ITAT Ahmedabad Upholds 14A Revision but Quashes 263 Action on Share Purchase Valuation

In a recent case, the Tribunal ruled that the PCIT was right to revise the assessment on the section 14A disallowance, as the Assessing Officer (AO) did not verify it properly, which led to a lower disallowance. However, the revision made by Revenue regarding the share purchase valuation was quashed because the share value was already settled via an NCLT-approved agreement and caused no real loss to the Revenue. Hence, the appeal was partially allowed in favour of the company.

The appeal was filed by Shalby Limited, a company based in Ahmedabad, Gujarat, challenging an order passed by the Principal Commissioner of Income Tax (PCIT) to revise its income tax assessment for the Assessment Year 2018-19. The company had filed its income tax return (ITR), declaring its total income of approximately Rs. 1.81 crore; however, during assessment, the Assessing Officer (AO) made an addition to the income of the company. Declared the total income of the company at Rs. 3.17 Crore after disallowing certain expenses and depreciation.

The PCIT issued a notice under section 263 of the Income Tax Act, saying the original assessment was erroneous and prejudicial to revenue. The issues included dividend income from investments, where the company voluntarily disallowed Rs. 3.37 lakh, but the actual disallowance should have been Rs. 10.17 lakh under Rule 8D and the purchase of shares in another hospital, where the company paid Rs. 4.68 crore without getting a valuation under Rule 11UA.

However, the company argued that it had enough interest-free funds; hence, there was no requirement for interest disallowance. All necessary information was already provided to the assessing officer. The share purchase was already settled legally through the National Company Law Tribunal, so no loss actually occurred.

When the case was taken before the ITAT Ahmedabad, the tribunal noted that on the 14A/Rule 8D issue, the AO did not properly verify the disallowance. This could cause a loss of revenue; therefore, the revision made by the PCIT was justified. On the share purchase issue, the settlement with the directors proved the actual cost, so there was no real loss, and the revision on this ground was not valid.

In the final decision, the tribunal partially allowed the company’s appeal; it upheld the revision regarding the disallowance under Rule 8D, but cancelled the revision regarding the share purchase.