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2022 (4) TMI 323 - AT - Income TaxAddition u/s 56(2)(vii)(b) - premium on preference shares which are unquoted - consideration received for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares, the difference is to be taxed as income - HELD THAT - As noted prescribed method for unquoted shares is not any specific method but it provides that assessee may obtain valuation report from merchant banker or accountant. In this case the assessee has obtained valuation report of the accountant. To this extent, valuation adopted by the assessee cannot be said to be not in accordance with law. Valuation method adopted by the assessee - Assessing Officer has adopted net asset value method which has been lifted from the method adopted for valuation of equity shares in Rule 11UA(c)(a). This is not at all a method prescribed for other shares and securities in which category the present issue of preference shares falls. The method applicable in the present case is as contained in Rule 11UA(C)(c). Hence the Assessing Officer s adoption of this method does not have the sanction of law. Once it is clear that the method adopted by the Assessing Officer is not permissible in law and the method adopted by the assessee is one permissible in law which has not been cogently rebutted by the Assessing Officer. It is crystal clear that the addition in this case has been made by the Assessing Officer on whims and fancies not sustainable in law. In this view of the matter valuation obtained by the assessee is as per the mandate provided under 56(2)(vii)(b) read with rule 11UA of the Act. Assessing Officer s substitution thereof is not in accordance with law and the same is not sustainable. Hence, we do not find any infirmity in the order of learned CIT(A). Hence, we uphold the same. Addition of depreciation under section 32(1)(ii) - A.O.'s action in denying depreciation on goodwill u/s. 32(1)(ii) arising to the Appellant pursuant to a scheme of amalgamation sanctioned by the Jurisdictional High Court, contending that the denial of depreciation ought to be restricted to the claim made by the Appellant in its books of accounts - HELD THAT - We note that learned CIT(A) has decided the issue in favour of the assessee by placing reliance on the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT . We agree with learned CIT(A) that the same is fully applicable in the present case. Hence, on this issue also we uphold the well reasoned order of learned CIT(A). Addition under section 56(2)(viia) - aggregate FMV of the shares of IHPL and VDPL, exceeding the consideration added as Income from Other Sources - assessee pointed that application of valuation method adopted by the Assessing Officer is not applicable for A.Y. 2015-16 and the said method is applicable only from A.Y. 2018-19 and CIT(A) has rightly held that it cannot be applied retrospectively - HELD THAT - The fair market value which has been computed by the Assessing Officer is not as per the extant Rules. The Rules in this regard contained in section 11UA are already reproduced by us earlier. The same clearly provide for taking the book value of shares as in the balance sheet for the computation. The same was amended by the Income Tax Rules 2017 with effect from 1.4.2018 where instead of book value, fair market value of shares is mentioned. The Act does not provide that this amendment is retrospective. It is clearly mentioned that this amendment is with effect from 1.4.2018. Hence, Assessing Officer s adoption of fair market value for making the computation which is not in accordance with the extant provisions has rightly been deleted by the learned CIT(A). It is not disputed that when the book value of the shares is adopted as per the extant rules the addition will not be justified. Hence, we do not find any infirmity in the same. We note that nothing has been brought before us by the revenue as to why the Assessing Officer has applied the same retrospectively. Hence, we do not find any infirmity in the order of learned CIT(A). Accordingly, we uphold the same. Addition under section 14A r.w.r. 8D - Sufficiency of own interest funds - HELD THAT - We note that as regards the disallowance under Rule 8D(ii) of the Act learned CIT(A) has given a finding that the assessee has sufficient interest free funds. The same has not been disputed by the revenue. In this view of the matter no disallowance under rule 8D(2)(ii) can be done on the touchstone of the Hon'ble Bombay High Court decision in the case of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT . As regards rule 8D(2)(iii) is concerned learned CIT(A) has directed to take average value of the investment on which no exempt income has been earned for making the computation. This view is supported by Special Bench decision of ITAT in the case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI . Hence we do not find any infirmity in the order of learned CIT(A) in this regard. Hence, we uphold the same.
Issues Involved:
1. Deletion of addition under section 56(2)(viib) of the Income Tax Act. 2. Deletion of addition of depreciation on goodwill under section 32(1)(ii) of the Income Tax Act. 3. Deletion of addition under section 56(2)(viia) of the Income Tax Act. 4. Deletion of addition under section 14A read with Rule 8D(2)(ii) of the Income Tax Act. 5. Disallowance based on directions under section 144A without providing an opportunity of being heard. Detailed Analysis: 1. Deletion of Addition under Section 56(2)(viib): The issue revolves around the valuation of preference shares issued by the assessee at a premium. The AO contended that the valuation method used by the assessee was not reliable and adopted the Net Asset Value (NAV) method, resulting in an addition of ?33,26,40,000. The CIT(A) held that preference shares are different from equity shares and should be valued based on the terms of issue, not the NAV method. The CIT(A) concluded that the Dividend Discount Method used by the Chartered Accountant was appropriate and in line with Rule 11UA of the Income Tax Rules. The Tribunal upheld the CIT(A)'s decision, stating that the AO's method was not permissible by law and the assessee's method was in accordance with the prescribed rules. 2. Deletion of Addition of Depreciation on Goodwill under Section 32(1)(ii): The AO denied depreciation on goodwill arising from an amalgamation, arguing that the goodwill was fictitious. The CIT(A) referred to the Supreme Court decision in CIT vs. Smifs Securities Ltd., which held that goodwill is an intangible asset eligible for depreciation under section 32(1)(ii). The CIT(A) found that the assessee had accounted for the amalgamation as per AS-14 and the goodwill was a result of excess liabilities over assets. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee was eligible for depreciation on goodwill. 3. Deletion of Addition under Section 56(2)(viia): The AO added ?41,94,79,280 under section 56(2)(viia), arguing that the assessee acquired shares of Impetus Healthserve Pvt. Ltd. at a consideration less than their fair market value. The CIT(A) held that the AO had used an incorrect valuation method applicable only from AY 2018-19 and not retrospectively. The correct method, as per Rule 11UA for AY 2015-16, was based on book value, not fair market value. The Tribunal upheld the CIT(A)'s decision, stating that the AO's method was not in accordance with the extant rules. 4. Deletion of Addition under Section 14A read with Rule 8D(2)(ii): The AO made a disallowance under section 14A for expenses related to exempt income. The CIT(A) found that the assessee had sufficient interest-free funds and referred to the Bombay High Court decisions in Reliance Utilities & Power Ltd. and HDFC Bank Ltd., which supported the assessee's case. The CIT(A) directed the AO to compute disallowance under Rule 8D(2)(iii) based on investments yielding exempt income. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order. 5. Disallowance Based on Directions under Section 144A: The assessee contended that disallowances were made based on directions under section 144A without providing an opportunity of being heard. The CIT(A) noted that the AO had issued show-cause notices and considered the assessee's submissions before making disallowances. Since no new additions were made based on the directions, the CIT(A) dismissed the ground. The Tribunal found the cross-objection to be academic as the issues had already been decided in favor of the assessee. Conclusion: The Tribunal dismissed the Revenue's appeal and held the assessee's cross-objection as infructuous, upholding the CIT(A)'s decisions on all issues.
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