M/S ABHINAV INTERNATIONAL PVT. LTD.,,NEW DELHI vs. DCIT, NEW DELHI

The grounds of appeal are as under:-

The assessee company is engaged in the business of investment in shares. Return of income was filed on 8/9/2013 declaring a loss of Rs. 1,17,70,956/-. Assessment u/s 143(3) was made on 19/2/2016 determining total income at Rs. 32,44,078/- in the assessment order. The Assessing Officer disallowed expenses pertaining to earning exempt income of Rs. 21,33,361/-. The Assessing Officer also disallowed interest and loan processing charges for diversion of interest bearing funds to the sister concerns to the extent of Rs. 60,72,432/-. The Assessing Officer also added Rs. 34,38,000/- on account of excess premium received on sale of shares to Shoveller Infra Commission Ltd.

Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A) and CIT(A) partly allowed the appeal of the assessee.

As regards Ground No. 1 relating to disallowance u/s 14A read with Rule 8D(2)(iii) of expenditure of Rs. 2,97,725/- on account of exempt income, the Ld. AR submitted that under Rule 8D (2)(ii) of Income Tax Rules, 1962, Assessing Officer can disallow interest paid on borrowed capital to the extent if that borrowed sum is used for the buying of tax free investment. The assessee did not purchase any tax free investment during the year under consideration. Besides this, the assessee took loan from Tata Financial Services Ltd. as on 31.03.2012 on which the assessee had paid interest during the year. The assessee as on 01.04.2012 had shareholder’s fund Rs. 5,94,09,786.96 as well as interest free borrowing from Directors and Associate concerns amounting to Rs. 97,25,000/- and value of investment on that date was Rs. 6,70,45,064.23/-. The Ld. AR further submitted that the assessee never used interest bearing borrowed money for purchase of investment. The Assessing Officer ignored this fact while making addition u/s 14A, the assessee used his own money to buy investment. The Ld. AR further submitted that the assessee

The Ld. DR relied upon the assessment order and the order of the CIT(A).

We have heard both the parties and perused the material available on record. During the year the assessee received dividend income of Rs. 54,84,142/-. The assessee made investment of Rs. 22,00,000/- in the shares of Glofin Investment & Finance of Rs. 22,00,000/- and other investments were made in earlier years. The assessee paid interest of Rs. 35,26,028/- for the loans taken by it from Tata Capital Finance Services as on 31.12.2012. Thus there is no correlation between the investment made in the shares of other company with the borrowing of funds during the year. Hence, the CIT(A) rightly held that interest disallowed has to be restricted to the extent of funds invested

As regards to Ground No. 2 relating to wrongly enhancing the disallowance made by the Assessing Officer u/s 36(1)(iii) of the Income Tax Act, 1961 of Rs. 79,08,068/- on account of interest paid for money borrowed, the Ld. AR submitted that the assessee had borrowed Rs. 13,00,00,000/- from Tata Capital Finance Services Limited on 31.12.2012. To avail loan, the assessee paid Rs. 43,82,040/- to Tata Capital Finance Services Limited as processing charges and deducted & deposited TDS on the amount of processing charges. The Assessee gave this borrowed fund to its sister/associates concerns as interest free advance as under: i) Hanung Infra & Power Ltd. Rs. 5,00,00,000/- ii) C K Software Pvt. Ltd. Rs. 5,00,00,000/- iii) Glofin Investment Pvt. Ltd. Rs. 2,60,00,000/- TOTAL Rs.12,60,00,000/- There is stipulated condition in the Terms and Conditions of Loan agreement under the head ‘purpose of loan facility’ that loan fund to be utilized to infuse funds into subsidiaries/JVs and for equity infusion. Further these aforementioned sister/associates concerns invested this borrowed fund in another associate/sister concern Hanung Toys & Textiles Ltd. (a listed company) as a fresh allotment of equity shares. The Ld. AR relied upon the

The Ld. DR relied upon the assessment order and the order of the CIT(A).

We have heard both the parties and perused the material available on record. From the perusal of the facts, it can be seen that the loan was taken for the purpose of ‘equity infusion’ in the associate concerns. Since, the entire fund was diverted for equity infusion in the associate concerns, the Assessing Officer held that the funds borrowed were not utilized for business purposes. Hence, interest expenditure and other associate expenditure were not incurred wholly and exclusively for business purposes. The reliance of the decision of the Hon’ble Supreme Court in case of Hero Cycles (P) Ltd. vs. CIT (2015) 379 ITR 347 (SC) will not be applicable in the present case as advance to subsidiary company became imperative as a business expediency in view of undertaking given to financial institutions by assessee to effect that it would provide additional margin to subsidiary company to meet working capital for meeting any cash losses. But in the present case, funds were specifically borrowed for infusion of equity in the associate concerns which is totally different aspect from the case of Hero Cycles (Supra). Hence the CIT(A) rightly confirmed the addition. Ground No. 2 is dismissed.

As regards to Ground No. 3 against the order of the CIT (A) in upholding the disallowance/addition made by the Assessing Officer under section 56 (2) (viiib) of the act of ₹ 34,38,000/- on account of valuation of premium received on issue of shares. The fact shows that Assessee Company had allotted 90,000 shares of ₹ 10 each to Messer Shoveller Infracon limited at the premium of Rs 40/- per share. The total shares allotment made by the assessee company amounts to Rs. 4500000/–. The Assessing Officer asked the assessee to file valuation report in support of the share premium charged by the assessee with

The assessee approached the CIT (A) submitting that the fair market value of the share can be substantiated by the company to the satisfaction of the assessing officer, based on the value on the date of the issue of shares of its assets, which is higher than the value which is derived in accordance with the valuation rules, therefore, the higher value should be accepted. The CIT(A) also rejected the argument of the assessee stating that assessee has not given any material in support of its claim as to how the book value of the share has been worked out at ₹ 71.04 per share. Further the assessee itself has worked out the

The Ld. AR submitted that as on 31st March 2013 the company was having shares of Hanung Toys and Textiles Limited whose book value (cost) was Rs 3,83,38,380/– being 2738000 equity shares whose market rate was Rs 138.80 per share having market value of Rs 38,00,34,400/– whereas its book value was only Rs 3,83,38,380/-. He submitted that assessee has substituted the book value of the shares of listed entity by taking market value of the listed shares as on that date. He submitted that all other unlisted equity shares are considered at that book value only. Thus, he submitted that listed equities book value was Rs 14/– per share, whereas the market value was Rs 138.80 per share, which has been added to the book value of the other assets of the company, resulted into the fair market value of the shares of the assessee company at Rs.71.04 per share. He also referred to the definition of ‘fair market value of the shares’ as provided under section 56 (2) (viiib) of the act and submitted that if the assessee can substantiate to the satisfaction of the assessing officer, based on the value as on the date of the issue of its shares, which is higher than the value determined in accordance with the method prescribed under the income tax rules, assessee has an option to adopt the fair market value, whichever is higher. He therefore submitted that case of the assessee falls under sub clause (ii) of the definition of the ‘fair market value of the shares’. Therefore, he submitted that the actions of the lower authorities are not in accordance with the law.

The Ld. DR vehemently supported the orders of the lower authorities and stated that when the assessee itself is value in shares at book value at Rs 11.80 per share, the revenue authorities are justified in making the above addition.

We have carefully considered the rival contention and perused the orders of the lower authorities. According to the provisions of the law the fair market value of the equity shares for the purpose of the taxation according to Section 56 (2) of the act is determined as under:-

In result, appeal of the assessee is partly allowed.