IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER) ITA. No: 2912/AHD/2011 (Assessment Year: 2008-09) ABIR Investments Pvt. V/S ACIT, Circle-1, Ltd. 74, Madhuban, Nr. Ahmedabad Madalpur Underbridge, Ellisbridge, Ahmedabad (Appellant) (Respondent) PAN: AABCA3129Q Appellant by : Shri Prasoon Kabra, Sr. D.R. Respondent by : None ORDER Date of hearing : 04 -10-2016 Date of Pronouncement : 06-10-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. This appeal by Assessee is preferred against order of Ld. CIT(A)-VI, Ahmedabad dated 27.09.2011 pertaining to A.Y. 2008-09. 2 ITA No 2912/Ahd/2011 . A.Y. 2008-09 2. assessee has raised three substantive grounds of appeal. Ground no. 1 relates to addition on account of loans treated as deemed dividends u/s. 2(22)(e) of Act amounting to Rs. 1,55,20,000/-, Ground no. 2 relates to disallowance on account of Insurance Premium of Rs. 5,25,578/- and Ground No. 3 relates to addition made u/s. 14A of Act amounting to Rs. 2,39,857/-. 3. return of income for year under consideration was filed on 29/09/2008 declaring total income of Rs. 31,94,099/-. return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon assessee. 4. During course of scrutiny assessment proceedings and on examination of Balance sheet of assessee-company, A.O. found that assessee-company has unsecured loans aggregating to Rs. 4,53,09,090/- as on 31.03.2008. On further examination, A.O. found that during year assessee-company has received loans and advances amounting to Rs. 4,03,70,000/-. Assessee was asked to furnish details of unsecured loans. assessee filed requisite details. On examination of details, A.O. found that assessee-company has received unsecured loans of Rs. 1,55,20,000/- from Arcata Trade Link Pvt. Ltd. (ATLPL). 5. On verification of shareholding pattern of assessee-company qua ATLPL, A.O. found that assessee company holds 26.81%% shares in 3 ITA No 2912/Ahd/2011 . A.Y. 2008-09 ATLPL. A.O. further found that ATLPL has accumulated profits of Rs. 3,22,97,892/-. 6. Drawing support from provisions of section 2(22)(e) of Act, A.O. asked assessee to show cause why sum of Rs. 1,55,20,000/- should not be treated as deemed dividend. 7. In response, assessee filed detailed reply vide submission dated 09/12/2010 and strongly contended that amount of Rs. 1,55,20,000/- received from ATLPL has been wrongly classified under head loan from companies. It was explained that in fact this is share application money received from ATLPL. Assessee filed copy of ledger account duly confirmed by ATLPL along with copy of Board resolution of ATLPL. 8. This contention of assessee was dismissed by A.O. for following reasons:- (i) Rs. 1,55,20,000/- received from ATLPL has been shown as unsecured loan in balance sheet of assessee-company and further same is also shown as loan in Schedule-II of 3CD report. (ii) contra account of ATLPL filed by assessee itself show amount of Rs. 1,55,20,000/- as loan amount. This is as per copy of ledger account of ATLPL submitted vide letter dated 21.10.2010. (iii) assessee has only produced copy of Board resolution of ATLPL when demonstrating that shares have been actually allotted by assessee-company. No documentary evidences have been brought on 4 ITA No 2912/Ahd/2011 . A.Y. 2008-09 record to suggest that any intimation has been sent to Registrar of Company. (iv) story of share application money has been made only after issue of show cause notice asking assessee to show cause why impugned amount should not be treated as deemed dividend. 9. A.O. further dismissed claim of assessee that impugned transaction is in nature of Inter-Corporate Deposits and, therefore, outside purview of section 2(22)(e) of Act. 10.The A.O. concluded by observing that loan received by assessee- company from ATLPL amounting to Rs. 1,55,20,000/- satisfies all conditions mentioned u/s. 2(22)(e) of Act and qualifies as deemed dividend. A.O. accordingly made addition of Rs. 1,55,20,000/-. 11.On further probe, A.O. found that assessee has debited Rs. 5,25,578/- as Insurance Premium paid on life of Director. On verification, A.O. found that Insurance Policies are in personal names of Director. A.O. was of firm belief that such expenditures are of personal in nature and cannot be allowed u/s. 37 of Act. 12. A.O. strongly objected to this observation of A.O. claiming that Insurance Premium paid on life of Directors are in form perquisites and, therefore, allowable. This contention of assessee did 5 ITA No 2912/Ahd/2011 . A.Y. 2008-09 not find any favour with A.O. who made disallowance of Rs. 5,25,578/-. 