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2013 (7) TMI 443 - AT - Income TaxDisallowance u/s 14A - Held that - With reference to investment in Integra Apparel & Textiles (P) Ltd., these amounts are out of advance received thus these amounts also do not call for any disallowance. The investment subsidiary Morarjee International Sri was made out of receipts from sales and further the dividend received from this company is taxable. Therefore, question of invoking section 14A does not arise. Apart from the above, assessee also had sufficient common funds as per the table extracted above so as to make investments in the group companies. Following the principles laid down in the case of Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - HIGH COURT BOMBAY) disallowance of proportionate interest under section 14A also does not arise on the facts of the case. Apart from that, as rightly held in the case of M/s. Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) application of Rule 8D cannot be made in this assessment year. Therefore, the disallowance made under section 14A by the AO and partly confirmed by the CIT(A) does not arise. However, as seen from the order of the AO in A.Y. 2004-05, consequent to the directions of the ITAT the AO disallowed an amount of ₹ 50,000/- as amount in relation to investment activities under section 14A. Therefore, on the facts of the case restrict the disallowance to a part of administrative expenses at ₹ 50,000/-, which is reasonable. Ground is partly allowed. Recalculating the long term capital gains in stead of long term capital loss - assessee purchased shares of its subsidiary & subsequently sold all the shares held as investment at loss - AO was of the opinion that the said sale of shares is not a genuine sale and disallowed the loss on the ground that sale is made to related parties to evade tax redetermining the sale price on the basis of (a) book value, (b) price as mentioned at d-mat Bank A/c of HDFC, and (c) yield method and arrived at an average sale price of ₹ 74.13 per share also invoking provisions of section 2(22B)(i) - Held that - It seems to be an error in mentioning the value as the said company is a private limited company and there cannot be any market value as it is not quoted in the Stock Exchange. Therefore, part of AO s finding about the value of demat statement is not correct. With reference to the future profit and also adoption of book value there is nothing brought on record by the AO how these amounts were arrived at. Therefore, unable to support the substitution of value even on facts. Be that as it may, first of all, the AO does not have power under the I.T. Act to substitute fair market value for full value of consideration . There are specific provisions for substitution of fair market value for full value of consideration like computation under section 50C and 50D at present but in the relevant assessment year, the AO has no power to adopt the fair market value in place of full value of consideration . This fair market value substitution is applicable only to the situation where the AO is empowered to determine the fair market value under the Act. As far as computation of capital gains on sale of shares are concerned under section 48 it does not empower the AO to substitute the fair market value for the full value of consideration. See CIT vs. George Henderson and Co. Ltd. 1967 (4) TMI 18 - SUPREME Court , CIT vs. Gillanders Arbuthnot & Co. 1972 (9) TMI 13 - SUPREME Court , K.P.Varghese vs. ITO 1981 (9) TMI 1 - SUPREME Court . Thus no hesitation in allowing the grounds raised by the assessee on the issue and direct the AO to adopt the full value of consideration as received by the assessee and to recompute the long term capital gains or losses accordingly. Adoption of value of shares of PMP Components Pvt. Ltd. - at ₹ 56.03 per share or ₹ 74.13 per share for the purpose of calculating Long Term Capital Gain - Held that - AO has no powers to substitute the value other than what the assessee has received as full value of consideration. In view of this the ground raised by the Revenue does not survive. Addition on account of forfeiture of shares made by the AO - CIT(A) deleted additions - Held that - the share application money was a capital receipt when it was received in the initial stage. The share application money was forfeited in order to restructure the capital of the company, then also the nature of the receipt cannot be changed from capital to revenue. It is not correct to say that all sorts of receipt are taxable in the hands of the assessee u/s. 56. Capital receipts are not taxable as Income from Other Sources. Since it is not an income or revenue receipt, section 28(iv) also is not applicable, as only revenue receipt can be taken as income u/s. 28(iv). It is also clear that forfeiture of share application money is not casual or non recurring receipt and hence not taxable u/s. 10(3). Thus since the amount is capital in nature the same cannot be brought to tax. In favour of assessee. Value of leasehold land received by the assessee company - CIT(A) deleted the addition - Held that - Receipt of leasehold land at Nil value is not an income u/s. 56(1) but a capital receipt in the hands of the assessee. The receipt is on account of leasehold land only as per tri-party agreement with MIDC and MLPL with the assessee. Hence, the nature of receipt is capital in nature and not taxable in the hands of the assessee. The A.O. is directed to delete this addition. Against revenue.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Re-determination of capital gains versus capital loss. 3. Substitution of fair market value for full value of consideration. 4. Addition on account of forfeiture of shares. 5. Addition of the value of leasehold land received. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: The assessee's appeal raised the issue of disallowance under Section 14A. The AO disallowed Rs. 32,00,358/- under Section 14A and Rs. 53,52,463/- under Section 36(1)(iii), concluding that borrowed funds were used for investments. The CIT(A) confirmed the disallowance, applying Rule 8D retrospectively. The assessee argued that Rule 8D was not approved for retrospective application by the jurisdictional High Court in the case of M/s. Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81. The tribunal found that the investments were made from borrowed funds on which no interest was paid and that the assessee had sufficient own funds. Following the principles in Reliance Utilities and Power Ltd., the tribunal restricted the disallowance under Section 14A to Rs. 50,000/- for administrative expenses, partly allowing the ground. 2. Re-determination of Capital Gains: The AO re-determined the sale price of shares, substituting it with the fair market value, resulting in a capital gain instead of the claimed capital loss. The CIT(A) upheld the AO's action but adjusted the value per share. The tribunal held that the AO does not have the power to substitute the fair market value for the full value of consideration received, citing Supreme Court decisions in CIT vs. George Henderson and Co. Ltd. and CIT vs. Gillanders Arbuthnot & Co. The tribunal directed the AO to adopt the full value of consideration as received by the assessee and recompute the capital gains or losses accordingly, allowing the assessee's ground. 3. Substitution of Fair Market Value: The AO substituted the fair market value for the full value of consideration received by the assessee in the sale of shares. The tribunal ruled that under the Income Tax Act, the AO does not have the authority to substitute the fair market value for the full value of consideration unless specifically empowered by the Act. The tribunal referred to various Supreme Court decisions and held that the AO's action was not justified. The tribunal directed the AO to adopt the full value of consideration as received by the assessee and recompute the capital gains or losses accordingly. 4. Addition on Account of Forfeiture of Shares: The AO treated the forfeiture of share application money as income from other sources under Section 56(1) and Section 28(iv). The CIT(A) deleted the addition, holding that the share application money was a capital receipt and its forfeiture did not change its nature from capital to revenue. The tribunal upheld the CIT(A)'s decision, agreeing that the amount was capital in nature and could not be taxed as income from other sources. 5. Addition of the Value of Leasehold Land Received: The AO added the value of leasehold land received by the assessee from an associate company at Nil value, treating it as income from other sources under Section 56(1). The CIT(A) deleted the addition, holding that the receipt of leasehold land was a capital receipt and not taxable as income from other sources. The tribunal upheld the CIT(A)'s decision, agreeing that the amount was on capital account and could not be treated as income from other sources. Conclusion: The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The tribunal provided detailed reasoning for each issue, emphasizing the distinction between capital and revenue receipts and the limitations on the AO's powers to substitute fair market value for full value of consideration. The tribunal's decisions were based on established legal principles and precedents from higher courts.
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