2020 (6) TMI 318 - AT - Income Tax

Computation of lease rental - addition of notional rent on the plant and machinery leased to sister concerns - Addition on this basis that fair market value (FMV) of lease rental is 8% of WDV plus interest expense and depreciation as per Income Tax Act - HELD THAT - As decided in HIGHWAYS CONSTRUCTION CO. PVT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1992 (11) TMI 86 - GAUHATI HIGH COURT it comes out that in a case where the income is not actually received by the assessee and it has not accrued to the assessee then under no provisions of Income Tax Act the income tax authorities are authorized to include such income which was neither due nor collected. In the present case also this is not the case of the AO that higher amount of lease rental was received by the assessee or it has accrued to the assessee and therefore in our considered opinion this judgment of Hon ble Gauhati High Court is squarely applicable in the present case. - Additions deleted. Addition by invoking the provisions of section 56(2)(viib) - assessee has obtained valuation report of Shri. P. Chandrasekhar Chartered Accountant where the value of the shares of the assessee company was recommended at Rs. 527/- per share as per DCF method but the AO adopted FMV method and made this addition - HELD THAT - In the present case we prefer to follow the judgment of Hon ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. Vs. Pr. CIT 2018 (3) TMI 530 - BOMBAY HIGH COURT in preference to the judgment of the Hon ble Kerala High Court cited by DR of the Revenue rendered in the case of Sunrise Academy of Medical Specialities (India) (P.) Ltd. Vs. ITO 2018 (8) TMI 203 - KERALA HIGH COURT because this is settled position of law by now that if two views are possible then the view favourable to the assessee should be adopted and with regard to various Tribunal orders cited by learned DR of the Revenue which are against the assessee we hold that because we are following a judgment of Hon ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. Vs. Pr. CIT (supra) these tribunal orders are not relevant. In the case of Innoviti Payment Solutions Pvt. Ltd. Vs. ITO 2019 (1) TMI 688 - ITAT BANGALORE this judgment of Hon ble Bombay High Court was followed and the matter was restored back to the file of AO for a fresh decision with a direction that AO should follow DCF method only and he cannot change the method opted by the assessee as has been held by the Hon ble Bombay High Court. Disallowance u/s 14A - as per assessee there is no exempt income earned by the assessee - HELD THAT - Computation of Income is not filed before us and the assessee has earned in the present year Rs. 58, 88, 121/- as profit on sale of investments (Net) and a part of it might have been claimed by the assessee as exempt income we feel it proper to restore this matter back to CIT(A) for a fresh decision after finding out this as to whether the assessee has earned any exempt income in the present year and by restricting the disallowance u/s 14A to the extent of such exempt income earned by the assessee in the present year in line with the judgment of Hon ble Delhi High Court rendered in the case of Cheminvest Ltd. Vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT - Ground No.4 of the assessee s appeal is allowed for statistical purposes. Disallowance of share issue expenses - revenue or capital expenditure - HELD THAT - Even if the fresh share capital is to meet working capital needs then also the nature of expenses remains same and hence the entire amount of such expenses is to be considered as capital expenditure as has been held by Hon ble Apex Court in these two judgments having been rendered in the case of Brooke Bond India Limited Vs. CIT 1997 (2) TMI 11 - SUPREME COURT and PSIDC Ltd. 1996 (12) TMI 6 - SUPREME COURT .

Summary

Issues Involved:
1. Notional Lease Rent
2. Addition under Section 56(2)(viib)
3. Disallowance under Section 14A
4. Disallowance of Share Issue Expenses

Issue-wise Detailed Analysis:

1. Notional Lease Rent:
- Assessment Year 2015-16: The assessee contested the addition of Rs. 2,36,67,539 on a notional basis for lease rent on plant and machinery leased to sister concerns. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this addition, stating that the lease rent charged was not at fair market value (FMV). The Income Tax Appellate Tribunal (ITAT) found that the CIT(A) based the FMV on 8% of the written down value (WDV) plus interest and depreciation. The ITAT referenced the Gauhati High Court judgment in Highway Construction Co. Pvt. Ltd. v. CIT, which held that income not actually received or accrued cannot be taxed. Thus, the ITAT ruled in favor of the assessee, allowing the appeal on this ground.
- Assessment Year 2016-17: Similar grounds were raised for the addition of Rs. 1,43,79,651. The ITAT applied the same reasoning as for the previous year and ruled in favor of the assessee, allowing the appeal on this ground.

2. Addition under Section 56(2)(viib):
- Assessment Year 2015-16: The assessee challenged the addition of Rs. 14,04,84,895, arguing that the Assessing Officer (AO) wrongly rejected the Discounted Cash Flow (DCF) method of valuation in favor of the Net Asset Value (NAV) method. The ITAT referenced the judgment of the Bombay High Court in Vodafone M-Pesa Ltd. v. Pr. CIT, which upheld the DCF method if chosen by the assessee. The ITAT restored the matter to the AO for a fresh decision, directing the AO to scrutinize the valuation report based on the DCF method only.
- Assessment Year 2016-17: The assessee raised similar grounds for the addition of Rs. 23,92,68,988. The ITAT followed the same reasoning as for the previous year, restoring the matter to the AO for a fresh decision based on the DCF method.

3. Disallowance under Section 14A:
- Assessment Year 2015-16: The assessee contested the disallowance of Rs. 66,65,268 under Section 14A, arguing no expenditure was incurred for earning exempt income. The ITAT noted the absence of exempt income in the present year and restored the matter to the CIT(A) for fresh decision, directing to restrict disallowance to the extent of exempt income, if any, in line with the Delhi High Court judgment in Cheminvest Ltd. v. CIT.
- Assessment Year 2016-17: This issue was not raised for this year.

4. Disallowance of Share Issue Expenses:
- Assessment Year 2016-17: The assessee challenged the disallowance of Rs. 1,25,09,633 as share issue expenses, arguing it should qualify for deduction under Section 35D or Section 37(1). The CIT(A) followed the Supreme Court judgments in Brooke Bond India Limited v. CIT and PSIDC Ltd. v. CIT, disallowing the expenses as capital expenditure. The ITAT upheld this decision, finding no merit in the assessee's contentions and rejecting the appeal on this ground.

Combined Result:
- Assessment Year 2015-16: The appeal was allowed in favor of the assessee.
- Assessment Year 2016-17: The appeal was partly allowed.
- Stay Petitions: Both were dismissed as infructuous due to the decision of the appeals.