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2022 (9) TMI 877 - AT - Income TaxDisallowance u/s 14A - Expenditure on earning exempt income - HELD THAT - Hon'ble Delhi High Court in the case of Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT has considered the issue of disallowance u/s.14A when there is no exempt income and held that no disallowance u/s 14A could be made if no exempt income was earned by the assessee - we hold that no disallowance is warranted u/s 14A and delete the disallowance made in this regard. This ground is allowed in favour of assessee. Addition towards prior period items - AO therefore disallowed the same for the reason that it is not allowable being a prior period expenditure - CIT(Appeals) confirmed the disallowance by stating that the assessee has not brought anything on record to substantiate the claim that the expenses became crystallized during the year and that these expenses are project expenses is not supported by any evidence - HELD THAT - We notice that the AO has made the addition based on what is stated in the 3CD report and has not discussed about examine the nature of expenditure in the assessment order. CIT(Appeals) has also not considered the submissions of the assessee that the said expenditure is not debited to the P L a/c of the assessee, but upheld the addition based on what is stated by the auditors in Form 3CD - Key issue that needs to be verified with regard to the addition made towards project expenses is, whether the said expenditure is debited to the P L account as mentioned in Form 3CD or capitalized in work-in-progress account as contended by the assessee. We therefore remit this issue back to the AO to examine factually whether the project expenses are debited to the P L account or kept in work-in-progress based on evidence and decide the allowability accordingly. Needless to say that the assessee may be given opportunity of being heard. Addition u/s. 56(2)(vii) - addition under the head income from other sources - HELD THAT - For the purpose of arriving at the fair market value of unquoted shares, the book value of the assets should be considered as prescribed in Rule 11UA(1)(c)(b). We notice that the AO has relied on the valuation report given by the CA which is based on DCF method for making the addition in the hands of the assesse u/s. 56(2)(viia). DCF method is not the prescribed method of valuation in accordance with Rule 11UA for the purpose of section 56(2)(viia) and the Act provides a separate Rule i.e., Rule 11UA(1)(c)(b) for this purpose which is the fair market value. AO therefore should have computed the fair market value of the unquoted shares based on the method prescribed as per the above Rule and should have calculated the disallowance u/s. 56(2)(viia). We therefore remit the issue back to the AO to recomputed the value of the shares of M/s. Zebra Cross Resorts P. Ltd. and M/s. Waterline Hotels P. Ltd. and arrive at the addition, if any, warranted u/s. 56(2)(viia). The assessee is directed to provide the necessary information as may be required in this regard before the AO and cooperate with the proceedings. Appeal by the assessee is partly allowed.
Issues Involved:
1. Disallowance under Section 14A - Rs. 84,78,588. 2. Addition towards prior period items - Rs. 25,51,882. 3. Addition under Section 56(2)(vii) - Rs. 6,95,35,940. Detailed Analysis: Disallowance under Section 14A r.w.s Rule 8D: During the assessment proceedings, the AO noticed significant investments in equity shares and invoked Section 14A, computing a disallowance of Rs. 84,78,588 under Rule 8D(2)(ii) and Rule 8D(2)(iii). The assessee argued that no expenditure related to exempt income was debited to the P&L account and that investments were made from non-interest-bearing funds. However, the AO proceeded with the disallowance, which was upheld by the CIT(A) based on the decisions of the Karnataka High Court in Pradeep Kar and the Supreme Court in Maxopp Investments Ltd. Before the Tribunal, the assessee reiterated that no exempt income was offered to tax, relying on the Delhi High Court's decision in Era Infrastructure (India) Ltd., which held that no disallowance under Section 14A could be made if no exempt income was earned. The Tribunal noted that the amendment to Section 14A by the Finance Act 2022 is prospective and does not apply to the assessment year in question. Consequently, the Tribunal held that no disallowance is warranted under Section 14A and deleted the disallowance, allowing the ground in favor of the assessee. Addition towards Prior Period Items: The AO disallowed Rs. 25,51,882 shown as project expenses in the Form 3CD report, considering it a prior period expenditure. The CIT(A) confirmed the disallowance, stating that the assessee failed to substantiate that the expenses crystallized during the year. Before the Tribunal, the assessee contended that the expenditure related to a project and was capitalized in work-in-progress, not debited to the P&L account. The Tribunal observed that the AO and CIT(A) did not examine the nature of the expenditure or its treatment in the accounts. The issue was remitted back to the AO to verify whether the expenses were debited to the P&L account or capitalized in work-in-progress and decide accordingly, giving the assessee an opportunity to be heard. Addition under Section 56(2)(vii)(a): The AO noticed that the assessee purchased shares of two companies at prices lower than the market value, invoking Section 56(2)(viia) to make an addition of Rs. 6,95,35,940 under 'income from other sources'. The CIT(A) confirmed the addition. Before the Tribunal, the assessee argued that the only permissible method for determining FMV under Section 56(2)(viia) is the book value method prescribed in Rule 11UA(1)(c)(b), not the DCF method used by the AO. The Tribunal agreed that the AO should have used the book value method as per Rule 11UA(1)(c)(b) for computing FMV. The issue was remitted back to the AO to recompute the value of the shares based on the prescribed method and determine any addition warranted under Section 56(2)(viia). The assessee was directed to provide necessary information and cooperate with the proceedings. Conclusion: The appeal by the assessee was partly allowed. The Tribunal deleted the disallowance under Section 14A, remitted the issue of prior period expenses back to the AO for verification, and directed the AO to recompute the addition under Section 56(2)(viia) using the prescribed method.
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