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2018 (5) TMI 503 - AT - Income TaxTransfer of shares without adequate consideration - Addition made on account of excess share premium u/s. 56 - method adopted for determining the value of the shares - non following rule of consistency for the year under appeal - Held that - AO cannot adopt a method of his choice. In the case under consideration the whole controversy has arisen because of the AO has rejected the method adopted by the assessee. Considering the ratio of Taparia Tools (2015 (3) TMI 853 - SUPREME COURT), we hold that the AO had tampered with the provisions of the Act. Section 56 allows the assessee to adopt one of the methods of their choice. But, the AO held that the assessee should have adopted only one method for determining the value of the shares. In our opinion, it was beyond the jurisdiction of the AO to insist upon a particular system, especially the Act allows to choose one of the two methods. Until and unless the legislature amends the provision of the Act and prescribes only one method for valuation of the shares, the assessees are free to adopt any one of the methods. Therefore, in our opinion the order of the FAA does not suffer from any factual or legal infirmity. As in the earlier assessment year, the AO had, while completing scrutiny assessment, accepted the valuation of same shares at ₹ 25, 500/-. But, during the year under appeal why did he not follow the earlier year s order is not known. As per the basic principles of taxation, the AO s are not governed by the principles of res judicata and every assessment is a fresh assessment. But, it is also equally accepted that the AO s should not deviate from the earlier years decisions without assigning any concrete and justifiable reasons. Tax determination cannot be left to whims and fancies of a person. Thus AO should have given some reasons for not accepting the valuation for the year under consideration whereas for the earlier year he had accepted the valuation. It is a clear violation of principle of consistency. - Decided in favour of assessee Expenditure incurred for maintaining corporate entity - Disallowance as business expenses - as per AO assessee had not carried out any business activity for the year under appeal - Held that - While making the disallowance he forgot the basic fact that assessee is a corporate entity. For maintaining the corporate status assessee has two incur certain expenditure and same could not be disallowed in absence of earning profit in a particular year. There is no doubt that the assessee is a corporate entity. Even if it is not carrying on any business activity it has to incur some expenditure to keep up its corporate entity. Therefore expenditure incurred by it has to be allowed. See Preimus Investment And Finance Ltd 2015 (6) TMI 756 - ITAT MUMBAI - Decided in favour of assessee
Issues Involved:
1. Deleting the addition made on account of excess share premium under Section 56 of the Income Tax Act. 2. Deleting the disallowance of business expenses. Issue-wise Detailed Analysis: 1. Deleting the addition made on account of excess share premium under Section 56 of the Income Tax Act: The Assessing Officer (AO) challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the deletion of an addition of ?4.99 crores made under Section 56 of the Income Tax Act. The AO found that the assessee had issued 1941 equity shares to Shapoorji Palonji Ltd. (SPL) at a face value of ?10 and a premium of ?25,749 per share, resulting in a total share premium of ?4,99,99,733. The AO questioned the valuation method adopted by the assessee, which was the Discounted Cash Flow (DCF) method, and instead adopted the Net Asset Value (NAV) method, valuing each share at ?26.4. Consequently, the AO made an addition of ?4.99 crores to the assessee's income. The CIT(A) held that the Finance Act, 2012, inserted a new clause to Section 56, which allowed for the taxation of excess consideration received for the issue of shares by a closely held company with effect from AY 2013-14. The CIT(A) noted that the assessee had chosen one of the prescribed methods for calculating the Fair Market Value (FMV) of shares and that the AO should not deviate from the method selected by the assessee. The CIT(A) also observed that the AO had not followed the consistency of earlier assessment orders where similar issues had arisen and that the premium could not be termed excessive or unreasonable. The Tribunal agreed with the CIT(A), stating that the valuation method was at the discretion of the assessee as per Section 56(viib) and Rule 11UA(2)(b). The Tribunal cited the case of Medplus Health Services P. Ltd., which held that the AO could not adopt a method of his choice if the statute prescribed a particular method. The Tribunal also referred to the Supreme Court's decision in Taparia Tools Ltd., emphasizing that the AO should not tamper with the provisions of the Act and should follow the method chosen by the assessee. The Tribunal noted that the AO had accepted the DCF method in the earlier assessment year but deviated in the current year without providing concrete reasons, violating the principle of consistency. The Tribunal upheld the CIT(A)'s order, confirming that the AO had no right to deviate from the method selected by the assessee and that the addition of ?4.99 crores was unjustified. 2. Deleting the disallowance of business expenses: The AO disallowed business expenses amounting to ?2.44 lakhs, stating that the assessee had not carried out any business activity during the year under consideration. The CIT(A) reversed the AO's decision, holding that the AO was not justified in disallowing normal business expenses required for day-to-day activities. The CIT(A) referred to the case of Espeejay Builders P. Ltd., which supported the allowance of business expenses even if no profit was earned. The Tribunal agreed with the CIT(A), noting that the expenses were incurred to maintain the corporate entity as a going concern. The Tribunal cited cases such as Multi-Act Reality Private Ltd., Premiums Investment And Finance Ltd., and Rampur Timber and Turnery Co. Ltd., which supported the allowance of expenses necessary for maintaining the corporate status. The Tribunal emphasized that the AO should not disallow routine business expenses essential for running the business, even if no profit was earned in a particular year. The Tribunal upheld the CIT(A)'s order, confirming that the disallowance of ?2.44 lakhs was unjustified and that the expenses were necessary for maintaining the corporate entity. Conclusion: The Tribunal dismissed the AO's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal confirmed that the assessee had the right to choose the valuation method for shares and that the AO should not deviate from the method selected by the assessee. Additionally, the Tribunal held that routine business expenses necessary for maintaining the corporate entity should not be disallowed, even if no profit was earned in a particular year.
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