Section 14A disallowance limited to actual exempt-income ; section 56(2)(viia) can still apply to amalgamation share receipts.

Section 14A disallowance was treated as limited to the expenditure actually incurred to earn exempt income, and the corresponding book-profit adjustment under section 115JB was sustained only to that extent because clause (f) of the Explanation covers expenditure relatable to exempt income. Section 56(2)(viia) was held applicable to shares received on amalgamation where unlisted shares are received for inadequate consideration, with the provision operating as a specific charging rule notwithstanding the general non-transfer character of amalgamation. The valuation and quantification issues were not finally determined and were remanded for fresh consideration under the prescribed valuation rules and the assessee's factual objections.

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Issues: (i) Whether the disallowance under section 14A could be restricted to the expenditure actually incurred for earning exempt income and whether the corresponding adjustment under section 115JB was sustainable; (ii) Whether section 56(2)(viia) applied to shares received pursuant to amalgamation and, if so, whether the matter relating to valuation and quantification required remand.

Issue (i): Whether the disallowance under section 14A could be restricted to the expenditure actually incurred for earning exempt income and whether the corresponding adjustment under section 115JB was sustainable.

Analysis: The disallowance under section 14A cannot exceed the expenditure actually incurred by the assessee for earning exempt income. The record showed that the assessee had already disallowed substantial expenditure on its own and the balance expenditure could be disallowed only to that extent. The adjustment to book profit under section 115JB followed the confirmed disallowance because clause (f) to the Explanation covers expenditure relatable to exempt income.

Conclusion: The restriction of the disallowance was upheld and the Revenue failed on this issue.

Issue (ii): Whether section 56(2)(viia) applied to shares received pursuant to amalgamation and, if so, whether the matter relating to valuation and quantification required remand.

Analysis: The receipt of shares by an amalgamated company falls within the charging language of section 56(2)(viia) when shares of an unlisted company are received for inadequate consideration. The proviso did not exclude section 47(vi), and the provision was treated as a specific charging provision overriding the general non-transfer character of amalgamation for this purpose. However, the appellate authority had not decided the assessee's valuation-related grounds on merits, so the quantification issue had to be reconsidered with reference to the prescribed valuation rules and the assessee's factual objections.

Conclusion: Section 56(2)(viia) was held applicable, and the valuation and related grounds were remanded for fresh adjudication.

Final Conclusion: The Revenue succeeded only on the applicability of section 56(2)(viia), while the disallowance under section 14A remained restricted; the dispute on valuation and computation was sent back for decision on merits.

Ratio Decidendi: A specific charging provision for receipt of unquoted shares for inadequate consideration can apply notwithstanding that the receipt arises in an amalgamation, unless the transaction is expressly excluded by the proviso, and a section 14A disallowance cannot exceed the actual expenditure relatable to exempt income.

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