TMI Blog2012 (12) TMI 1125X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.1 The Commissioner of Income Tax (Appeals) grossly erred in upholding the disallowance of interest expenditure u/s. 14A read with Rule 8D to the tune of ₹ 19,67,681/-. 1.2 to 2. Xxxxxxxxxxxxx 3. Facts apropos the grounds above said are that the assessee [individual] is the Managing Director of a company namely M/s. ASL Capital Holdings Pvt. Ltd. On 30.09.2008, he had filed his return admitting total income of ₹ 2,48,99,350/- which was processed and accepted under section 143(1) of the Act on 05.02.2010. 4. In the enclosures filed with the return , the assessee had claimed an amount of ₹ 38,26,191/- in the shape of dividend as exempt income under section 10(34) of the Act without attributing any expenditure in earning the same in his P L account. In scrutiny proceedings, he reiterated the said factual position that no expenditure had been incurred in relation to earning exempt income. The Assessing Officer vide assessment order dated 31.12.2010; by invoking section 14A of the Act prescribing disallowance of expenditure incurred for earning exempt income and after placing reliance on Special Bench decision of Mumbai ITAT in CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the pendency of the assessment proceedings. The principle contention advanced by the assessee before the CIT(A) that Rule 8D applies only with effect from 24.03.2008 [from the date of its notification] stands rejected. However, qua disallowance made by the Assessing Officer under section 2(22)(e) on the question of deemed dividend, the CIT(A) has agreed to assessee s contention that the understanding between him and the company in making him to furnish bank guarantee and in receiving the amount later on was a case of business expedience which could not be treated as deemed dividend under the provisions of the Act . Accordingly, the assessee s appeal stands partly accepted by the CIT(A). In this manner; on the one hand, the Revenue is aggrieved by the order of the CIT(A) on the issue of deemed dividend, whereas, the assessee is challenging the disallowance under section 14A which has been confirmed. 7. On behalf of the Appellant/Revenue, the DR has vehemently argued that the CIT(A) has wrongly deleted the disallowance of deemed dividend which was deservingly made by the Assessing Officer qua the facts of the case. Therefore, he has reiterated the pleadings raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving sufficient funds, he chose to receive the said amount as quid pro quo. In these circumstances, we are of the view that the arrangement between the assessee and the company in question is commercial expedience, wherein, the assessee being Managing Director furnished bank guarantee; continued it, later on received the amount from the company. In our considered opinion, the same cannot be called as an instance of deemed dividend as it is neither a case of advancement of loan nor that of a deposit. We notice that the Coordinate Bench of ITAT Chennai in the case of Smt. G. Sreevidya (supra), while dealing with similar facts has held as under: 6. We have heard the submissions made by the respective parties and have gone through the documents on record, orders of the lower authorities as well as the judgements referred to by the respective parties. The provisions of section 2(22)(e) are reproduced herein below:- 2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) any distribution of debentures, debenture stock, deposit certificates and bonus to preference share- holders; (c) distribution on liquidation of company; (d) distribution on reduction of capital (e) any payment by way of loan or advances by a closely held company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of business and money lending should not be a substantial part of the company s business. 7. In order to attract the provisions of section 2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every amount paid must make the company a creditor of the shareholder of that amount. At the same time, it is to be borne in mind that every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of each case have to be scrutinized before applying the ratio of the cases holding above well settled law. In the facts and circumstances of the instant case, judgements relied upon by the DR in the cases of Sarada P.(supra), P.K.Abubucker (supra) and Tarulata Shyam (supra) are not applicable. 10. The Commissioner of Income Tax (Appeals) vide order dated 6.4.2011 has rightly deleted the addition made on account of deemed dividend by the Assessing Officer. We do not find any infirmity in the order passed by the Commissioner of Income Tax (Appeals). In view of our aforesaid findings, the appeal of the Revenue fails and the same is dismissed being devoid of any merit. Expressing our agreement with the aforesaid findings of the Coordinate bench, we also hold that the recourse taken by the assessee in first furnishing a bank guarantee for the company and later on receiving the amount in question is not covered by the concept of the deemed dividend as defined under section 2(22) of the Act . Consequently, we find no infirmity in the order of the CIT(A) to this extent, which is hereby upheld. 11. Coming to the Cross Objections of the assessee, we no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is empowered to determine the amount of expenditure incurred in relation to an exempt income. However, before proceeding to determine the disallowance, pre-condition is that the Assessing Officer has to record his satisfaction that the claim of the assessee, per his account in respect of expenditure in relation to such income is not correct. From perusing the order of the Assessing Officer, we notice that there is no such satisfaction recorded by the Assessing Officer before computing the disallowance. In appeal, the CIT(A) has also not considered vital aspect above said. This inaction of the Assessing Officer as well as CIT(A), in our considered opinion does not satisfy the test to be applied before invoking 14A. Further, the previous year relevant to the impugned assessment year is from 01.04.2007 to 31.03.2008. In the intervening period i.e. on 24.03.2008, the CBDT incorporated Rule 8D in the Income Tax Rules prescribing the methodology to compute expenditure incurred in relation to earning income not includeable in total income i.e. exempt income. The strife between the parties before us is that per assessee, the authorities below have wrongly computed the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) had been introduced with effect from April 1, 2007, they remained empty shells inasmuch as the expression such method as may be prescribed got meaning only by the introduction of Rule 8D by virtue of the Income-tax (Fifth Amendment) Rules, 2008 which was notified by the Central Board of Direct Taxes by its notification No.45/2008 dated 24/03/2008. 34. Dr Rakesh Gupta, the learned counsel, who had appeared for some of the assessees, submitted that Section 295 of the said Act empowered the Central Board of Direct Taxes to make rules for the whole or any part of India for carrying out the purpose of the said Act. He referred to sub-section (4) of Section 295 and submitted that the power to make rules conferred on the Central Board of Direct Taxes included the power to give retrospective effect, from a date not earlier than the date of the commencement of the said Act, to the rules or any of them and, unless the contrary was permitted (whether expressly or by necessary implication), no retrospective effect was to be given to any rule so as to prejudicially affect the interests of the assessees. He further submitted that Rule 8D was inserted in the said rules, but the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is specifically mentioned in the said Notes on Clauses that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 38. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 39. We may also refer to the CBDT Circular No.14/2006 dated December 28, 2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of sub- section (2) and it clearly indicated that it would be applicable from the assessment year 2007-08 onwards . 40. It is, therefore, clear that sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:- The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened under section 14A. So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to ve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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