2025 (7) TMI 1576 - AT - Income Tax

Disallowance u/s 14A - claim of the assessee company that as it had not received any dividend income during the subject year - HELD THAT - Although we principally agree with the Ld. AR that in the absence of receipt of any exempt income during the subject year no disallowance under the pre-amended Section 14A of the Act could have been made by the A.O. but the fact that the assessee company has during the subject year not received any exempt income cannot safely be gathered from the record. Accordingly we herein set aside the matter to the file of the A.O. with a direction to verify the veracity of the aforesaid claim of the assessee company and if the same is found to be in order then delete the disallowance made by him u/s 14A of the Act. Though the legislature vide its amendment made available on the statute by the Finance Act 2022 has inserted an Explanation to Section 14A of the Act as per which notwithstanding anything to the contrary contained in the Act the provisions of Section 14A shall apply in a case where the income not forming part of the total income under the Act has not accrued or arisen or has not been received during the subject year and the expenditure has been incurred during the said previous year in relation to such exempt income but the same is effective from April 1 2022 and cannot be presumed to have retrospective effect. Our aforesaid view is fortified by the judgment of Era Infrastructure (India) Ltd 2022 (7) TMI 1093 - DELHI HIGH COURT and Keti Constructions 2024 (5) TMI 168 - MADHYA PRADESH HIGH COURT wherein it has been held that the amendment made available on the statute vide the Finance Act 2022 in Section 14A is effective from 01.04.2022 and cannot be permitted with retrospective effect. The Grounds of appeal Nos.3 and 4 are allowed for statistical purposes in terms of our aforesaid observations. Disallowance u/s 56(2)(viia) - shares received by way of fresh allotment as opposed to transfer - HELD THAT - Allotment indicates the creation of shares by appropriation out of the unappropriated share capital to a particular person and that such creation does not amount to transfer. We thus in the backdrop of the aforesaid settled position of law are of the firm conviction that the allotment of 3, 15, 00, 000 shares of M/s. Kineta Metals and Minerals Limited to the assessee company on 02.07.2012 (supra) i.e creation of shares by appropriation out of the unappropriated share capital cannot be brought within the meaning of receipt of shares which is a pre-condition for invoking the provisions of Section 56(2)(viia) of the Act. We further find that our aforesaid view that the provisions of Section 56(2)(viia) of the Act cannot be invoked regarding the fresh allotment of 3, 15, 00, 000 shares of M/s. Kineta Metals and Minerals Limited (supra) to the assessee company on 02.07.2012 is supported by the judgment of Pr. CIT Vs. Jigar Jashwantlal Shah 2023 (9) TMI 1162 - GUJARAT HIGH COURT Fresh allotment of shares is a mere creation of such shares which cannot be brought within the meaning of receipt of shares under Section 56(2)(viia) of the Act; read alongwith the Explanatory Notes to the Finance Bill 2010 (explaining the purpose and intent of inserting Section 56(2)(viia) of the Act) are of the firm conviction that the transaction of allotment of 3, 15, 00, 000 nos. of equity shares of M/s. Kineta Metals and Minerals Limited to the assessee company at a face value of Rs. 10/- per share will not be hit by the provisions of Section 56(2)(viia) of the Act. The Grounds of appeal partly allowed in terms of our aforesaid observations. Liability towards payment of interest u/s 234B and 234C - We are afraid that considering the judgment of Anjum M.H Ghaswala 2001 (10) TMI 4 - SUPREME COURT the same does not merit acceptance. At the same time as the redetermination of the interest liability of the assessee company under the aforesaid statutory provisions will be required to be done while giving effect to our aforesaid observations qua the issues involved in the present appeal therefore the A.O. is directed accordingly.

Summary

ISSUES:

Whether disallowance under Section 14A of the Income Tax Act, 1961 is justified in absence of exempt income during the relevant assessment year'Whether addition under Section 56(2)(viia) of the Income Tax Act, 1961 is applicable on shares received by way of fresh allotment as opposed to transfer'Whether an agreement entered into prior to the insertion of Section 56(2)(viia) (w.e.f. 01.06.2010) exempts the assessee from applicability of the said provision'Whether the computation of fair market value (FMV) of shares as per Rule 11UA is correct for the purpose of addition under Section 56(2)(viia)?Whether interest under Sections 234B and 234C of the Income Tax Act is payable when there is no additional tax liability determined?

RULINGS / HOLDINGS:

Disallowance under Section 14A cannot be made in the absence of receipt of any exempt income during the relevant year; the issue is remanded to the Assessing Officer (A.O.) to verify the claim of no exempt income. The Court relied on the Hon'ble Supreme Court ruling in CIT Vs. Chettinad Logistics (P) Ltd. and related authorities, emphasizing that "in the absence of receipt of any exempt income no disallowance under the pre-amended Section 14A of the Act could have been made".The provisions of Section 56(2)(viia) do not apply to shares received by way of fresh allotment since such allotment is a "creation" of shares and not a "transfer"; the shares must pre-exist for the section to apply. The Court referred to the Supreme Court decision in Khoday Distilleries Ltd. and the Hon'ble High Court of Gujarat's ruling in Pr. CIT Vs. Jigar Jashwantlal Shah, holding that "allotment of shares is creation of shares by appropriation out of the unappropriated share capital" and "allotment of new shares cannot be regarded as transfer of shares".The existence of an agreement prior to the insertion of Section 56(2)(viia) does not exempt the assessee from applicability of the provision, as the statute does not provide any such exception. The Court noted that "wherever the legislature has intended to provide for an exception where an 'agreement' was executed before the date of the subject transaction, the same has specifically been provided for as part of the said statutory provision itself", which is absent in Section 56(2)(viia).The computation of FMV of shares under Rule 11UA is accepted for the purpose of determining the value, but since the provision itself is not applicable on fresh allotment, the addition under Section 56(2)(viia) is not sustainable in this context.Interest under Sections 234B and 234C is payable as per settled law despite the assessee's contention, referencing the Supreme Court judgment in CIT Vs. Anjum M.H Ghaswala; however, the interest liability is to be redetermined after giving effect to the other observations in the appeal.

RATIONALE:

The Court applied the statutory framework of the Income Tax Act, 1961, particularly Sections 14A and 56(2)(viia), and relevant Rules (Rule 8D and Rule 11UA), along with judicial precedents including CIT Vs. Chettinad Logistics (P) Ltd., Khoday Distilleries Ltd. Vs. CIT, and Pr. CIT Vs. Jigar Jashwantlal Shah.Section 14A disallowance requires the presence of exempt income during the year; absence thereof precludes such disallowance, consistent with the pre-amended statutory position and Supreme Court rulings.Section 56(2)(viia) is an anti-abuse provision aimed at taxing receipt of shares without consideration or at less than FMV from any person, but only where shares pre-exist and are transferred; fresh allotment is a creation of shares, not a transfer, hence outside the scope of this section.The absence of a legislative exception for agreements predating the insertion of Section 56(2)(viia) indicates no exemption can be judicially read into the provision.The Court emphasized the importance of the legislative intent as explained in the Explanatory Notes to the Finance Bill, 2010, which clarify that Section 56(2)(viia) targets transfers and not fresh allotments.The Court acknowledged the binding nature of Supreme Court precedents and High Court rulings, and declined to extend the provision beyond its clear statutory contours.The issue of interest under Sections 234B and 234C was decided in accordance with settled Supreme Court authority, subject to recalculation after the final determination of tax liability.