13.On further examination, A.O. found that assessee has earned dividend income of Rs. 3,16,907/- and Long Term Capital Gain at Rs. 7,83,525/- which have been claimed as exempt. Invoking provisions of section 14A read with Rule 8D of Act, assessee was asked to explain why disallowance in relation to expenses incurred for earning exempt income should not be made as per provisions of section 14A read with Rule 8D. 14.Assessee filed detailed reply explaining that share investments have been made through Portfolio Management Company, Kotak Mahindra for which assessee has paid Rs. 2,94,345/- as Portfolio Management Fees and same has also been disallowed. Further Demat charges of Rs. 16,238/- and Security Transaction Tax of Rs. 8003/- have also been disallowed. Therefore, no further disallowance is necessary. claim of assessee was dismissed and A.O. computed disallowance at Rs. 2,39,857/-. 15.Aggrieved by these additions/disallowances, assessee carried matter before ld. CIT(A) but without any success. 16.The relevant findings of ld. CIT(A) while confirming addition on account of deemed dividend reads as under:- 6 ITA No 2912/Ahd/2011 . A.Y. 2008-09 2.3 I have considered facts of case; assessment order and appellant's submission. It is not in dispute that appellant is substantial shareholder of lender company and is covered by provisions of section 2(22)(e) of IT act. money received by appellant was reflected as loans and advances in books as well as balance sheets of appellant as well as Lender Company. When assessing officer raised issue as to why loans received from Arcata trade Link private Ltd should not be treated as deemed dividend, appellant took argument that it was share application money received from said company. To support its claim, appellant even prepared share application form and board resolution to this effect. However while doing so, appellant did not realize that loan transactions with Arcata trade Link private Ltd are so many during year that these could not be put in category of share application money. Assessing officer dealt with this issue in great detail. arguments are not repealed here but I fully agree with assessing officer's view. Appellant s argument that entries in books of accounts will not determine nature of transactions is relevant where facts prove nature of transactions otherwise. In case of appellant, there are no facts contrary to accounting entries and therefore it can be held that accounting entries reflect true stale of transactions. In case of appellant loan transactions were more than 20 during year and there were certain repayments also. Treating these many loan transactions as share application money is nothing but creating false evidences to get out of clutches of deemed dividend. There is no contemporary evidence with appellant before assessing officer took up issue of deemed dividend that these loan transactions were share application money received. evidences were created by appellant and related lender concern even when facts are contrary. None of decision relied upon by appellant supports appellant s claim that loans taken are in fact share application money. height of appellant s argument is in its alternative claim of ICD. If it is inter corporate deposits, then how can it be share application money? This claim itself proves that appellant made claim of share application money just to get out of 7 ITA No 2912/Ahd/2011 . A.Y. 2008-09 deemed dividend provisions. False evidences were created for this purpose. Considering this, appellant s claim of share application money is rejected. Coming to appellant's claim of infer corporate deposits, it is not reflected from records that loans taken from associate concern is ICD in normal course of business. Neither appellant nor associate concern is in business of ICD. Assessing officer discussed nature of ICD in detail and i endorse his view that appellant's loan transactions cannot get out of purview of deemed dividends under section 2(22)(e) of IT act. In case of appellant, loan transactions are not in nature of ICD since there is no tenure or interest payment in appellant's transactions. decisions relied upon by appellant are not applicable in clear facts of case. In my considered view, it is fit case of application of section 2(22)(e). If such transactions will not be considered deemed dividend then there may not be any transactions which may find place in category of deemed dividend. provision in statute and therefore same has to be applied. Accordingly, I confirm addition made by assessing officer. 