TaxTMI 
TaxTMI 
2021 (11) TMI 565
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....nd in law, the Ld.AO pursuant to the directions of the Hon'ble DRP erred in sustaining the suo-moto disallowance made by the Appellant in its Return of Income u/s 14A, which, in the course of assessment proceedings, was inter alia sought to be restricted to the extent of dividend income. 2. He failed to appreciate and ought to have held that i. The assessing officer is duty bound to assess correct income irrespective of the income returned by the assessee; and ii. The Appellant had made a specific claim during the course of assessment that the suo moto disallowance u/s 14A be restricted to exempt income earned or be computed by considering only investments which have actually yielded exempt income. 3. The Appellant prays that the disallowance u/s 14A of the Act of Rs. 145,02,09,668/- be deleted or be appropriately reduced. Ground No.III : Addition on account of share premium received u/s 56(2)(viib) of Rs. 257,87,32,783/- 1. On the facts and in the circumstances of the case and in law, the Ld.AO pursuant to the directions of the Hon'ble DRP, erred in making an addition of Rs. 257.87 crores as excess share premium allegedly colle....
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.... u/s 14A of the I.T.Act is to be restricted to the exempted income earned for the relevant assessment year. The Assessing Officer by placing reliance on the CBDT Circular No.5/2014 dated 11.02.2014, held that even if there is no exempt income earned by the assessee during the year, disallowance u/s 14A can be made. Pursuant to the draft assessment order dated 28.12.2018, the assessee filed objections before the Dispute Resolution Panel (DRP). 3.1 The DRP vide its directions dated 30.09.2019, upheld the disallowance u/s 14A of the I.T.Act amounting to Rs. 145,02,09,668. The DRP by placing reliance on the judgment of the Hon'ble Orissa High Court in the case of Orissa Rural Housing Development Corporation Ltd. v. ACIT in Writ Petition (C) No.4554 of 2011, held that an error or omission can be rectified only filing a revised return within the prescribed time limit u/s 139(5) of the I.T.Act. Therefore, it was concluded by the DRP that the assessee is not entitled to raise such a claim before the Assessing Officer nor the Assessing Officer is empowered to entertain such claim. Pursuant to the DRP's direction, final assessment order was passed on 14.10.2019. 3.2. Aggrieved, the ass....
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.... of the Hon'ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41 (Kar.)]. In the case considered by the Hon'ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14A of the I.T.Act more than the dividend income earned and the Tribunal confirmed the disallowance made u/s 14A of the I.T.Act. However, the Hon'ble Madras High Court held that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year. The relevant finding of the Hon'ble Madras High Court reads as follow:- "20. Before parting, we may also note with reference to the Table of disallowance voluntarily made by the Assessee, which is part of the Paper Book before us for the four assessment years in question. In the Table quoted in the beginning of the order, shows that the Assessee himself computed and offered the disallowance beyond the exempted income in the particular year, namely AY 2009-10, as against the dividend income of Rs. 41,042/- and the Assessee himself computed disallowance under Rule 8D of the Rules to the extent of Rs. 2,38,575/-, which was increased to Rs. 98,16,104/- by....
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....he disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is directed to restrict the disallowance u/s 14A of the I.T.Act to Rs. 27,37,47,187. 3.8 In the result, ground No.II raised by the assessee is allowed. Ground No.III : Addition on account of share premium received u/s 56(2)(viib) of Rs. 257,87,32,783/- 4. During the relevant assessment year, the assessee-company had allotted 1,51,740 shares and 46,245 non CCD. The assessee had collected share premium of Rs. 258,24,26,100. The face value of each share is Rs. 10/-. The assessee stated that these shares have been issued based on the share valuation report obtained from a Chartered Accountant, who has valued the share by adopting "Discount Cash Flow" (DCF) method and also under "Net Asset Value" (NAV) method. During the course of assessment proceedings, the A.O. noticed that the value of shares adopted for the subsidiary company did not match with the Balance Sheet. Therefore, the AR was asked to submit the details of valuati....
