ACIT Vs Bhagwati Coal Movers (P) Ltd. (ITAT Delhi)
ITAT Delhi held that the ‘Security Premium Reserve’ cannot be regarded as part of accumulated profits under Section 2(22)(e) of the Income Tax Act.
Facts-
AO observed that the assessee has obtained loan amounting to Rs.5,52,50,000/- from M/s. Ajmala Stationery Ltd. A part of the loan amounting to Rs.2,57,00,000/- was repaid during the year. It was observed by the AO that the assessee-company is beneficial owner if more than 10% of voting power in the lender-company and thus susceptible to provisions of Section 2(22)(e) of the Act and consequently the amount of Rs.5,52,50,000/- is liable to be taxed as deemed dividend income under Section 2(22)(e) of the Act. The addition was accordingly made in the hands of the assessee to this extent.
Aggrieved by such additions, the assessee preferred appeal before the CIT(A). CIT(A) reversed the additions. Being aggrieved, the revenue preferred the present appeal.
Conclusion-
We observe that the CIT(A) has examined the issue threadbare and restricted the addition to the extent of ‘General Reserve’ after excluding the ‘Security Premium Reserve’ which has been regarded to be outside the ambit of expression ‘accumulated profits’ under Section 2(22)(e) of the Act. The CIT(A), in essence, held that the security premium reserve cannot be regarded as part of accumulated profits under Section 2(22)(e) and when such security premium is excluded, the General Reserve available for the purposes of addition under Section 2(22)(e) is Rs.2,86,084/- only and thus sustained the addition to the extent accumulated profit excluding share premium reserve. We find the approach of the CIT(A) is in consonance with judicial precedent available in this regard as cited by the CIT(A). We thus see no infirmity in the action of the CIT(A). Hence, we decline to interfere.
FULL TEXT OF THE ORDER OF ITAT DELHI
The captioned appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals), Faridabad [‘CIT(A)’ in short] dated 24.03.2017 arising from the assessment order dated 28.03.2016 passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 20 13-14.
2. The grounds of appeal raised by the Revenue read as under:
“(i) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs.56,88,000/- made by the A.O on account of disallowance of interest u/s. 36(i)(iii) of the Act, disregarding the facts that amount of interest on investment made in the assets not used for the business purpose is not allowable.
(ii) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in the deleting the addition of Rs.5,49,63,916/- out of addition of Rs.5,52,50,000/- made by the A. O on account of deemed dividend of income as per the provisions of section 2(22)(e) of the Act, disregarding the incontrovertible evidence with regard to loan taken by the assessee from M/s Ajmala Stationery (P) Ltd.”
3. Briefly stated, the assessee is stated to be engaged in the business of supply of coal and real estate business. The assessee filed return of income declaring total income of Rs.1,20,11,130/-. A survey was conducted under Section 133A of the Act on 29.11.2012 at the business premises of the assessee. Consequently, the return of the assessee was subjected to scrutiny assessment. In the course of the scrutiny assessment, the Assessing Officer inter alia observed that the assessee is engaged in the business of trading of coal only and no trade in real estate is substantiated. It was further noticed that the assessee has paid Rs.4,74,00,000/- by way of advance for purchase of land during the year under consideration and incurred interest cost thereon which is claimed as revenue expenditure. The Assessing Officer estimated interest @ 12% per annum attributable to such investment in land which worked to Rs.56,88,000/-. The Assessing Officer held that the aforesaid amount of interest of 56,88,000/- has been incurred towards purchase of capital asset being advance towards land and therefore the assessee is not entitled to deduction of such interest expenditure under Section 36(1)(iii) of the Act. Thus disallowance under Section 56,88,000/- was carried out under Section 36(1)(iii) of the Act.
4. The Assessing Officer further observed that it has obtained loan amounting to Rs.5,52,50,000/- from M/s. Ajmala Stationery Ltd. A part of the loan amounting to Rs.2,57,00,000/- was repaid during the year. It was observed by the Assessing Officer that the assessee-company is beneficial owner if more than 10% of voting power in the lender-company and thus susceptible to provisions of Section 2(22)(e) of the Act and consequently the amount of Rs.5,52,50,000/- is liable to be taxed as deemed dividend income under Section 2(22)(e) of the Act. The addition was accordingly made in the hands of the assessee to this extent.
5. Aggrieved by such additions, the assessee preferred appeal before the CIT(A). The CIT(A) took note of the factual matrix and submissions made on behalf of the assessee. The respective issues dealt with by the CIT(A) are reproduced hereunder:
“8. Ground No. 2 deals with the fact that the AO has made an addition of Rs.56,88,000/- by disallowing interest Rs.56,88,000/- @ 12% u/s 36(l)(iii) by holding that investment of Rs.4,74,00,000/- for purchase of land remained invested during the year which were never put to use for the business purpose, as evident from para 5 of the assessment order.
9. During the course of appellate proceedings, the Ld. AR of the appellant filed written submissions on this issue, which are reproduced as below:
“That the LD AO erred in law and erred in facts to disallow interest Rs.56,88,000/- on the pretext of investment Rs.4,74,00,000/- not used for business purpose u/s 36(1) Hi of the Income Tax Act, 1961.
