DCIT, CIR-10(1), KOLKATA, KOLKATA vs. M/S BHORUKA INVESTMENT LTD., KOLKATA

Ground Nos. 1 to 6 raised by the assessee in its appeal and ground no.1 raised by the revenue in its appeal can be conveniently taken up together. These grounds relate to disallowance u/s 14A of the Income Tax Act, 1961 (Act). They read as follows : Ground No.1 to 6 in Assessee’s appeal: “1.That the learned Commissioner of Income Tax (Appeals) erred in sustaining a disallowance of Rs. 4,32,847/- out of a total disallowance of Rs.43,79,995 made in the assessment under section 14A of the Income Tax Act read with Rule 8D.

The Assessee is a company. It is engaged in the business of construction and dealing in shares. The assessee earned dividend income of Rs.22,16,243/- and the same was claimed as exempt u/ s 10(34) of the Income Tax Act, 1961 (Act). Similarly

Before CIT(A) the assessee pointed out that with regard to disallowance of interest expenses of Rs.33,31,806/- under Rule 8D(2)(ii) of Income Tax Rules, 1962 (Rules), the assessee had own interest free funds and therefore no part of the interest expenses which are debited in the profit and loss account can said to have been used for the purpose of making investments which yielded exempt income. The assessee therefore pleaded that no disallowance of interest expenses should be made. On the above plea the assessee gave the following computation of own funds based on the balance sheet for the financial year 2007-08 to 2011-12.

It can be seen from the aforesaid chart that the investments during the previous year in shares by the assessee was a sum of Rs.7,02,.96,574/- and non interest bearing funds of the assessee was Rs.10,44,47,811/- which was in excess of the investment in shares.

The CIT(A) was of the view that the AO was not right in coming to the conclusion that borrowed funds of interest was paid and was utilised for making investments. He however sustained addition on account of interest expenses to the extent there was a difference between the interest paid by the assessee which was quantified by him at Rs.75.35 lakhs and interest income earned by the assessee which was Rs.74.60 lakhs. Addition of Rs.33,31,,806/- made by the AO was therefore directed by CIT(A) to be restricted to the difference of interest expenses and interest income referred to above. 7. As far as disallowance of other expenses in terms of Rule 8D(2)(iii) of the Rules is concerned, the assessee pleaded that 0.5% of the average value of investment should be worked out by taking only the investments which yielded tax free exempt income and not the entire investments. The details of the investments which yielded tax free dividend income was given by the assessee as follows :-

On the above submission the CIT(A) was of the view that the same is not acceptable and he therefore upheld the disallowance made by the AO.

Thus the disallowance made by the AO was restricted to the following sum by CIT(A) :- “2.7. As regards the amount of interest to be disallowed for the purpose of Rule 8D(2)(ii) I restrict the same to the net interest expense being equal to the difference of Rs.75,34,709/- and Rs.74,60,295/-, being equal to Rs.74,414/- . Thus, the total disallowance upheld by me as detailed above comes to Rs.4,32,847/- (Rs.3,366 + 74,414 + 3,55,167/-.”

Aggrieved by the relief granted by CIT(A) the revenue has raised ground no.1 in its appeal. Aggrieved by the order of CIT(A) in not deleting the disallowance of interest expenses in full and in not accepting the plea of the Assessee that while working the average value of the investments for the purpose of Rule 8D(2)(iii) of the Rules, only investments which yield dividend income should be considered and not deleting the addition of Rs.3,266/- which was the demat charges which was already shown by the assessee in its computation of income, the assessee has raised ground nos. 1 to 6 before the tribunal.

We have heard the rival submissions. The ld. Counsel for the assessee reiterated the submissions as were made before CIT(A) besides referring to a certain decided cases. The ld. DR relied on the order of the AO.

We have carefully considered the rival submissions. As far as disallowance of Rs.3,266/- being demat charges is concerned it is clear from page-7 of the order of AO which is the computation of total income by the AO that a sum of Rs.3,266/- has already been added to the profit as per profit and loss account. Making the addition of the very same sum as disallowance u/s 14A of the Act would be a double addition and therefore the addition of Rs.3,266/- is directed to be deleted.

As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, it is clear from the summarised balance sheet of the assessee from the financial years 2008-09 to 2011-12 that the assessee had non-interest bearing funds sufficient to cover the investments made in shares. It has been held by the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. (2009) 313 TR 340 (Bom) and CIT vs HDFC Bank Ltd (2014) 49 taxmann.com 335 (Bom) that where interest free funds and overdraft and loans taken are available with an assessee, then a presumption would arise that the investments would be out of the interest free funds generated or available with the assessee, if the interest free funds were sufficient to meet the investments. The aforesaid view has been followed by the Hon’ble Calcutta High Court in the case of Principal CIT vs Rasoi Ltd. In ITAT o.109 of 2016 in GA No.633 of 2016 judgment dated 15.02.2017. In view of the aforesaid legal position and the view of the fact that the assessee had enough own funds which was more than the investments which yielded tax free income there can be no disallowance of interest expenses in terms of Rule 8D(2)(ii) of the Rule.

As far as Rule 8D(2)(iii) of the Rules is concerned it has been held by the Hon’ble ITAT Kolkata Bench in the case of DCIT vs REI Agro Ltd. In ITA No.1811/Kol/2012 dated 14.05.2013 that it is only the investment which yielded tax free income that should be considered for working out the average value of investment while applying the Rule 8D(2)(iii) of the Rules. This order of the tribunal has been confirmed by the decision of Hon’ble Calcutta High Court in G.A. No.3022 of 2013 Judgement dated 23.12.2013. In view of the aforesaid legal position we are of the view that the order of the CIT(A) on this issue cannot be sustained. It has also been held by the Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT (2015) 378 ITR 33 (Del) that when there is no exempt income then there can be no question of disallowance u/s 14A of the Act. In the light of the judicial pronouncements, we are of the view that the plea of the assessee to exclude investments which had not yielded any exempt dividend income during the previous year while working out the average

For the reasons given above we allow ground nos. 1 to 6 raised by the assessee in part and dismiss ground no.1 raised by the revenue.