17.The relevant findings of ld. CIT(A) while confirming addition on account of Insurance Premium paid reads as under:- 3.3. I have considered facts of case; assessment order and appellant s submission. Appellant claimed insurance premium paid on life of its directors as allowable deduction. insurance premium paid was not under keyman insurance premium scheme and therefore relevant provisions and circulars issued in respect of keyman insurance scheme are not applicable. Accordingly appellant s submissions with regard to keyman insurance premium are not discussed. Undooubtedly, payment is Insurance Premium on LIC policy taken by directors. premium was not paid for benefit of company but same was for directors. It was basically director s personal responsibility to pay for insurance policies taken by them. This is different than keyman insurance policy in which premium is paid by company and on death of 8 ITA No 2912/Ahd/2011 . A.Y. 2008-09 keyman, insurance money is received by company and is taxable in hands of company. Since Insurance premium paid in case of appellant is not for benefit of company, expense is not allowable as business expense. alternative argument of appellant is that it is perquisite as per terms of employment and allowable as salary to directors. However during course of appeal hearing it is confirmed that insurance premium is not paid by appellant as per terms of employment and it is not perquisite in hands of directors. In personal income tax returns of directors, insurance premium paid by appellant company was not offered for tax. In light of these facts available on record and confronted to appellant s counsel during appeal hearing, it is clear that payment of insurance premium was personal responsibility of directors and such payment had nothing to do with business purpose of appellant company. In view of this, claim of insurance premium made by appellant is without any basis and for no business purpose and accordingly disallowance made by A.O. is confirmed. 18.The relevant findings of ld. CIT(A) for upholding disallowance made u/s. 14A reads as under:- 4.3 I have considered facts of case; assessment order and appellant's submission. Assessing officer made disallowance of expense relating to exempt income. Such disallowance was considered necessary since appellant did not disallow any part of interest and other expenses treating same as relating to investment resulting in exempt income. Now rule 8D is held Io be applicable with effect from assessment year 2008-09 by Bombay High Court disallowance of expenses relating to exempt income are Io be made by method prescribed in said rule. It is not in dispute that appellant earned exempt income in form of dividend on investment of more than Rs. 213 Lacs. Appellant paid interest of Rs. 36.58 Lacs on borrowed funds used for business purposes as well as making investments. Appellant incurred substantial employees' remuneration and other 9 ITA No 2912/Ahd/2011 . A.Y. 2008-09 administrative expenses, part of which may relate to investment resulting in exempt income. Similarly payment of interest will also partly relate to investment resulting in exempt income' therefore disallowance under section 14 on account-.of interest and other expenses are necessary. Coming to method of computation of disallowance under section 14A, assessing officer disallowed expenses relatable to exempt income as per rule 8D which is mandatory from assessment year 2008-09. For interest, proportioned expense is disallowable whereas for other expenses .5% of investment value is disallowable. Considering fact that appellant claimed huge administrative and other expenses, disallowance of administrative expenses made by assessing officer @ .5% of investment resulting in exempt income is reasonable formula given in rule 8D is mandatory for making disallowance. In view of this addition @ .5% of investment resulting in exempt income made by assessing officer is confirmed. As regards interest, appellant had borrowed funds on which interest was paid. While making investments, both borrowed funds as well as own funds were used hence one cannot say that borrowed funds were used only for business purpose and owned capital was only used for Investment. Admittedly no separate accounts ere maintained for business and investment activities therefore appellant's claim is not justified that borrowed funds were not used in making investment. Therefore in absence of clear cut details of utilization of funds, formula given in rule 8D which is mandatory from this year onward is most appropriate method. Since assessing officer worked out interest disallowance on same basis, interest disallowance is confirmed. These grounds are accordingly dismissed. 19.Aggrieved by this, assessee is before us. appeal was first posted for hearing on 30.01.2012. Thereafter, assessee has been taking adjournments constantly. On this date of hearing, none appeared on behalf of assessee nor any application has been moved for seeking 10 ITA No 2912/Ahd/2011 . A.Y. 2008-09 adjournment. Since, this is old matter and assessee has been frequently taking adjournments without any justifiable cause, we decided to proceed ex parte. 