GMR Enterprises Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Facts-
The appellant has claimed that the suo moto disallowance under section 14A should be restricted to exempt income earned for the relevant assessment year.
The appellant collected share premium of INR 2,58,24,26,100. During the assessment proceedings, AO noticed that the value of share adopted for the subsidiary company didn’t match with the balance sheet. AO made addition of INR 2,57,87,32,783 u/s 56(2)(viib) of IT Act.
Conclusion-
It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. Accordingly, the amount of disallowance u/s 14A of the IT Act needs to be restricted to the extent of exempted income earned during the relevant assessment year.
In view of the judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT (supra), it is clear that the disallowance u/s 14A of the I.T. Act cannot exceed the exempt income earned during the relevant assessment year.
We notice that the AO has not appreciated the necessity of preparing two valuation reports and the AO has also omitted to consider the correct provisions of Rule 11UA. Hence, various faults found by the AO with regard to the valuation reports are liable to be rejected. Under these set of facts, we are of the view that this issue requires fresh examination at the end of AO.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against final assessment order dated 14.10.20199 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2015-2016.
2. The assessee has raised five grounds and various sub grounds. The assessee by its application dated 13.07.2020 has also raised an additional ground. The learned AR during the course of hearing submitted that grounds No.II and III may be adjudicated and the other grounds may be left open. Therefore, grounds No.II and III are reproduced below:-
“Ground No.II : Disallowance u/s 14A of the Act amounting to Rs.145,02,09,668/-:
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 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 collected in violation of the provisions of section 56(2)(viib) of the Act on the basis of several factual inconsistencies and infirmities including errors in calculation.
2. He failed to appreciate and ought to have held:
a) The assessee is entitled to value the shares having regard to Explanation (a)(ii) to section 56(2)(viib) which 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;
b) When the legislature provides option for valuation of shares u/s 56(2)(viib) under three different methods, the AO cannot impose a particular method on the assessee;
c) If the AO was not satisfied with the valuation reports furnished by the assessee, he ought to have referred the same to the Valuation Officer as per the provisions of section 142A of the Act; and
d) Section 56(2)(viib) of the Act being an anti-avoidance provision introduced with the intention of deterring generation and use of unaccounted money, would not apply to cases where the issue of shares is to the existing shareholders on proportionate basis or genuine cases.
4. The Appellant prays that the addition made on account of share premium received u/s 56(2)(viib) of the Act be deleted or be appropriately reduced.”
We shall adjudicate the above grounds as under:
Ground No.II : Disallowance u/s 14A of the Act amounting to Rs.145,02,09,668/-:
3. The assessee is a private limited company. For the assessment year, the return of income was filed on 28.11.2015 declaring loss of Rs.50,95,80,349 and book profit loss of Rs.45,82,24,981. In the return of income the assessee had made voluntary disallowance u/s 14A of the I.T.Act of Rs.145,02,09,668. The assessee during the relevant assessment year had received exempted income of Rs.27,37,47,187. The assessee filed revised computation of income during the course of assessment proceedings. In the revised computation, the assessee had restricted the disallowance u/s 14A of the I.T.Act to the exempted income earned of Rs.27,37,47,187 for the relevant assessment year. The assessee during the course of assessment proceedings, by placing reliance on various judicial pronouncements (refer para 5.5 of the draft assessment order) submitted that the disallowance 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 assessee has raised this issue before the Tribunal. The learned AR reiterated the submissions made before the Income Tax Authorities and also placed reliance on the order of the Tribunal in assessee’s own case for assessment years 2010-2011, 2011-2012 and 2013-2014 in ITA Nos.2145, 2146 & 2148/Bang/2016 (order dated 08.02.2019).
3.3 The learned Departmental Representative, on the other hand, submitted that the assessee had voluntarily made the disallowance u/s 14A of the I.T.Act amounting to Rs.145,02,09,668 and hence, was precluded from changing its stand and seeking the reduced of disallowance u/s 14A of the I.T.Act to Rs.27,37,47,187.
3.4 We have heard rival submissions and perused the material on record. It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. In this context, the following judicial pronouncements support the stand of the assessee:-
(i) Joint Investments Pvt. Ltd. v. CIT (59 com 295) – it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income.
(ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRV-ITAT-MUM-123) – has held that disallowance u/s 14A r.w.Rule 8D cannot exceed the exempt income.
(iii) M/s.Pinnacle Brocom Pvt. Ltd. v.ACIT (ITA No.6247/M/2012) – has held that disallowance u/s 14A cannot exceed the exempt income.
(iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) – held that the disallowance u/s 14A of the Act cannot exceed the exempt income.
3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187.
3.6 However, in this case, the assessee had made disallowance of Rs.145,02,09,668 voluntarily while filing the return of income. In this context, it is important to refer to the judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT in Tax Case Appeal Nos.41 to 43 & 220 of 2017 (judgment dated 30.09.2020). The Hon’ble Madras High Court followed the judgment 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 the Assessing Authority. Similarly, for AY 2012-13, against Nil dividend income, the Assessee himself computed disallowance at Rs.8,50,000/-, which was increased to Rs.2,61,96,790/-.
21. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank(2018) 95 com 41 (Kar.) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard.
22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income Tax Rules, 1962.”
(underlining supplied)
3.7 In view of the above judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT (supra), it is clear that the 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 valuation of the shares issued and justify why the share premium received should not be taxed under income from other sources, in view of section 56(2)(viib) of the I.T. Act. The assessee filed written submissions on 13.12.2018 submitting the details and stated that shares issued during the year have been valued under DCF method and Net Asset Value method. The A.O. was of the view that the assessee cannot pick and chose with regard to valuation of certain assets. It was stated by the A.O. that for certain assets the assessee was valuing at market value and certain others at book value. It is further held by the AO that the assessee could take an asset which has diminished at book value and still seek a premium while it could also avail of the appreciation in other assets. The A.O. rejected the contentions of the assessee. The A.O. valued the share adopting Net Asset Value (NAV). The A.O. made an addition of Rs.257,87,32,783 u/s 56(2)(viib) of the I.T.Act. The relevant findings of the A.O. in this regard reads as follow:-
“7.14 As discussed in para 3.4 above the assessee company has to substantiate the share valuation value even under the Prescribed method mentioned under rule 11U and 11UA “to establish bv proof or competent evidence which is “reasonably satisfied by the assessing officer with material or evidence produced objectively substantiates the value. In the present case the assessee company has failed to substantiate the valuation withproper materialistic evidences of cash flow projected by the company in the share valuation report. In the case of M/s Medplus Health Services Pvt Ltd Vs ITO the ITAT Hyderabad (2016 TaxPub(DT) 1326 (Hyd-Trib) :(2016) 158 ITD 0105 :(2016) 048 ITR (Trib) 0396] stated that if
“The assessing officer however, was not convinced with the assessee’s contentions and held that the ‘market value’ mentioned in the rule means “price which it would have fetched if sold in the open market. He observed that the valuation of any property is based on the fact as to what value the property would fetch if sold in the open market. Further if AO is not satisfied with working of the assessee, he ought to have computed the FMV himself in the method prescribed under the rule”. Also the Hon’ble ITAT, Delhi Bench “A” in the case of Agro Portfolio (p.) Ltd vs. Income Tax Officer, Ward -1(4], New Delhi has held that,
“……. 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 the assessee at least on test basis. The merchant bankers solely relied upon an assumed without independent verification, the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying The formula to the data provided by the assessee. We, therefore, are unable to brush aside thecontention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre-determined conclusions .”
As in the present case also the assessing officer not satisfied with the valuation of the share and further assessing officer calculated as below the share value based on the Net Asset Method second method mention in Income tax rules. The detail calculation/working under Net Asset Value method is as under:
The Fair Market Value as per Rule 11 UA would be: [(A-L) /(PE)] x (PV)
Where, —
A= book value of the assets in the balance-sheet as reduced by any amount of tax paid asdeduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortized amount of deferred expenditure which does not represent the value of any asset;
L= book value of liabilities shown in the balance-sheet, but not including the following amounts, namely: —
i. the paid-up capital in respect of equity shares;
ii. the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
iii. reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
iv. any amount representing provision for taxation, other than amount of tax paid as deductionor collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
v.any amount representing provisions made for meeting liabilities, other 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;
