TMI Blog2022 (9) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... sed about examine the nature of expenditure in the assessment order. CIT(Appeals) has also not considered the submissions of the assessee that the said expenditure is not debited to the P L a/c of the assessee, but upheld the addition based on what is stated by the auditors in Form 3CD - Key issue that needs to be verified with regard to the addition made towards project expenses is, whether the said expenditure is debited to the P L account as mentioned in Form 3CD or capitalized in work-in-progress account as contended by the assessee. We therefore remit this issue back to the AO to examine factually whether the project expenses are debited to the P L account or kept in work-in-progress based on evidence and decide the allowability accordingly. Needless to say that the assessee may be given opportunity of being heard. Addition u/s. 56(2)(vii) - addition under the head income from other sources - HELD THAT:- For the purpose of arriving at the fair market value of unquoted shares, the book value of the assets should be considered as prescribed in Rule 11UA(1)(c)(b). We notice that the AO has relied on the valuation report given by the CA which is based on DCF method for ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to exempt income was debited to the P L Account and that the company has advanced money out of noninterest funds and hence disallowance u/s. 14A is not applicable. However, the AO proceeded to compute the disallowance u/s. 14A r.w. Rule 8D(2)(ii) and Rule 8D2(iii) and made a disallowance of Rs.84,78,588. Aggrieved, the assessee preferred an appeal before the CIT(Appeals). 5. Before the CIT(Appeals), the assessee submitted that the interest debited to the P L account is attributable entirely towards the purpose of business of the assessee. The assessee further submitted that the entire investment is out of the internal approvals the break-up of which is as given below:- Particulars Amount (Rs.) Share Capital 17,19,00,000 Reserves surplus 5,54,22,450 Advance received for properties 14,88,75,190 Security deposits 2,35,87,849 Loan from sister concerns 18,33,13,450 Total 57,30,98,939 6. The assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment to section 14A and has held that the explanation inserted to section 14A vide Finance Act 2022 is prospective in nature. The relevant observations are reproduced here under 5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: 4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment years. 12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read: Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India. The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are it is declared or for the removal of doubts .' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:- 22. Second, a retrospective provision in a tax act which is for the removal of doubts cannot be presumed to be retrospective, even w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. Considering the fact that the assessee has not earned any exempt income during the year under consideration and respectfully following the decision of the Hon ble Delhi High Court in the case of Era Infrastructure India Ltd. (supra) we hold that no disallowance is warranted u/s.14A and delete the disallowance made in this regard. This ground is allowed in favour of assessee. Prior period expenses 12. The AO noticed from the Form 3CD report of the assessee that an amount of Rs.25,51,882 is shown as project expenses debited to the P L account which is relating to prior period. The AO therefore disallowed the same for the reason that it is not allowable being a prior period expenditure. 13. The CIT(Appeals) confirmed the disallowance by stating that the assessee has not brought anything on record to substantiate the claim that the expenses became crystallized during the year and that these expenses are project expenses is not supported by any evidence. 14. Before us, the ld. AR submitted that the AO has made the addition merely based on the tax audit report but did not appreciate that the said expenditure is incurred in relation to one of the projects of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has purchased shares at a price lower than the market value of the shares as under: Sl. Name of the company PAN No. of Shares Face Value Premium As per Market Value Premium Paid Premium Paid below the FMV Shortfall to be brought to tax 1 M/s Zebra Cross Resorts Pvt. Ltd AAACZ3383N 49930 10 448 190 258 1,28,81,940 2 M/s. Waterline Hotels Private Limited 13.00,000 10 208.58 165 43.58 5,66,54,000 Total 6,95,35,940 7.2 The assessee was asked to explain why the provisions of section 56(2)(viia) of the Income-tax Act, 1961 should not be attracted in its case and the shortfall in payment of premium to the FMV of the shares should not be brought to tax in its case under the head 'Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely :- **** ***** (viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010 but before the 1st day of April, 2017, any property, being shares of a company not being a company in which the public are substantially interested,- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause, fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (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 in respect of cumulative preference shares; PV= the paid up value of such equity shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; ] 21. A combined reading of the section and the relevant rules makes it clear that for the purpose of arriving at the fair market value of unquoted shares, the book value of the assets should be considered as prescribed in Rule 11UA(1)(c)(b). We notice that the AO has relied on the valuation report given by the CA which is based on DCF method for making the addition in the hands of the assesse u/s. 56(2)(viia). The DCF method is not the prescribed method of valuation in accordance with Rule 11UA for the purpose of section 56(2)(viia) and the Act provides a separate Rule i.e., Rule 11UA(1)(c)(b) for this purpose which is the fair market value. The AO therefore should have computed the fair market value of the unquoted shares based on the method prescribed as per the above Rule and should have cal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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