2022 (9) TMI 651 - AT - Income Tax

ITAT Partially Rules in Favor of Assessee, Directs Reconsideration of Exemption Claim

The Income Tax Appellate Tribunal (ITAT) partially ruled in favor of the assessee. The ITAT directed the Assessing Officer (AO) to reconsider the denial ... Powers of ITAT in dealing with the claim otherwise than by revised return - whether claim not allowed in the assessment proceedings be allowed during the appellate proceedings? - Denial of claim of exemption u/s 10(38) as assessee did not claim deduction - HELD THAT:- We note that in the said order, Goetze (India) Ltd. [2006 (3) TMI 75 - SUPREME COURT] the Hon’ble Apex Court has expounded that the said decision would not impinge upon the powers of ITAT in dealing with the claim otherwise than by revised return. Accordingly, we direct the Assessing Officer to consider this issue and decide as per law. Addition invoking section 56(2)(vii)(a) - difference of share price and FMV as deemed income u/s 56(2)(viia) - Valuation of shares for the purpose of calculation of FMV as done by CA u/r 11UA(1)(e) on 10.09.2014 @ Rs. 103/- - HELD THAT:- Rules in this regard contained in section 11UA are already reproduced by us earlier. The same clearly provide for taking the book value of shares as in the balance sheet for the computation. The same was amended by the Income Tax Rules 2017 with effect from 1.4.2018 where instead of book value, fair market value of share is mentioned. The Act does not provide that this amendment is retrospective. It is clearly mentioned that this amendment is with effect from 1.4.2018. Hence, Assessing Officer's adoption of fair market value for making the computation which is not in accordance with the extant provisions has rightly been deleted by the learned CIT(A). It is not disputed that when the book value of the shares is adopted as per the extant rules the addition will not be justified. Hence, we do not find any infirmity in the same. We note that nothing has been brought before us by the revenue as to why the Assessing Officer has applied the same retrospectively - we agree with the submission of the ld. Counsel of the assessee and remit back the issue to the file of the AO to examine the issue on the basis of exposition in the case law pointed above. Needless to add, the assessee should be granted adequate opportunity of being heard. Disallowance of Processing fees under the head ‘Interest & Finance Costs’ - HELD THAT:- As assessee submitted that the revenue authorities have erred in disallowing the expenditure by holding that processing fee for purchase of capital asset is capital expenditure relied upon the decision of Hon’ble Supreme Court in the case of India Cements Ltd. [1965 (12) TMI 22 - SUPREME COURT] as expounded that loan is neither an asset nor any business advantage and that nature of expenditure incurred in raising a loan is not dependent upon nature and purpose of loan. Accordingly, we set-aside the order of authorities below and decide the issue in favour of the assessee. Allowability of loss - shares continue to be held as capital assets and have not been transferred during the year - whether diminution in the value of the investments can be claimed as revenue expenses? - HELD THAT:- Assessee’s justification regarding the allowability of this loss is without any basis whatsoever and is against the basic principles of accounting. As we find that authorities below are correct in holding that this claim of Bad Debts is not justified. Hence, we uphold the order of the ld. CIT(A). Appeal of the assessee is partly allowed for statistical purpose. Issues Involved:1. Denial of exemption claim under Section 10(38) of the Income Tax Act.2. Addition under Section 56(2)(vii)(a) of the Income Tax Act.3. Disallowance of processing fees as revenue expenditure.4. Disallowance of bad debt claim under Section 36(1)(vii) of the Income Tax Act.5. Levy of interest under Section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Denial of Exemption Claim under Section 10(38):The assessee claimed an exemption of Rs. 4,05,241/- under Section 10(38) for Long Term Capital Gain, which was denied by the Assessing Officer (AO) citing the Supreme Court judgment in Goetze (India) Ltd. vs. CIT. The CIT(A) upheld this decision. However, the ITAT noted that the Goetze (India) Ltd. decision does not restrict the powers of ITAT to entertain such claims. Therefore, the ITAT directed the AO to reconsider the issue according to the law.2. Addition under Section 56(2)(vii)(a):The AO added Rs. 2,87,80,000/- to the assessee's income, invoking Section 56(2)(vii)(a) due to discrepancies in the share purchase transactions. The AO noted that shares were purchased at rates lower than their Fair Market Value (FMV), calculated as per a valuation report. The CIT(A) upheld this addition, stating that the FMV should be determined according to Rule 11UA(1)(b) and not Rule 11UA(1)(c). The ITAT, referring to the decision in CIT vs M/s. Kilitch Healthcare India Ltd., remitted the issue back to the AO to re-examine the matter based on the correct legal exposition.3. Disallowance of Processing Fees:The AO disallowed Rs. 7,74,864/- claimed as processing fees for the purchase of business assets, treating it as capital expenditure. The CIT(A) upheld this decision. The ITAT, however, relied on the Supreme Court's decision in India Cements Ltd. vs CIT, which states that the nature of expenditure incurred in raising a loan is not dependent on the nature and purpose of the loan. Therefore, the ITAT set aside the order of the lower authorities and allowed the claim.4. Disallowance of Bad Debt Claim:The AO disallowed a bad debt claim of Rs. 3,40,313/- related to shares of M/s Crayons Advertising (Nepal) Pvt. Ltd., stating that the shares were still held as capital assets and not transferred. The CIT(A) upheld this decision. The ITAT agreed with the lower authorities, finding no mistake in their reasoning and upheld the disallowance.5. Levy of Interest under Section 234B:The issue of levy of interest under Section 234B was not separately discussed in detail in the judgment. The appeal on this ground was implicitly dismissed as the ITAT did not provide any relief on this issue.Conclusion:The ITAT provided partial relief to the assessee by directing the AO to reconsider the exemption claim under Section 10(38) and remitting the addition under Section 56(2)(vii)(a) for re-examination. The ITAT allowed the processing fees as revenue expenditure but upheld the disallowance of the bad debt claim. The appeal was partly allowed for statistical purposes.