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TMI Blog2022 (9) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come was debited to the P&L Account and that the company has advanced money out of noninterest funds and hence disallowance u/s. 14A is not applicable. However, the AO proceeded to compute the disallowance u/s. 14A r.w. Rule 8D(2)(ii) and Rule 8D2(iii) and made a disallowance of Rs.84,78,588. Aggrieved, the assessee preferred an appeal before the CIT(Appeals). 5. Before the CIT(Appeals), the assessee submitted that the interest debited to the P&L account is attributable entirely towards the purpose of business of the assessee. The assessee further submitted that the entire investment is out of the internal approvals the break-up of which is as given below:- Particulars Amount (Rs.) Share Capital 17,19,00,000 Reserves & surplus 5,54,22,450 Advance received for properties 14,88,75,190 Security deposits 2,35,87,849 Loan from sister concerns 18,33,13,450 Total 57,30,98,939 6. The assessee therefore submitted that the interest free source is more than the investments made by the assessee and therefore no disallowance is warranted u/s. 14A. The CIT(A) rejected the submissions of the assessee and confirmed the disallowance made by the AO. The CIT(A) in this regard relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: "4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation would read: "Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India." The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:- "22. Second, a retrospective provision in a tax act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows : 17. As was affirmed by this Court in Goslino Mario [(2000) 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court in the case of Era Infrastructure India Ltd. (supra) 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. Prior period expenses 12. The AO noticed from the Form 3CD report of the assessee that an amount of Rs.25,51,882 is shown as project expenses debited to the P&L account which is relating to prior period. The AO therefore disallowed the same for the reason that it is not allowable being a prior period expenditure. 13. The 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. 14. Before us, the ld. AR submitted that the AO has made the addition merely based on the tax audit report but did not appreciate that the said expenditure is incurred in relation to one of the projects of the asse, a mall at Kamraj Road. The ld. AR also submitted that the details of such expenditure are already furnished before the AO which has not been considered by the AO. The ld AR further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emium Paid below the FMV Shortfall to be brought to tax 1 M/s Zebra Cross Resorts Pvt. Ltd AAACZ3383N 49930 10 448 190 258 1,28,81,940 2 M/s. Waterline Hotels Private Limited 13.00,000 10 208.58 165 43.58 5,66,54,000 Total 6,95,35,940 7.2 The assessee was asked to explain why the provisions of section 56(2)(viia) of the Income-tax Act, 1961 should not be attracted in its case and the shortfall in payment of premium to the FMV of the shares should not be brought to tax in its case under the head 'Income from Other Sources'. In the case of M/s. Waterline 14otels Private Limited, a valuation Report has been submitted by the said company to its jurisdictional Assessing Officer wherein the FMV of the equity shares have been determined at Rs. 208.58 per share whereas; the assessee company has paid a premium of Rs. 165/- per equity shares for 13,00,000 equity shares, shortfall amounting to Rs. 5,66,54,000/-. 7.3 In the case of M/s. Zebra Cross Resorts Private Limited, the assessee has paid Rs. 1,28,81,940 lower than the FMV for purchase of the shares as above. Therefore, in accordance with the provisions of Section 56(2)(viia) of the Income-tax Act the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);" Rule 11UA(1)(c)(b) "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- **** **** (c) valuation of shares and securities,- **** (b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market va ..... X X X X Extracts X X X X X X X X Extracts X X X X
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