2020 (6) TMI 102 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D(2)(iii) of expenditure on account of exempt income - HELD THAT - There is no correlation between the investment made in the shares of other company with the borrowing of funds during the year. Hence, the CIT(A) rightly held that interest disallowed has to be restricted to the extent of funds invested in Glofin Investment Finance during the year. As this working the CIT(A) held that the interest pertaining to the investments made during the year works out to ₹ 67,821/- under Rule 8D(2)(ii). The disallowance under Rule 8D(2)(iii) being % of the value of average investments had been rightly disallowed at ₹ 2,97,725/-. Thus, there is no need to interfere with the findings of the CIT(A). Ground No. 1 is dismissed. Disallowance made u/s 36(1)(iii) - interest paid for money borrowed - HELD THAT - From the perusal of the facts, it can be seen that the loan was taken for the purpose of equity infusion in the associate concerns. Since, the entire fund was diverted for equity infusion in the associate concerns, the AO held that the funds borrowed were not utilized for business purposes. Hence, interest expenditure and other associate expenditure were not incurred wholly and exclusively for business purposes. The reliance of the decision in case of Hero Cycles (P) Ltd. vs. CIT 2015 (11) TMI 1314 - SUPREME COURT will not be applicable in the present case as advance to subsidiary company became imperative as a business expediency in view of undertaking given to financial institutions by assessee to effect that it would provide additional margin to subsidiary company to meet working capital for meeting any cash losses. But in the present case, funds were specifically borrowed for infusion of equity in the associate concerns which is totally different aspect from the case of Hero Cycles (Supra). Hence the CIT(A) rightly confirmed the addition. Ground No. 2 is dismissed. Addition u/s 56 (2) (viiib) - valuation of premium received on issue of shares - HELD THAT - In the present case, the assessee is saying that value of the shares owned by the assessee company of the listed companies which are recorded at the book value (cost price) is far less than the listed price (traded price) of those shares, therefore, same should be taken while determining the fair market value of its shares in accordance with the provisions of section 56 (2) of the act. Principally, we agree with the argument of the Ld. AR, that if assessee can substantiate that fair market value of its shares is higher than the valuation determined in accordance with the rules framed there under, then, higher of the above should be considered for working out income u/s 56 (2) of the act. Assessee has to satisfy the assessing officer and it is only the satisfaction of the assessing officer, which is required for working out fair market value of shares. As the lower authorities stated that assessee has not produced anything to substantiate the above claim of the assessee, they disbelieved it. Before us, assessee has submitted the quotation at the National stock exchange of share price of Hanung Toys and Textiles Ltd on 7 November 2012 at ₹ 138.80 per share. These details have not been noted by the lower authorities. In view of the above facts, we set aside this ground back to the file of the AO with a direction to the assessee to substantiate the fair market value of its shares by incorporating the market value of the listed equities owned by it, as demonstrated before us. AO may examine the claim of the assessee on the merits of the case and then decide the fair market value of the shares of the assessee company as on the date on which the new issue of shares has been allotted to the new allottees. Appeal of the assessee is allowed with above direction.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(iii) of the Income Tax Act, 1961.
2. Enhancement of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.
3. Disallowance under Section 56(2)(viib) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(iii):
The assessee contested the disallowance of ?2,97,725/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D(2)(iii) for expenses related to exempt income. The assessee argued that no tax-free investments were made during the year and that borrowed funds were not used for such investments. The assessee's funds included shareholder’s funds and interest-free borrowings from directors and associates. The AO disallowed the amount attributing it to exempt income, despite the assessee's claim that such expenses were statutory obligations unrelated to exempt income. Upon review, the Tribunal upheld the CIT(A)’s decision, confirming the disallowance as correctly calculated under Rule 8D(2)(iii) at ?2,97,725/-.

2. Enhancement of disallowance under Section 36(1)(iii):
The assessee challenged the enhancement of disallowance to ?79,08,068/- for interest paid on borrowed funds. The funds were borrowed from Tata Capital Finance Services Limited and advanced interest-free to sister concerns, contrary to the stipulated loan conditions for equity infusion. The assessee cited the Supreme Court decision in Hero Cycles (P) Ltd. vs. CIT, arguing business expediency. However, the Tribunal noted that the borrowed funds were specifically for equity infusion, not business purposes, distinguishing it from the Hero Cycles case. The Tribunal upheld the CIT(A)’s decision, confirming the disallowance.

3. Disallowance under Section 56(2)(viib):
The assessee disputed the addition of ?34,38,000/- under Section 56(2)(viib) for the premium received on share issuance. The AO questioned the valuation, as the book value was ?11.80 per share, while shares were issued at a ?40/- premium. The assessee argued that the fair market value, considering the market value of listed shares, was ?71.04 per share. The CIT(A) rejected this, noting insufficient substantiation. The Tribunal acknowledged the assessee’s argument that fair market value could be higher if substantiated to the AO’s satisfaction. The Tribunal remanded the issue back to the AO to verify the fair market value based on market prices of listed shares and re-evaluate the addition.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the disallowance under Section 14A and the enhancement under Section 36(1)(iii) while remanding the issue under Section 56(2)(viib) back to the AO for re-evaluation based on substantiated fair market value.