) confirmed the order of AO on this issue.
Before us, the Ld.AR reiterated that the transactions entered between both the private limited companies are commercial transactions and they are not in the nature of loans or advances as contemplated in sec. 2(22)(e) of the Act. However, when it was pointed out that the assessee has not furnished any documents before the Ld.CIT(A) in support of the above said submissions, the Ld.AR sought for an opportunity to furnish those documents before the Ld.CIT(A).
We heard the Ld.DR and perused the record. From the submissions made by the assessee, prima facie it appears that the transactions mentioned above may not be in the nature of loans or advances falling within the scope of section 2(22)(e) of the Act. However, a definite view could be taken only if the relevant documents are examined. Since the assessee has not furnished relevant documents before the tax authorities, we are of the view that, in the interest of natural justice, the assessee may be provided with one more opportunity to present the documents. Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and restore the same to his for adjudicating the same afresh, by duly considering the evidences that may be furnished by the assessee.
The next issue relates to the addition made u/s 14A of the Act. The AO noticed that the assessee has earned dividend income of Rs.3,85,365/- and share of profit from partnership firm of Rs.27,98,046/-. Both the above said incomes were claimed as exempt. However, the assessee did not make any disallowance as required u/s 14A of the Act. When questioned about the same, the assessee submitted that it did not incur any expenses in earning the exempt income. The AO did not accept the same. Accordingly, he computed the disallowance as per Rule 8D at Rs.21,25,070/- and added the same to the total income of the assessee. The Ld CIT(A) also confirmed the same.
The Ld.AR submitted that the assessee did not incur any expenses in earning above said exempt incomes. The AO also did not verify the claim of the assessee and record dissatisfaction, having regard to the books of accounts. Further, the assessee is having own funds exceeding the value of investments. Hence, as per the decision rendered by Hon‟ble Bombay High Court in the case of HDFC Bank Ltd, the AO could not have disallowed interest expenses. He submitted that the AO did not consider judicial precedents in computing disallowance out of expenses also.
We heard Ld.DR. Having regard to the submissions made by Ld. AR, we are of the view that this issue also requires fresh examination at the end of Ld CIT(A). Accordingly, we set aside the order passed by him on this issue and restore the same to his file for adjudicating it afresh, after considering the information and explanations that may be furnished by the assessee.
After affording adequate opportunity of being heard to the assessee, the Ld.CIT(A) may take appropriate decision in accordance with law.
In the result, the appeal of the assessee is treated as allowed.