prpri Interest free funds presumed to be used for interest free loans: ITAT Interest free funds presumed to be used for interest free loans: ITAT

Case Law Details

Case Name : Assetz Infrastructure Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Appeal Number : ITA No. 563/Bang/2019
Date of Judgement/Order : 02/12/2020
Related Assessment Year : 2014-15

Assetz Infrastructure Pvt. Ltd. Vs DCIT (ITAT Bangalore)

There is no dispute with regard to the fact that the interest free advances received from customers was available with the assessee to the tune of Rs.16.96 crores as noticed by Ld CIT(A) at page 28 of his order, i.e., Rs.14.22 crores under Schedule V and Rs.2.74 crores under Schedule X, both aggregating to Rs.16.96 crores. The interest free loans given to subsidiary companies stand at Rs.10.26 crores. Hence the assessee has contended that the interest free funds available with it has been used to make interest free loans to the subsidiaries. The Ld A.R placed his reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd (2014)(49 taxmann.com 335)(Bom) in which it was held that if the own funds and “interest free funds” available with the assessee is more than the investment in tax free securities, then it should be presumed that the said investments have been made out of interest free funds available with the assessee.

Since the interest free funds available with the assessee is more than the interest free loans given to subsidiaries, it should have to be presumed that the loans have been given out of interest free funds. Accordingly, following the decision rendered by the Hon’ble jurisdictional Karnataka High Court (referred supra), we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance.

Interest Free Funds

FULL TEXT OF THE ITAT JUDGEMENT

These cross appeals are directed against the order dated 2018-2019 passed by Ld CIT(A)-1, Bengaluru and they relate to the assessment year 2014-15.

2. The assessee is in appeal in respect of the following issues:-

(a) Disallowance of interest expenses u/s 36(1)(iii) of the Income-tax Act,1961 [‘the Act’ for short].

(a) Addition of deemed dividend u/s 2(22)(e) of the Act partially sustained by Ld CIT(A).

Remaining grounds are either general in nature or consequential in nature.

3. The revenue is in appeal in respect of the following issues: –

(a) Disallowance made u/s 14A of the Act.

(b) Partial relief granted in respect of addition of deemed dividend u/s 2(22)(e) of the Act.

4. The assessee company is engaged in the business of construction, development and sale of all types of housing projects, commercial projects and related activities.

5. The first issue contested by the assessee relates to the disallowance of interest expenditure u/s 36(1)(iii) of the Act. The AO noticed that the assessee has taken interest bearing loans from various persons to the tune of Rs.29.16 crores. It was also noticed that the assessee has given interest free loans to related concerns to the tune of Rs.10.26 crores. Further, he assessee had also claimed interest expenditure of Rs.1,54,10,932/-. Hence the AO proposed to disallowed a part of interest expenditure. When questioned, the assessee offered following explanations:-

(a) The interest free loans were given to subsidiary companies, which are also engaged in the real estate development activities only. Hence it is in furtherance of business activities of the assessee.

(b) The assessee has got interest fee funds in the form of “Advances from customers” and it has been used to give interest fee loans. Hence it should be presumed that interest free funds have been used to give interest free loans.

The AO held that that loan given to/investment made in subsidiaries cannot be termed as a business activity of the assessee. The assessee could not prove the nexus between the business purpose and advancing of loans. Accordingly, the AO rejected the contentions of the assessee. Accordingly, he disallowed proportionate interest expenses of Rs.43,13,634/-.

5.1 The Ld CIT(A) also held that there is no business purpose in given interest free advances to the subsidiaries. He also noticed that the assessee has invested funds in JDA projects, in purchase of lands etc., and hence the interest free advances from customers could have been used for the above said purposes. Since the assessee was having small amount of share capital, the Ld CIT(A) took the view that the interest bearing loans have been diverted to the subsidiary companies in the form of interest free loans. Accordingly, he confirmed the addition made by the AO.

5.2 We heard the parties on this issue and perused the record. There is no dispute with regard to the fact that the interest free advances received from customers was available with the assessee to the tune of Rs.16.96 crores as noticed by Ld CIT(A) at page 28 of his order, i.e., Rs.14.22 crores under Schedule V and Rs.2.74 crores under Schedule X, both aggregating to Rs.16.96 crores. The interest free loans given to subsidiary companies stand at Rs.10.26 crores. Hence the assessee has contended that the interest free funds available with it has been used to make interest free loans to the subsidiaries. The Ld A.R placed his reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd (2014)(49 taxmann.com 335)(Bom). Following observations made by the Hon’ble High Court would show that, if the own funds and “interest free funds” available with the assessee is more than the investment in tax free securities, then it should be presumed that the said investments have been made out of interest free funds available with the assessee:-

5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities & Power Ltd. (supra)**. The finding of fact given by the ITAT in the present case is that the Assessee’s own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities & Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.”

