2019 (6) TMI 1174 - AT - Income Tax

Addition u/s 14A read with Rule 8D(2)(ii) and under rule 8D(2)(iii) - no exempt income is received or receivable during the relevant previous year - CIT(A) deleted the addition - HELD THAT - It is an admitted fact that the assessee company has not earned any dividend income during the year in respect of investments made as per the audited accounts. Since no exempt income earned by the assessee therefore there should not be any disallowance on account of section 14A. The said issue of the assessee is squarely covered in the case of CIT vs. Holcim India Pvt. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT wherein it was held that in the absence of any tax free income the corresponding expenditure could not be worked out for making disallowance u/s. 14A of the Income Tax Act 1961 In the case of Chemnivest vs. Commissioner of Income Tax-Vl 2015 (9) TMI 238 - DELHI HIGH COURT held that section 14A will not apply if no exempt income is received during the relevant previous year. Since the assessee does not have any exempt income therefore no disallowance is warranted. That being so we decline to interfere in the order passed by the Ld. CIT(A) his order on this issue is hereby upheld and grounds raised by the revenue is dismissed. Addition of income from other sources u/s 56(2)(viib) - allotment of shares at a price which exceeds fair market value of the share and thus violated the provisions of section 56(2)(viib) - HELD THAT - AO has observed that the assessee company has made allotment of 6, 19, 000 Equity Shares @ 42/- per share during the instant year at a price which exceeds fair market value of the share and thus the provisions of section 56(2)(viib) of the Act was violated. The fair market value on the basis of book value of company as on 31.03.2013 was calculated by ld. Assessing Officer at 25.55/- per share. Revaluation reserves need not be deducted while calculating the fair market value as per rule 11UA(2) of the I.T. Rules. Considering all no infirmity in the order passed by the CIT(A) hence we dismiss the ground raised by the revenue.

Summary

Issues Involved:
1. Disallowance under section 14A read with Rule 8D in the absence of exempt income.
2. Addition under section 56(2)(viib) for income from other sources due to the valuation of shares.

Issue 1: Disallowance under Section 14A read with Rule 8D

The Revenue appealed against the deletion of an addition of ?4,50,37,200/- under section 14A read with Rule 8D by the CIT(A). The Assessing Officer had made an addition based on the assessee's investments in shares and securities, despite no dividend income being earned. The CIT(A) deleted this addition, holding that in the absence of exempted income, expenditure under section 14A could not be disallowed.

The Revenue argued that the interest expenditure should be disallowed as it had no nexus with the business activity of the assessee, citing the case of CIT vs. RKBK Fiscal Services (P) Ltd. However, the CIT(A) and the Tribunal found that since no exempt income was earned by the assessee, disallowance under section 14A was not warranted. This position was supported by various judicial pronouncements, including the Hon'ble Delhi High Court in CIT vs. Holcim India Pvt. Ltd. and Chemnivest vs. Commissioner of Income Tax-VI, which held that in the absence of exempt income, no disallowance under section 14A could be made.

Issue 2: Addition under Section 56(2)(viib) for Income from Other Sources

The Revenue also contested the deletion of an addition of ?1,01,82,550/- made under section 56(2)(viib) by the CIT(A). The Assessing Officer had observed that the assessee allotted shares at a price exceeding the fair market value, thus violating section 56(2)(viib). The assessee argued that the fair market value should include the revaluation reserve, which the Assessing Officer had excluded.

The CIT(A) found that the Assessing Officer did not consider intangible assets such as goodwill and other business rights while determining the fair market value, as required under section 56(2)(viib). The CIT(A) held that these intangible assets should be included in the valuation, and thus, the addition made by the Assessing Officer was deleted.

The Tribunal upheld the CIT(A)'s decision, noting that revaluation reserves need not be deducted while calculating the fair market value as per Rule 11UA(2) of the Income Tax Rules. Consequently, the Tribunal dismissed the Revenue's grounds on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision on both issues. The disallowance under section 14A read with Rule 8D was not applicable in the absence of exempt income, and the addition under section 56(2)(viib) was deleted due to the proper inclusion of intangible assets in the valuation of shares.