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2022 (8) TMI 795 - AT - Income TaxDisallowance u/s 14A - HELD THAT - We find that as the exempt income earned by assessee is merely ₹17,910/-, the disallowance u/s 14A cannot exceed the sum.CIT (A) allowed the relief to the assessee following the decision of Hon'ble Delhi High Court in case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT and CIT Vs. Cortech Energy P. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT . The learned Departmental Representative could not show us any infirmity in the appellate order. Accordingly, we confirm the order of the CIT (A) in restricting the disallowance u/s 14A of the Act to the extent of exempt income of ₹17910/-. Accordingly, the solitary ground of appeal of AO is dismissed. Addition u/s 56(2) (viib) regarding alleged excess share price received by the assessee - HELD THAT - In the present case, the assessee has worked out fair market value of the shares according to explanation (a) (ii) to section 56 (2)(viib) of the act. However, the learned assessing officer, in absence of proper justification by the assessee, could not verify the above valuation by assessee. Now assessee has tried to substantiate the same before us. In view of above additional evidences submitted by the assessee, we direct the assessee to justify the share valuation before the learned assessing officer as per explanation (a) (ii) of section 56 (2) (viib) - We direct the learned AO examine methodology of working adopted by the assessee by including market value of certain assets only to certain extent as well as the value of quoted equity shares at indicative market value but considering only part of such market value for the purpose of valuation. The above working given by the assessee is strange; as it is not of the date of on which the shares are issued and also it includes only part of the market value of some of the assets , at its own whims and fancies. Valuation needs to fulfill the criteria of satisfaction of the AO , therefore, it is prerogative of ld AO to apply his mind to it and then decide. If , the ld AO is not satisfied with such valuation , the only option left with ld AO is to value shares according to Rule 11 UA of The IT Rules, which ld AO has already done as per net assets value method, against which ld AR did not submit anything, should be upheld. Accordingly ground number 1 4 of the appeal of the assessee are restored back to the file of the learned assessing officer to decide the issue on the merits of the case on the basis of submission made by the assessee. Learned AO may also carry out such inquiries in accordance with the law, as he may deem fit. The assessee is also directed to justify the valuation supported by the proper documentation as well as any other information to justify share valuation. Disallowance of interest expenses - whether the amount of advances given by the assessee without charging any interest are having any nexus of non-interest-bearing funds obtained by the assessee? - HELD THAT - Claim of the assessee before the lower authorities was only that assessee has given the advances for the business consideration and also assessee has enough interest free funds available and therefore it is entitled to a presumption that the advances have been given out of those interest-free funds. Both these arguments before the lower authorities have been rejected by them for cogent reasons. The assessee does not have enough interest free funds available with it to have the benefit of presumption that advances given free of interest have emanated out of that. The claim of the advances given for the business purpose is also not repeated before us. Therefore, both these arguments have been correctly rejected by authorities. The onus is very heavy on the assessee to show that the amount of advances given by it does not have nexus with interest-bearing funds or mix funds. Here the assessee has stated that the advances have been given prior to the assessee of obtaining interest-bearing funds as loan. Further, the claim of the assessee is also that on some of the advances, interest has been charged. If the interest has been charged at the lower rate, even then disallowance deserves to be made o the extent of differential rate of interest. As this facts are not raised before ld AO CIT (A), same were not examined. As this are the factual examination, in the interest of justice, same needs to be remitted back to file of LD AO. Therefore, the ground number 5 6 are set-aside to the file of the learned assessing officer with a direction to the assessee to justify the claim with adequate evidences to the satisfaction of the assessing officer that non-interest-bearing funds have been utilized , or proper interest has been charged. The AO may examine the claim of the assessee and decide the issue afresh.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Addition under Section 56(2)(viib) of the Income Tax Act regarding the fair market value of shares. 3. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act. Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The learned Assessing Officer (AO) disallowed Rs. 3,46,18,729/- under Section 14A of the Act, invoking Rule 8D, on the grounds that the assessee earned exempt income of Rs. 17,910/- but did not disallow any expenses. The CIT(A) restricted this disallowance to the exempt income earned, Rs. 17,910/-, citing the decision of the Hon'ble Delhi High Court in Cheminvest Ltd. v. CIT and CIT Vs. Cortech Energy P. Ltd. The Tribunal upheld the CIT(A)'s decision, confirming that disallowance under Section 14A cannot exceed the exempt income earned. 2. Addition under Section 56(2)(viib) of the Income Tax Act: The AO added Rs. 1,93,38,298/- under Section 56(2)(viib) due to alleged excess share price received by the assessee, questioning the fair market value of shares issued at a premium. The CIT(A) confirmed this addition as the assessee failed to substantiate the valuation of shares. At the Tribunal, the assessee sought to admit additional evidence to justify the share valuation, which was initially omitted. The Tribunal admitted the additional evidence, noting its relevance for determining the fair market value. The Tribunal directed the AO to re-examine the share valuation methodology, considering the additional evidence and ensuring compliance with Rule 11UA of the Income Tax Rules. The issue was remanded back to the AO for a fresh decision based on the merits of the case. 3. Disallowance of Interest Expenses under Section 36(1)(iii) of the Income Tax Act: The AO disallowed Rs. 1,01,20,374/- of interest expenses, citing that the assessee advanced interest-free loans to related parties from interest-bearing funds. The CIT(A) upheld this disallowance, noting the substantial interest-bearing funds and lack of business expediency for the loans. The assessee argued that the advances were made from interest-free funds and claimed interest was charged on certain loans. The Tribunal found these arguments were not presented before the lower authorities. The Tribunal remitted the issue back to the AO to verify the nexus between the advances and non-interest-bearing funds, and to examine if proper interest was charged. The AO was directed to re-evaluate the claim with adequate evidence. Conclusion: - Appeal by the AO (ITA No. 1288/Mum/2019): Dismissed. - Appeal by the Assessee (ITA No. 1644/Mum/2019): Allowed for statistical purposes, with directions to the AO for re-examination of the issues on merits. Order Pronouncement: The order was pronounced in the open court on 17.08.2022.
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