2022 (2) TMI 755 - AT - Income Tax

Addition of share premium received on issue of equity shares u/s.56(2)(viib) - whether shares have been valued by taking the growth projections during the year rather than adopting the book value of the assets? - HELD THAT - Assessee has submitted the detailed working of the fair market value of all the assets along with supporting documents including stamp duty ready reckoner in order to substantiate the value arrived by the valuer on the date of issue of shares. CIT(A) has accepted the method adopted by the assessee and he came to the conclusion that it is at the option of the assessee to adopt the value as per explanation (a)(i) or a(ii) of section 56(2)(viib). Assessee has an option to adopt explanation a(i) or a(ii) of the Act and assessee has chosen the option explanation a(ii) to value the shares. Before accepting, the Ld.CIT(A) has given an elaborate finding in his order. it is also a fact on record that AO has not brought on record that there is any involvement of cash transaction in these transactions which goes to the main purpose of the introduction of section 56(2)(viib) and further we also noticed that shares were issued to its sister s concern only and the transactions are between two closely held companies and it cannot be classified or equated to generations/circulations of unaccounted money. Therefore, we do not find any reason to interfere with the finding of the CIT(A) and accordingly we deem it fit and proper to dismiss the ground raised by the revenue. Disallowance u/s 14A r.w.r. 8D - HELD THAT - The assessee has earned only ₹.3000/- as exempt income and Ld.CIT(A) has restricted the same to the extent of exempt income earned by the assessee. Therefore, the action of the Ld.CIT(A) is in line with the various judicial pronouncements which restricts the disallowance u/s. 14A of the Act to the extent of exempt income earned by the assessee. Therefore, we are inclined to dismiss the grounds raised by the revenue. Revenue appeal dismissed.

Summary

Issues Involved:
1. Deletion of addition made under Section 56(2)(viib) of the Income Tax Act on account of share premium received.
2. Restriction of disallowance under Section 14A of the Income Tax Act to the extent of exempt income earned.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 56(2)(viib) on Account of Share Premium Received

The revenue challenged the deletion of an addition of ?4,99,24,500 made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act. The AO had added this amount as income from other sources, contending that the share premium received by the assessee was unjustified and based on inflated asset valuations.

The assessee issued 2005 equity shares at a face value of ?100 each with a premium of ?24,900 per share. The fair market value (FMV) was determined to be ?37,890 per share based on a valuation report by M/s. Dharmesh M. Kansara & Associates, Chartered Accountants. The AO rejected this valuation, arguing that the assets were overvalued using a provisional balance sheet rather than the book value.

The assessee contended that the valuation was based on the stamp duty ready reckoner and the FMV of shares held as investments. The CIT(A) accepted the assessee's method, noting that the valuation was substantiated by detailed workings and supporting documents. The CIT(A) emphasized that the assessee had the option to choose between the methods prescribed under Explanation (a)(i) or (a)(ii) of Section 56(2)(viib), and the chosen method was justified.

The Tribunal upheld the CIT(A)'s decision, stating that the AO did not provide evidence of any cash transactions or unaccounted money involved. The Tribunal noted that the transactions were between sister concerns, which did not equate to the generation or circulation of unaccounted money. Therefore, the Tribunal dismissed the revenue's appeal on this ground.

Issue 2: Restriction of Disallowance under Section 14A to Exempt Income Earned

The revenue also challenged the CIT(A)'s decision to restrict the disallowance under Section 14A to the extent of exempt income earned by the assessee. The AO had disallowed ?2,47,000 under Rule 8D of the Income Tax Rules, while the assessee had earned only ?3,000 as exempt income.

The CIT(A) restricted the disallowance to ?3,000, aligning with the principle that disallowance under Section 14A cannot exceed the exempt income earned. The Tribunal upheld this decision, citing various judicial pronouncements supporting this principle. Consequently, the Tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The deletion of the addition under Section 56(2)(viib) was justified based on the substantiated valuation method chosen by the assessee, and the restriction of disallowance under Section 14A was in line with judicial precedents limiting disallowance to the amount of exempt income earned.