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2016 (1) TMI 322 - ITAT CHENNAI

2016 (1) TMI 322 - ITAT CHENNAI - TMI - Addition on deemed dividend u/s 2(22) - Held that:- In the case of the assessee the provisions of Section 2(22)(e) of the Act will not be applicable because there is a close nexus between the business activity of the assessee-company and its sister concern and the loan received from the assessee’s sister concern is utilized for the very purpose of acquiring the shares of the sister concern itself in order to have a strategical edge over the competing busin .....

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with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee’s sister concerns. See EIH Associated Hotels Ltd v. DCIT [2013 (9) TMI 604] - Decided in favour of the assessee. - I.T.A.No.1272/Mds. /2015 & C.O. No.82/Mds/2015 - Dated:- 27-11-2015 - SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER Appellant by : Mr.V. Vivekanandan, CIT DR Respondent by : Mr.T. Banusekar, CA ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBE .....

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o take only investments ₹ 7.72 Crores while working out average investment for the purpose of limb (iii). (2) The learned CIT(A) erred in deleting the investments made in the subsidiary companies while arriving at the average investments is not acceptable as such investments are capable of earning dividend income. (3) The learned CIT(A) erred in directing the AO to withdraw the addition made U/s. 2(22)(e) stating that the provisions of Sec.2(22)(e) are not attracted in the instant case. 2. .....

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, filed its return of income for the assessment year 2010-11 on 12.10.2010 admitting loss of 2,48,37,432/-. Subsequently, the return was taken up for scrutiny and the assessment was completed vide order dated 11.03.2013 wherein the Ld. AO made disallowed the expenditure of 2,64,09,499/- by invoking the provisions of Section 14A of the Act and also made addition of 7,26,03,874/- on account of Section 2(22)(e) of the Act. 4. During the course of assessment proceedings, it was observed by the Ld. A .....

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the provisions of Section 14A read with Rule 8D for having incurred the expenditure on interest of 74,39,591/- against the loan taken from the subsidiary company for ₹ 15 Crores and interest payment of ₹ 85,95,549 to M/s Igarashi Motors India Ltd., towards deferred settlement of dues for the purchase of the shares. Further the Ld.A.O also invoked Section 2(22)(e) of the Act since the assessee-company s subsidiary company Agile Electrical Sub Assembly Pvt. Ltd., from whom the assesse .....

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the decision of the Tribunal in the case of Southern Petrochemical Industries reported in 93 TTJ 161 and Escorts Ltd. reported in 102 TTJ 522. 5.2 With respect to the invoking of provisions of Section 2(22)(e) of the Act the ld. CIT(A) deleted the addition based on the finding that the advances given by M/s Agile Electrical Sub Assembly Pvt. Ltd. to the assessee-company is undoubtedly an advance in the ordinary course of business. 6. Ld. DR vehemently argued before us by stating that the provis .....

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y Pvt. Ltd., and M/s Agile Electrical Technologies which are in the related fields of business to that of the assessee company s business. The entire process of consolidation of business of all the three companies was made with an intention for deriving strategical benefits. These facts are not disputed. In similar circumstance, Hon ble Karnataka High Court in M/s Bagmane Constructions Pvt. Ltd. v. CIT dated 16th September, 2014 has held as under:- Deemed dividend - Trade advances - Receipt of a .....

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hareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-0 of the Act. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding payment of tax by having these companies pay or distribute money in the form of advance or loan. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend, If such loan o .....

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efit of such shareholder, in such an event, by the deeming provisions, such payment by the company is treated as dividend. It is so made by legal fiction created under Section 2(22)(e) of the Act. Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is required for carrying on the business, it would hot fall within the definition .....

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this question is concerned, this Court following the judgment of the Bombay High Court in the case of Commissioner of income Tax vs Universal Medicare (P) Limited reported in [2010 (3) TMI 323 - BOMBAY HIGH COURT] has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern - Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister conce .....

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n has been made with a view to consolidate the business of the assessee and thereby derive benefit by stalling competition. Further, in the case Farida Holdings Pvt. Ltd. v. DCIT decided by the Chennai Bench of the Tribunal reported in 51 SOT 452, it has been held that regular business transaction carried on by the assessee in its ordinary course of business cannot be treated deemed dividend for the purpose of Section 2(22)(e) of the Act. Following the above cited decisions, we hereby hold that .....

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ompany also because the assessee had obtained the loan from its sister company in order to purchase the shares of the very same sister company and thus avoid the perils of those shares being held by two entities thus endangering its existence. Accordingly, this issue is decided in favour of the assessee. 7.2 In regard to applicability of Section 14A of the Act read with Rule 8D also; the above view will be applicable. Moreover in the case EIH Associated Hotels Ltd v. DCIT reported in 2013 (9) TM .....

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