ASST CIT CIR 3, KALYAN vs. HERBERT BORWN PHARMACEUTICALS & RESEARCH LABORATORIES, MUMBAI

We shall first take up the appeals filed by the assessee. The solitary issue urged in both the appeals and cross objections filed by the assessee relates to disallowance made u/s. 14A of the Act. The Assessing Officer noticed that the assessee has received exempt dividend and capital gains, but did not make any disallowance u/s. 14A of the Act. Hence the Assessing Officer computed disallowance u/s. 14A of the Act and accordingly disallowed the interest and administrative expenses by applying provisions of Rule 8D of the I.T. Rules in all the years. The learned CIT(A) also confirmed the same and hence the assessee has filed these appeals before us.

Learned AR submitted that the assessee has made investments in mutual funds. It is having sufficient own funds which is in far excess value of investments made in mutual funds. Accordingly, learned AR submitted that no disallowance is required to be made out of interest expenditure, as per the decision rendered by Hon'ble Jurisdictional Bombay High Court in the case of HDFC Bank Ltd. Vs. DCIT (366 ITR 505). With regard to disallowance of administrative expenses, learned AR submitted that disallowance should not exceed the amount of dividend. However, she did not press the same in view of the smallness of the amount except for AY 2011-12, wherein the AO had taken incorrect figure of “investments”.

On the contrary, learned Departmental Representative strongly supported the orders passed by the learned CIT(A).

Having heard the rival submissions, we find merit in the submissions of the assessee. For the sake of convenience, we have tabulated the facts which are relevant to dispose of this issue:-

Perusal of the above said table would show that the own funds available with the assessee is in excess value of mutual funds held by the assessee. Other investments made by the assessee consisted of fixed deposits made with the Bank and investment made in shares of Cooperative Bank, income from both of which is not exempt. Since own funds available with the assessee is in far excess of value of investment made in mutual funds, there is merit in the contentions of the assessee that the disallowance of interest expenditure is not called for, in view of the decision of Hon'ble Bombay High Court rendered in the case of HDFC Bank Ltd. (supra). Accordingly, we set aside the order passed by the learned CIT(A) on this issue in all five years and direct the Assessing Officer to delete the disallowance of interest expenditure made u/s. 14A of the Act. For assessment year 2011-12, the AO is directed to compute the disallowance under Rule 8D(2)(iii) by adopting correct figures.

We shall now take up the appeals filed by the Revenue. The solitary issue urged in all the four years relates to relief granted by the learned CIT(A) in respect of deemed dividend assessed u/s. 2(22)(e) of the Act. The Assessing Officer noticed that the partners of the assessee-concern are also directors in a closely held company named M/s. Shirdi Chemicals Pvt. Limited. The Assessing Officer further noticed that the assessee company has borrowed funds from the above said closely held company. Accordingly, the Assessing Officer invoked provisions of section 2(22)(e) of the Act and assessed borrowings as deemed dividend. Before the learned CIT(A) the assessee contended that the advances were received in the course of carrying on 4 M/s. Herbert Brown Pharmaceuticals & Research Laboratories business. It was also contended that the assessee is not a shareholder of the above said closely held company and hence it cannot be subjected to tax u/s. 2(22)(e) of the Act. In support of this legal proposition, assessee placed reliance on the decision rendered by Hon'ble Bombay High Court in the case of CIT Vs. Impact Containers Pvt. Ltd. & others (Income Tax Appeal No. 114 of 2012). The learned CIT(A) was convinced with contentions of the assessee and accordingly deleted the additions made u/s. 2(22)(e) of the Act. The Revenue is aggrieved by the decision of the learned CIT(A).

Learned Departmental Representative submitted that the decision rendered by Hon'ble Bombay High Court has since been challenged by the Revenue by filing SLP before Hon'ble Supreme Court.

On the contrary, learned AR submitted that Hon'ble Supreme Court has since decided identical issue in the case of CIT Vs. Madhur Housing and Development Company (Civil Appeal No. 3196 of 2013) has held that addition of deemed dividend u/s. 2(22)(e) of the Act can be made only in the hands of shareholders, meaning thereby, the decision rendered by Hon’ble Bombay high Court in the case of Impact containers P Ltd (supra) has been upheld by Hon’ble Supreme Court. Since the assessee is not a share holder of M/s Shirdi Chemicals P Ltd, the assessing officer was not right in law in invoking the provisions of sec. 2(22)(e) of the Act in its hands. Accordingly, we find no reason to interfere with the order passed by the learned CIT(A) on the legal issue. Since we have upheld the decision of Ld CIT(A) on the basis of legal ground, we do not find it necessary to deal with the issue on merits.

In the result, appeals/cross objections filed by the assessee are treated as partly allowed and appeals of the Revenue are dismissed. Order has been pronounced in the Court on 21.11.2017.