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.... "........we are unable to accept the contentions of the assessee that in view of the provisions under section 56(2)(viib) of the Act read with Rule 11UA(2) of the Rules the Ld. AO had no jurisdiction to adopt a different method than the one adopted by the assessee, and if for any reason the AO has any doubt recording such valuation report and does not agree with the same is bound to make a reference to the Income tax Department Valuation Officer to determine the fair market value of such capital asset. This is so because unless and until the assessee produces the evidences to substantiate the basis of projections in cash flow And provides reasonable connectivity between those projections in cash flow with the reality evidences by the material, it is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the truth or otherwise the figures furnished by ....
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.... than ascertained liabilities; vi. any amount representing contingent liabilities other than arrears of dividends payable inrespect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; Particulars Amount in Rs. 1. Value of Asset 14959063000 Less Tax paid TDS, Adv. Tax 24005000 Less Differed expenses Add Refund 24005000 Total (A) 14935058000 Book value of liabilities 14959063000 Less Paid up capital in respect of equity shares 430202470 Less Reserve and surplus 387906000 Less Payment of dividend on preference share and/equity share 0 Less Provision and tax 9546000 Less Other provisions 83000 Less Contingent liabilities 0 827737470 Total (L) 14131325530 Paid up equity shar....
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....ss: advance tax etc. Advance tax -2.40 Prepaid exp -2.08 Loans to others (doubtful of recovery) -32.28 Advances to others (doubtful of recovery) -12.35 Doubtful receivables -20.00 -69.11 678.70 Total of Assets (A) 5,480.77 Liabilities: Total of liabilities(L) 1,491.68 (A)-(L) 3,989.09 Paid up equity share capital 3.02 Paid up value of such equity shares 10 Paid up equity share capital 30,20,247 Fair value per equity share 12,466 2,26,996 7.18 It will be seen from the above that when the consistent valuation method of book value is substituted then the share value stands at Rs. 2,26,996/-. However, there is nothing brought on record to evidence the fact that this value was the book value as on date of issue of shares. Further, it will be seen that the NAV arrived at as at 30.09.2014 stan....
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.....87crores as excess share premium allegedly collected in violation of the provisions of Section 56(2)(viib) of the Act. The Assessee objects to the proposed action of the AO mainly for the following amongst various reasons: Objection No. 3.2: The Ld. AO, has rejected the value of shares having regard only to the first limb of the clause (a) of the Explanation to section 56(2)(viib); completely ignoring the express provisions of the second limb which clearly provides that the assessee is entitled to value the shares having regard to the fair value of the assets on the date of issue of shares. Objection No. 3.3: Explanation (a)(ii) to section 56(2)(viib) prescribes that the fair market value ("FMV") of shares shall be the value as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. The assessee has substantiated the said value by a Valuation Report, which was done on the 'basis of the Fair m....
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.... 15th November, 2014. The same is placed at pages 447 to 455 of the paper book. This valuation report was obtained when the assessee has issued 151740 shares on rights basis to the existing shareholders. The shares were issued on rights basis on 27.11.2014 & 29-11-2014 at a premium of Rs. 13,190/- per share. Paragraph 4 of the valuation report discusses about the valuation methodology followed. The CA has determined the value under "Discounted Free Cash Flow Method (DCF) at Rs. 13,246/- per share. (b) Following observation made by the valuer is relevant here:- "As the Discounted Free Cash Flows are based on projections, we strongly believe that the same should be corroborated with another method of valuation, accordingly the fair value arrived under DFCF method is corroborated with valuation as per Net Asset Value Method." Thus, the valuer has primarily valued the shares under DCF method and corroborated the same under Net Asset Value (NAV) method. As per NAV method, the value of share was determined at Rs. 13,208/- per share. (c) It is pertinent to note that the NAV was arrived on the basis of value of assets as on 30-09-2014. Since the valuatio....
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....aluation reports. 4.5 We notice that the AO has expressed the view that the assessee has adopted market value for one asset and book value for remaining assets. According to AO, this kind of differential method is not permissible. We notice that the AO has also extracted Rule 11UA in the assessment order. However we notice that the AO has referred to the rules applicable to "unquoted shares", i.e., Rule 11UA(2). The determination of fair market value of "quoted shares" is governed by the provisions of Rule 11UA(1)(c)(a), which reads as under:- "c) valuation of shares and securities,- (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,- (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,- (a....