(** 313 ITR 340)

It may be noticed that the above said decision was made in the context of the disallowance made u/s 14A of the Act. However, the Hon’ble Bombay High Court has followed the decision rendered by it in the case of Reliance Utilities and Power Ltd, wherein the question was disallowance made u/s 36(1)(iii) of the Act. It may also be noticed that the decision rendered in the case of HDFC Bank Ltd (supra) has been followed by the jurisdictional Hon’ble Karnataka High Court in the case of CIT vs. Micro Labs Ltd (2017)(79 taxmann.com 365)(Kar). The decision rendered by Hon’ble Bombay High Court in the case of Reliance Utilities Power Ltd (supra) has been followed by the Hon’ble Karnataka High Court in the case of CIT vs. Brindavan Beverages (P) Ltd (2017)(88 taxmann.com 477)(Kar.) in the context of disallowance made u/s 36(1)(iii) of the Act.

5.3 Since the interest free funds available with the assessee is more than the interest free loans given to subsidiaries, it should have to be presumed that the loans have been given out of interest free funds. Accordingly, following the decision rendered by the Hon’ble jurisdictional Karnataka High Court (referred supra), we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance.

6. The next issue relates to the addition made by the AO u/s 2(22)(e) of the Act. Since the Ld CIT(A) has given partial relief in respect of this addition, both the parties are in appeal before us on this issue.

6.1 The AO noticed that the assessee has received loan of Rs.8,99,11,142/- from its subsidiary named M/s Assetz Property Services P Ltd, in which the assessee held 99.99% of shares. The AO noticed that M/s Assetz Property Services P Ltd had reserves to the tune of Rs.22,66,94,775/- as at the beginning of the year, which included “Surplus P & L” balance of Rs.4,42,41,971/-. Hence the AO took the view that the provisions of sec.2(22)(e) relating to deemed dividend is applicable to the loan taken by the assessee.

6.2 The assessee submitted that it is having running account with its subsidiary company (referred to by the assessee as “Assetz Property Management Services P Ltd (APMS).). The Ld A.R submitted that this subsidiary company was earlier known as “Bearing Point Property Services P Ltd. Hence all the three names refer to the same subsidiary. There were financial transactions of both deposits and receipts in the running account. The assessee had received advances of Rs.5,11,38,000/- and paid advances of Rs.5,20,91,533/-. It was submitted that these transactions were in furtherance of business objective and business needs of both the companies. Accordingly, it was submitted that the provisions of sec.2(22)(e) are not attracted. The assessee placed its reliance on the decision rendered by Hon’ble Karnataka High Court in the case of Bagmane Constructions (P) Ltd (2015)(57 taxmann.com 120)(Kar) and CIT vs. M/s Shree Balaji Glass Manufacturing P Ltd (2016)(72 taxmann.com 118)(Cal.)

6.3 The AO did not accept the contentions of the assessee. As noticed earlier, the “Reserves & Surplus” of Rs.22.66 crores included “Surplus in P & L a/c” of Rs.4,42,41,971/-. Accordingly, the AO held that the loan to the extent of Rs.4,42,41,971/- is assessable as deemed dividend income u/s 2(22)(e) of the Act. Accordingly he assessed the same as deemed dividend.

6.4 The Ld CIT(A) noticed that the assessee has received loans from APMS to the extent of Rs.5,11,38,000/- and repaid a sum of Rs.4,99,88,354/-. Accordingly, the Ld CIT(A) held that the net amount of Rs.11,49,646/- only as deemed dividend u/s 2(22)(e) of the Act. Aggrieved, by the decision so rendered by Ld CIT(A), both the parties are in appeal before us.

6.5 We notice that the decision taken by Ld CIT(A) to give set off amounts repaid is against the decision rendered by Hon’ble Supreme Court in the case of Miss P Sarada vs. CIT (229 ITR 444)(SC). In the above said case, Hon’ble Supreme Court held that the loan or advance taken from the company may have been ultimately repaid or adjusted but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period. Hence the order passed by Ld CIT(A) on this issue requires to be set aside.

6.6 The Ld A.R contended that the Reserves & Surplus of M/s Assetz Property Management Services P Ltd included Share Premium account and the Share Premium amount shall not fall under the definition of “accumulated profits”. However, we have noticed earlier that the AO has assessed the “Surplus in P & L A/c” of Rs.4,42,41,971/- only as deemed dividend u/s 2(22)(e) of the Act, i.e., the AO himself has not taken Share premium account as part of accumulated profits.