20.Having heard ld. D.R., we have carefully perused orders of authorities below. first grievance of assessee relates to addition of Rs. 1,55,20,000/- treated as deemed dividend u/s. 2(22)(e) of Act. undisputed fact is that assessee is holding 26.81% shares in ATLPL. It is also undisputed fact that impugned amount has been shown under head loans and advances from companies. It is also undisputed fact that when assessee made its first submission along with copy of ledger account, same was shown as unsecured loan. It is only when A.O. issued show cause notice; assessee took altogether new plea that impugned amount is nothing but share application money received from ATLPL. 21.Let us first consider this claim of assessee. perusal of balance sheet of assessee shows at Schedule-1, share capital of assessee which is at page 13 of paper book and reads as under:- SHARE CAPITAL As at 31-03-2008 As at 31-03-2007 Authorised 100000 Equity Shares of Rs. 10/- 1000000.00 1000000.00 Each (P.Y. 100000) 1900000 8% Cummu. Red. Preference 19000000.00 19000000.00 Shares of Rs. 10/- each fully paid up 20000000.00 2000000.00 (P.Y. 1900000) 11 ITA No 2912/Ahd/2011 . A.Y. 2008-09 Issued,Subscribed & Paid up: 100000 Equity Shares of Rs. 10/- 1000000.00 1000000.00 Each fully paid up (P.Y. 100000) 1900000 8% Cummu. Red. Preferance 19000000.00 19000000.00 Shares of Rs.10/- each fully paid up 2000000.00 2000000.00 (P.Y.1900000) Total:- 20000000.00 20000000.00 22. As can be seen from above, authorized share capital of Rs. 2 crores is fully paid up. When authorized capital has been fully subscribed and paid up, we fail to understand how can assessee accept share application money of Rs. 1,55,20,000/- when it cannot allot shares of even one rupee to anyone. There is no documentary evidence on record to suggest that assessee has applied for increase in its authorized share capital. When subscribed and paid up share capital has fully exhausted, authorized share capital of assessee company claiming to have received share application money of Rs. 1.55 crores is nothing but eyewash and afterthought just to manipulate facts. theory of share application money can be demolished simply by these facts on record. 23.The second claim of assessee is that it is Inter-Corporate Deposits. assessee blows hot and cold in same breath. On one hand it is claiming impugned amount as share application money and when this story is demolished, it is taking alternative plea on Inter-Corporate Deposits (ICD). There is nothing on record to suggest that two companies are authorized for Inter-Corporate Deposits. Since there is no demonstrative evidence on record by which it can be proved that 12 ITA No 2912/Ahd/2011 . A.Y. 2008-09 impugned amount is Inter-Corporate Deposits, claim of assessee cannot be accepted. 24.Considering afore-stated facts in totality, we do not find any merits in this ground of appeal and same is dismissed. 25.Coming to second grievance of assessee which relates to disallowance of Insurance Premium, there is no denying that Insurance Premium has been paid on life of Directors of Company. claim of assessee that such Insurance Premium is nothing but perquisite is not acceptable. Since there is nothing on record which could suggest that such perquisite is part of service agreement with Directors. Moreover, there is no commercial expediency to take Insurance on life of Directors unless premium is paid towards Keyman Insurance Policy. assessee has also failed to produce any documentary evidence to prove that said amount has been treated as perquisite in hands of Directors. Considering all these facts in totality, we decline to interfere with findings of ld. CIT(A). second grievance of assessee is also dismissed. 26.The third grievance relates to disallowance made u/s. 14A read with Rule 8D of Act. There is no denying that during year under consideration assessee has earned exempt income in form of dividends and Long Term Capital Gains. It is also admitted fact that assessee has engaged Portfolio Manager for doing transaction on its 13 ITA No 2912/Ahd/2011 . A.Y. 2008-09 behalf. Portfolio Management Fees, Demat charges and Security Transaction Tax have already been disallowed by assessee. It is also admitted fact that assessee has paid substantial interest on its borrowings. Assessee must have also incurred some administrative expenses. Provisions of Section 14A read with Rule 8D squarely apply on facts of case. disallowance computed by A.O. are as per provisions of Act; therefore, calls for no interference with findings of ld. CIT(A). Ground No. 3 is accordingly dismissed. 27.In result, appeal filed by Assessee is dismissed. Order pronounced in Open Court on 06 - 10- 2016. Sd/- Sd/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: True Copy Rajesh Copy of Order forwarded to:- 1. Appellant. 2. Respondent. 3. CIT (Appeals) 4. CIT concerned. 5. DR., ITAT, Ahmedabad. 6. Guard File. By ORDER Deputy/Asstt.Registrar ITAT,Ahmedabad ABIR Investments Pvt. Ltd. v. ACIT, Circle-1, Ahmedabad