2019 (12) TMI 1178 - AT - Income Tax

Tax Relief: ITAT Grants Partial Victory on Disallowances u/ss 14A and 56(2)(viia), Orders Reassessment.

The ITAT partially allowed the assessee's appeal and dismissed the revenue's appeal, granting relief on disallowances under Sections 14A and 56(2)(viia). ... Disallowance u/s 14A - investments which yielded exempt income - HELD THAT:- Considering the fact that the lower authority has considered all investments made by assessee for calculating average investment for disallowance u/r 8D(2)(iii), the Special Bench of Delhi Tribunal in Vireet Investments P Ltd [2017 (6) TMI 1124 - ITAT DELHI] held that only those investments which yielded exempt income should be considered for disallowance u/r 8D(2)(iii), we restore this part of ground to the file of AO to make fresh computation of average investments by taking into consideration only those investments which yielded the exempt income. Disallowance u/r 8D(2)(ii) - assessee vehemently argued that the disallowance in respect of net interest has to be made by taking into consideration only 3 investments which yielded dividend income during the year. We have noted that the assessee has raised this plea, for the first time before us and has strongly relied upon the decision of Mumbai Tribunal in Sajjan India Ltd vs ACIT [2017 (12) TMI 47 - ITAT MUMBAI] wherein it was held that mandate of Act is to tax real income and tax can only be levied under authority of law. Even if disallowance fall below disallowance u/s 14A offered by assessee in the return of income, revenue cannot charge tax on income, which never was income of assessee chargeable to tax. Therefore, we deem it appropriate to restore this part of disallowance u/r 8D(2)(ii) to the file of the AO to examine the issue afresh in the light of above referred decision and pass the order afresh in accordance with law. Disallowance u/s 56(2)(viia) - AO treated the investment in shares as income under section 56(2) (viia) - HELD THAT:- We have noted that the assessing officer during the assessment not provided the valuation (FMV) arrived by him to the assessee. During the first appellate stage the assessee furnished the working of the FMV of the shares of these two entities, however, the AO despite granting opportunity to file his remand report, not controverted the said valuation. The valuation furnished by the assessee is in accordance with Rule 11UA is also not disputed by AO. The values of shares as per valuation furnished by assessee are less than the consideration paid by the assessee for acquisition of shares. The ld. DR for the revenue failed to bring any fact or evidence to our notice to take other view. Thus, we do not find any infirmity in the order passed by ld. CIT (A) in deleting the addition qua the acquisition of shares of Shivalik Solid Waste management and Coimbatore Integrated Waste Management Pvt Ltd., which we affirm. In the result ground No.2 in revenue’s appeal is dismissed. Addition in respect of purchase of shares of ETL - CIT(A) sustained the addition of difference of FMV as per Rule 11UA. The ld. AR for the assessee vehemently argued that ETL is a closely held company and its shares are not readily available in the market for sale or trading and that the sale by Sidhi Samrat Dychem Pvt Ltd was a mode of exit from the agreement due to certain financial difficulties faced by Sidhi Samrat Dychem Pvt Ltd. No such evidence in the form of correspondence or any communication is brought on record by the assessee that Sidhi Samrat Dychem Pvt Ltd was facing financial difficulties, which may justify the action/ transaction with assessee. Hence, we do not find merit in the submissions of the ld. AR for the assessee. Alternative submission of the ld AR for the assessee that provisions of section 56(viia) are anti abuse and intended to prevent the practice or receiving property without consideration or for inadequate consideration, are concerned, the ld AR has strongly relied on the Circular No. 01/2011 dated 6th April 2011 issued by Central Board of Direct Tax (CBDT) and the decision of Tribunal in ACIT Vs Subhodh Menon (supra). The throughout the proceedings took the stand that the assessee that the transaction with ETL is bonafide transaction. We are also of the view that in absence of any imputation of any consideration over and above consideration was passed, the addition is not justified. As we have already noted that in absence of any imputation of any consideration over and above consideration was passed, the addition is not justified. The assessing officer has not made any investigation from ETL nor brought any adverse material on record against the assessee. Hence, we accept this submission of the ld. AR for the assessee and allow the ground of appeal raised by the assessee. Issues Involved:1. Disallowance under Section 14A as per Rule 8D of the Income-tax Rules.2. Disallowance under Section 56(2)(viia) in respect of investment in shares.Issue-wise Detailed Analysis:1. Disallowance under Section 14A as per Rule 8D of the Income-tax Rules:The assessee challenged the disallowance made by the Assessing Officer (AO) under Section 14A, arguing that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in confirming the disallowance to the extent of Rs. 2,25,86,138. The assessee contended that the CIT(A) did not follow the appellate order passed by the Income-tax Appellate Tribunal (ITAT) in the assessee's own case for previous assessment years and failed to appreciate that investments in subsidiaries/associate companies were made out of commercial expediency, not to earn dividend income. The assessee also argued that only investments which yielded exempt income should be included in the computation of disallowance under Rule 8D(2)(ii) and that disallowance should be restricted to the amount of exempt income earned.The AO did not accept the assessee's suo moto disallowance and invoked the provisions of Rule 8D, disallowing Rs. 2,76,75,760 under Rule 8D(2)(ii) and Rs. 41,06,584 under Rule 8D(2)(iii). The CIT(A) held that the AO considered the entire interest expenses for disallowance, but the net interest should have been considered after reducing the interest income. The ITAT restored the issue to the AO to make a fresh computation of average investments by considering only those investments which yielded exempt income and to examine the issue afresh regarding disallowance of net interest.2. Disallowance under Section 56(2)(viia) in respect of investment in shares:The AO treated the investment in shares as income under Section 56(2)(viia) amounting to Rs. 5,28,07,024. On appeal, the CIT(A) restricted the addition to Rs. 10,58,250 and deleted the remaining addition. The assessee challenged the addition upheld by the CIT(A), while the revenue challenged the deletion of the addition.The ITAT noted that the AO did not provide the working of the fair market value (FMV) of shares to the assessee. The CIT(A) accepted the assessee's valuation of shares as per Rule 11UA, which was not disputed by the AO. The ITAT affirmed the CIT(A)'s decision to delete the addition regarding the shares of Shivalik Solid Waste Management Ltd and Coimbatore Integrated Waste Management Pvt Ltd, as the valuation provided by the assessee was in accordance with Rule 11UA.Regarding the addition in respect of shares of Enviro Technology Ltd (ETL), the ITAT noted that ETL is a closely held company, and its shares are not readily available in the market for sale or trading. The ITAT accepted the assessee's submission that the transaction was bona fide and that the provisions of Section 56(2)(viia) should not apply to bona fide transactions. The ITAT allowed the assessee's appeal on this ground and dismissed the revenue's appeal.Conclusion:The ITAT partly allowed the assessee's appeal and dismissed the revenue's appeal, providing relief to the assessee on both grounds of disallowance under Section 14A and Section 56(2)(viia). The ITAT directed the AO to re-examine the disallowance under Section 14A and affirmed the CIT(A)'s decision regarding the deletion of addition under Section 56(2)(viia) for specific investments.