Addition u/s 14A
1. If at relevant point of time of receiving the advance, the assessee is not the beneficial shareholder then the conditions of Section 2(22)(e) of the Act are not fulfilled and additions of Deemed Dividend cannot be made
2. If the Assessing Officer failed to comply with the requirement of recording dissatisfaction as to the correctness of claim of the assessee, additions u/s 14A are unjustified
1. A search and seizure action under section 132 of the Income-tax Act, 1961 (for short “the Act”) was carried out at the assessee’s of ‘Tulip Group’ including the assessee
2. Notice under section 153A of the Act was issued to the assessee for filing return of income for the assessment years involved
3. In response to the notice under Section 153A of the Act issued on 28.04.2010, the assessee filed return declaring income of Rs. 16,93,882/- on 29th October, 2010
4. The Assessing Officer observed that an advance from M/. Sharad Enterprises Pvt. Ltd. i.e. another company of Tulip Group was appearing as opening balance in the books of the assessee company
5. It was further observed by the Assessing Officer that during the relevant previous year, the assessee company subscribed to the share capital of M/s. Sharad Enterprises pvt Ltd and acquired 13,332 equity shares out of 54,996/- equity shares of that company
6. The Assessing Officer was of the view that the share holding of the assessee company being more than 10 percent. and there was an accumulated profit in the books of M/s. Sharad Enterprises Pvt. Ltd. during the year, the assessee company was liable for deemed dividend in terms of Section 2(22)(e) of the Act
7. The submissions of the assessee objecting to the proposed addition were not accepted by the Assessing Officer and the A.O. finally made additions to the extent of Rs. 55,14,626/- on account of deemed dividend under section 2(22)(e) of the Act
8. The Assessing Officer also noticed investment of Rs. 9,74,56,010/- on 31.03.2006 and found interest payment of Rs. 72,618/-
9. The Assessing Officer following the decision of the Tribunal in the case of the Cheminvest Ltd. Vs. ITO, 317 ITR (AT) 0086 (2009) Delhi, and disallowed the interest of Rs. 72,618/- under Section 36(1)(iii) of the Act
10. The ld. CIT(A) observing that the advance was not received during the year and the assessee became shareholder subsequent to the receipt of the advance held that additions under Section 2(22)(e) was not sustainable and he accordingly allowed the relief to the assessee.
11. The ld. CIT(A) has examined the disallowance even from the angle of Section 14A of the Act. The ld. CIT(A) accepted the submission of the assessee and allowed relief to the assessee
12. Aggrieved with the findings of the learned Commissioner of Income Tax (Appeals), Revenue moved to ITAT
13. In another appeal of the same assessee Revenue has challenged the deletion of addition of Rs. 70,72,280/- under Section 14A of the Act
13. Honb. Tribunal decided both issues in favour of the Assessee
On Deemed Dividend u/s 2(22)(e)
We are of the view that the provisions of Section 2(22)(e) are very clear and all the following conditions are to be simultaneously met for holding that advance or loan received by a person falls in the category of deemed dividend:
1. Any payment of any sum by way of advance or loan was made by the company to the shareholder.
2. The company was not a company in which public was not substantially interested.
3. The shareholder was a beneficial owner of shares ( other than shares entitled to fixed rate of dividend) holding not less than 10% of the voting power .
4. The company was having accumulated profit.
But in the fact of the case of the assessee, the payment was received in a year prior to the relevant previous year and at that relevant point of time of receiving the advance, the assessee was not the beneficial shareholder of M/s. Sharda Enterprises Pvt. Ltd. and thus the conditions of Section 2(22)(e) of the Act are not fulfilled in the case of the assessee. The finding of the ld. CIT(A) on the issue are therefore well reasoned.
In view of the above discussion, we are of the opinion that no interference is required in the finding of the ld. CIT(A). Accordingly, we dismiss this ground of the appeal.
On Proportionate Disallowance u/s 14A
As seen from the paragraph 5 of the Assessment order, we find that the Assessing Officer has not complied with the requirement of recording dissatisfaction as to the correctness of claim of the assessee as held in Judgement of Delhi High Court in the case of Maxopp Investement ( supra), the action of the AO in invoking rule 8D was not justified. Despite the observation, the CIT(A) has upheld disallowance of Rs. 4,22,000 towards administrative expenses. In view of the above discussion, we find that the order of ld. CIT(A) on the issue in dispute is well reasoned and, therefore, no interference is required.
Cases referred to