The next issue that arises for consideration in these appeals is the issue of taking deemed dividend u/s 2 (22)(e) of the Act. The relevant grounds of appeal of the assessee are 7 to 13 and grounds of appeal of the revenue is ground no.2 in its appeal. These grounds read as follows :- Grounds of appeal of the Assessee: “7. That the learned Assessing Officer erred in arbitrarily invoking the provisions of section 2(22) (e) of the Income Tax Act, 1961 even when the said provisions are not applicable. in case of the appellant and on the facts and circumstances the Commissioner of Income Tax (Appeals) erred in sustaining the said action of the Assessing Officer.

The assessee had taken a loan of Rs.94,79,346/- from a company TCI Bhoruka Projects Limited. The assessee also took a loan of Rs.10,21,302/- from a company by name Transcorp Enterprises Ltd. It is not in dispute that the assessee held 41.33% of shares in Transcorp Enterprises Ltd and 12.75% in TCI Bhoruka Projects Ltd. In terms of section 2(22)(e) of the Act any loan or advance from a company by which the assessee is a beneficial shareholder, holding not less than 10% of the voting power of the lending company, such loan or advance has to be construed as dividend and taxed in the hands of the assessee i.e. recipient of the loan or advance, to the extent the lending company possesses accumulated profits. The AO held that the loan received from the aforesaid two companies are to be construed as deemed dividend and accordingly brought the same to tax as deemed dividend.

On appeal by the assessee the CIT(A) reduced the quantum of deemed dividend in respect of loan from TCI Bhoruka Projects Ltd of Rs.12,08,616/- (to the extent of accumulated profits of TCI Bhoruka Projects Ltd.) and deleted the addition made on account of deemed dividend in respect of loans from Transcorp Enterprises Ltd. On the ground that the loan and advance given by Transcorp Enterprises Ltd., in the ordinary course of its principal business of money lending.

Aggrieved by the orders of CIT(A) in allowing relief to the assessee the revenue has raised ground no.2 before the Tribunal. Aggrieved by the order of CIT(A) in not deleting the entire addition of the deemed dividend in respect of loans received

It is the case of the Assessee that as far as TSI Bhoruka Projects Ltd., is concerned, the said companies shares are listed in the Calcutta Stock Exchange and the provisions of Sec.2(22)(e) of the Act does not apply to a company in which the public are substantially interested. Sec.2(18)(b)(A) of the Act lays down that shares of a company which is not a private company, if they are listed in a recognised stock exchange, they are to be regarded as Company in which public are substantially interested. The loan or advance which a company is substantially interested is outside the purview of section 2(22)(e) of the Act. As far as loan from Transcorp Enterprises Ltd., is concerned, the ld. Counsel for the assessee brought to our notice that one of the exceptions u/.s 2(22)(e) is that if loans and advances are made to a shareholder by a company in the ordinary course of its business where lending of money is substantial part of the business of the lending company then such loan or advance is outside the purview of section 2(22)(e) of the Act. In this regard the ld. Counsel drew our attention to page 119 of the paper book which shows the summarised balance sheet of Transcorp Enterprises Ld. For financial year 2008-09 to 2011-12. The same is as follows :-

The ld. Counsel for the assessee pointed out to the aforesaid chart and highlighted that 80% of the assets are loans and advances and that would be sufficient to conclude that the substantial part of the business of the assessee is lending and the sum in question has been give as a loan in the ordinary course of business .

We have given a very careful consideration to the rival submissions. The ld. Counsel has filed before us the evidence in the form of a computer print out of the list of companies listed in the Calcutta Stock Exchange and the assessee’s name figures as a listed company in Calcutta Stock Exchange which is a recognised stock exchange. Though trading in shares of the assessee company remains suspended for non payment of fees to the stock exchange, the fact remains that the assesee’s shares have not been delisted in Calcutta Stock Exchange. In these circumstances it has been construed that TCI Borukha Projects Ltd is a company in which public or substantially interested and therefore the payment of loan or advance by TCI Borukha Projects Ltd., even to a beneficiary shareholder having not less than 10% of the voting power is outside the provision of section 2(22)(e) of the Act. Therefore we hold that no part of the loan given by TCI Boruka Projects Ltd., can be taxed as deemed dividend u/s 2(22)(e) of the Act in the hands of the assessee.

As far as loans or advance by Transcorp Enterprises Ltd is concerned it is clear from page 119 of the paper book Vol.I which we have extracted in the earlier part of this order that substantial part of the business of this company is lending of money. It is not disputed that the lending of money to the assessee is in the ordinary course of the business of Transcorp Enterprises Ltd. In such circumstances no part of the advance or loan can be construed as deemed dividend within the meaning of section 2(22)(e) of the Act. We therefore are of the view that CIT(A) was fully justified in giving relief to the assessee in this regard. On the question as to what can be regarded as substantial part of business of the assessee, the ld. Counsel for the assessee placed reliance on the decision of the Honble Calcutta High Court in the case of CIT vs Shree Balaji Glass Manufacturing Pvt. Ltd 386 ITR 128(Cal). The said decision supports

In the result the appeal by the assessee is allowed and the appeal by the revenue is dismissed.