The Kolkata Bench of Income Tax Appellate Tribunal (ITAT) has deleted the disallowance made under Section 14A of the Income Tax Act 1961 read with Section 8D(2)(ii) of the Income Tax Rules 1962.
The assessee, Apeejay Pvt. Ltd was a private limited company engaged in the business of operating business centres and letting out. Its e-filed its return for AY 2013-14 on 28/09/2013 declaring income. Case selected for scrutiny through CASS followed by issuance of notice under Section 143(2) and 142(1) of the Income Tax Act.
The major issues for consideration by the assessing officer were with regard to disallowance under Section 14A of the Income Tax Act as well as deemed dividend under section 2 (22)(e) of the Income Tax Act. The AO observed that during the year the assessee company had received a sum from another group concerned Apeejay Tea Limited.
The AO further noticed that both the companies, namely, assessee company Apeejay Pvt. Ltd and Apeejay Tea Limited, had a common shareholder, namely, Kathua Steel Works Pvt. Ltd., holding shares at 58.64% in Apeejay Tea Limited and 99.96% in the assessee company.
Since accumulated profits for distribution in the books of Apeejay Tea Limited, were to the tune of Rs. 239.33 Crores, the Assessing Officer invoked the provisions of Section 2(22)(e) of the Income Tax Act. Though the assessee stated that addition for deemed dividend could be made only in the hands of the shareholder and assessee not being a shareholder, addition for deemed dividend was uncalled for, but the Assessing Officer was not satisfied and he made the addition in the hands of the assessee as deemed dividend.
As far as the disallowance under Section 14A of the Act was concerned, the AO after considering the disallowance suo moto offered by the assessee further made interest disallowance under Rule 8D(2)(ii) as well as disallowance under Rule 8D(2)(iii) of the Income Tax Rules, 1962 at 0.5% of the average value of investment.
Manish Tiwari, on behalf of the assessee submitted that interest disallowance under Rule 8D(2)(ii) of the Income Tax Rules, was uncalled for since the assessee had sufficient interest free funds available for making the investments in the equity shares
Subhrajyoti Bhattacharjee on behalf of the revenue on the other hand vehemently argued supporting the orders of the lower authorities.
The two-member Bench of Manish Borad, (Accountant Member) and Sonjoy Sarma, (Judicial Member) set aside the impugned order and deleted the disallowance made under Rule 8D(2)(ii) of Income Tax Rules for the impugned assessment years holding the admitted fact that there was no finding of the revenue authorities at any stage indicating specifically that interest bearing funds had been applied for the purpose of making investments.
‘In absence of any such finding, we find that the judgement of the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd were squarely applicable on the facts of the present case and, therefore, on account of sufficient availability of interest free funds, we find no merit in the finding of the AO making interest disallowance under Rule 8D(2)(ii) of the Rules” the Bench further observed.
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