6.7 The Ld A.R submitted that the opening balance of “Surplus in P & L a/c” was Rs.4,42,41,971/-. During the year ending 31.3.2013, i.e., in the immediately preceding previous year, the assessee has credited profit and loss account with “Deferred Tax liability reversal amount” of Rs.8,59,35,099/-. He submitted that “Deferred tax liability amount” is a notional reserve, which is created in compliance with the requirements of Accounting Standards. Accordingly, he submitted that the “Deferred Tax liability amount” and its reversal should be ignored for determining “accumulated profits”. He submitted that the Mumbai bench of Tribunal has held in the case of ACIT vs. Shri Narayan J Pagrani (ITA No.7480/Mum/2011 dated 13-08-2014) that the deferred tax liability amount is a notional reserve and it need not be deducted from the “Profits of the year” and hence could not be allowed to be deducted from “accumulated reserves”. Accordingly, if Rs.8,59,35,009/- is excluded from the “Surplus in P & L a/c” as on 31.3.2013, the above said company shall not have any “accumulated profits”. Hence the addition made by AO u/s 2(22)(e) of the Act is liable to be deleted.

6.8 On the contrary, the Ld D.R submitted that the term “accumulated profits” have been defined under Explanation 2 to sec.2(22)(e) of the Act. The said definition does not allow deduction of any amount from accumulated profits as contended by Ld A.R.

6.9 On a careful consideration of the arguments of Ld A.R, we are of the view that the same is liable to be rejected on two grounds, viz.,

(a) The expression “accumulated profits” would refer to the “Reserves and Surplus” accumulated over the years as per the accounts prepared under the Companies Act. Further, the term “accumulated profits” has been defined under Explanation 2 to sec.2(22)(e) of the Act. As submitted by Ld D.R, the said definition does not provide for exclusion of any amount from the “accumulated profits”.

(b) Reversal of Deferred tax liability is nullifying the effect of provision created earlier, meaning thereby, the net monetary effect would be nil, when it is reversed. For example, if Rs.100/- is transferred to Deferred tax liability in any of the earlier years and if the same is reversed now, then both the transactions get neutralised and hence the same shall not have any effect on “accumulated profits”. Accordingly, no adjustment need be made in the year of reversal.

6.10 Accordingly, the accumulated profit amount determined by the AO at Rs.4,42,41,971/- is justified and accordingly we hold that the AO was justified in assessing the same as deemed dividend u/s 2(22)(e) of the Act. Accordingly, we reverse the order passed by Ld CIT(A) on this issue.

7. The remaining issue contested by the revenue relates to the addition made u/s 14A of the Act.

7.1 The AO noticed that the assessee has made investment of Rs.14,72,66,000/-. However, it did not disallow any amount in terms of sec.14A of the Act r.w.r 8D of IT Rules. The assessee submitted that it did not earn any dividend income during the year under consideration and hence no exemption was claimed. Accordingly it submitted that no disallowance u/s 14A is called for. The assessee placed its reliance on the decision rendered by co-ordinate bench in the case of M/s Kingfisher Finvest India Ltd vs. Addl CIT (ITA No.1368/B/2012 dated 17.10.2014), CIT vs. M/s Shivam Motors (P) Ltd (2014)(272 CTR 277)(All). The AO did not accept the contentions of the assessee and disallowed a sum of Rs.44,89,934/- u/s 14A of the Act.

7.2 However, the Ld CIT(A) accepted the contentions of the assessee and accordingly, he deleted the disallowance made u/s 14A of the Act by following the decision rendered by co-ordinate bench in the case of M/s Kingfisher Finvest India Ltd (supra). Revenue is aggrieved.

7.3 We heard the parties on this issue. We notice that the Hon’ble Delhi High Court, in the case of Cheminvest Ltd vs. CIT (2015)(61 taxmann.com 118)(Delhi), held as under:-

“23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression “does not form part of the total income” in Section 14A of the Act envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

Identical view has been expressed by Hon’ble Madras High Court in the case of CIT vs. Chettinad Logistics (P) Ltd (2017)(80 taxmann.com 221)(Mad). We also notice that the appeal filed before the Hon’ble Supreme Court by the revenue in the case of Chettinad logistics (P) Ltd has been dismissed on the ground of delay as well as on merits. It is reported in (2018)(95 taxmann.com 250)(SC).

7.4 In view of the above, we do not find any infirmity in the decision taken by Ld CIT(A) on this issue.

8. In the result, the appeal filed by the assessee and revenue are partly allowed.

Order pronounced in the open court on 2nd Dec, 2020.

Download Judgment/Order

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