2021 (11) TMI 565 - AT - Income Tax

Disallowance u/s 14A - Voluntary disallowance made by assessee - HELD THAT - It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. In view of the above judgment of M/s.Marg Limited 2020 (10) TMI 102 - MADRAS HIGH COURT it is clear that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is directed to restrict the disallowance u/s 14A to the amount of exempted income was earned on investment. Addition on account of share premium received u/s 56(2)(viib) - AO has expressed the view that the assessee has adopted market value for one asset and book value for remaining assets - According to AO, this kind of differential method is not permissible - HELD THAT - AO has omitted to consider the provisions applicable for quoted shares. Further, we notice that the AO has not referred to the date of Balance Sheet considered by him for determining the NAV, i.e., the date of Balance sheet is not discernible from the AO. We noticed that the valuer has considered the nearest available quarterly Balance Sheet for determining NAV. In effect, the AO has ignored the methodology prescribed in Rule 11UA for valuing quoted shares, which accounts for major difference in the valuation. Thus, the AO has misguided himself in determining the value under NAV method. Further, it is not discernible as to which Balance Sheet, the AO has referred for determining NAV. This is also lacunae in the computation made by the AO. We notice that the Ld DRP has also confirmed the draft assessment order passed by AO on this point without appreciating the above stated factual aspects. AO has not examined the DCF method of valuation submitted by the assessee and the value of shares determined by the AO under NAV also suffers from major defects. The reasoning given by the AO for rejecting DCF method of valuation would fall on the ground, since the NAV method adopted by the AO suffers from major defects. We notice that the AO has not appreciated the necessity of preparing two valuation reports and the AO has also omitted to consider the correct provisions of Rule 11UA. Hence, various faults found by the AO with regard to the valuation reports are liable to be rejected. This issue requires fresh examination at the end of AO. Accordingly, we restore this issue to the file of the AO for examining it afresh with the direction to examine the valuation reports furnished by the assessee in order to find out whether they have been prepared in accordance with Rule 11UA. If the AO could find fault in the methodology, he may put it across to the assessee and seek explanation. After considering the explanations and information that may be furnished by the assessee, the AO may take appropriate decision in accordance with law.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition on account of share premium received under Section 56(2)(viib) of the Income Tax Act.

Detailed Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act

The assessee, a private limited company, filed a return of income declaring a loss and made a voluntary disallowance under Section 14A of ?145,02,09,668. The assessee later revised the computation during the assessment proceedings, restricting the disallowance to the exempt income earned, which was ?27,37,47,187. The Assessing Officer (AO) relied on CBDT Circular No. 5/2014 and held that disallowance under Section 14A can be made even if no exempt income is earned during the year. The Dispute Resolution Panel (DRP) upheld the AO's decision, referencing the judgment of the Orissa High Court in Orissa Rural Housing Development Corporation Ltd. v. ACIT, which stated that errors can only be rectified through a revised return within the prescribed time limit under Section 139(5).

The Tribunal, however, cited multiple judicial pronouncements, including Joint Investments Pvt. Ltd. v. CIT and Daga Global Chemicals Pvt. Ltd. v. ACIT, which established that disallowance under Section 14A cannot exceed the amount of exempt income earned. The Tribunal also referred to the judgment of the Madras High Court in M/s. Marg Limited v. CIT, which reinforced that disallowance under Section 14A cannot exceed the exempt income, regardless of the amount voluntarily disallowed by the assessee in the return of income.

Conclusion:
The Tribunal directed the AO to restrict the disallowance under Section 14A to ?27,37,47,187, aligning with the exempt income earned during the relevant assessment year. The appeal on this ground was allowed.

Issue 2: Addition on account of share premium received under Section 56(2)(viib) of the Income Tax Act

The assessee issued shares and collected a premium of ?258,24,26,100. The valuation was based on the "Discount Cash Flow" (DCF) method and "Net Asset Value" (NAV) method. The AO found discrepancies in the valuation, particularly in the subsidiary company's value, and determined the share value using the NAV method, resulting in an addition of ?257,87,32,783 under Section 56(2)(viib). The DRP upheld the AO's decision, rejecting the differential valuation method used by the assessee.

The Tribunal noted that the AO did not examine the DCF method, which was primarily used by the assessee. The AO's valuation under the NAV method was flawed as it did not consider the correct provisions of Rule 11UA for valuing quoted shares and did not specify the Balance Sheet date used for NAV computation. The Tribunal found that the AO misguided himself in determining the value under the NAV method and failed to appreciate the necessity of preparing two valuation reports due to different issuance dates.

Conclusion:
The Tribunal restored the issue to the AO for a fresh examination, directing the AO to evaluate the valuation reports in accordance with Rule 11UA and to seek explanations from the assessee if any faults are found in the methodology. The appeal on this ground was partly allowed, with the issue remanded for re-examination.

Final Order:
The appeal filed by the assessee was partly allowed, with specific directions for the AO to re-examine the valuation reports and restrict the disallowance under Section 14A to the exempt income earned. The order was pronounced on October 28, 2021.