DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2 1 1 , VADODARA, VADODARA vs. SHAPOORJI PALLONJI INFRASTRUCTURE GUJARAT PRIVATE LIMITED, VADODARA

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ITA 1510/AHD/2025Status: DisposedITAT Ahmedabad24 August 2026AY 2016-1727 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal found that the assessee failed to establish the genuineness of share capital transactions involving circular rotation of funds. Consequently, the matter was restored to the AO for fresh examination.

What were the facts?

The assessee did not comply with the Assessing Officer's notices, leading to an ex-parte assessment. The CIT(A) partly allowed the assessee's appeal, deleting certain additions made by the AO. The Revenue appealed this decision.

What were the issues?

Whether the CIT(A) erred in deleting additions related to business loss, interest disallowance, Section 14A, and unexplained cash credit, particularly concerning the genuineness of share capital transactions.

Which sections of the Income-tax Act were involved?

Section 68,Section 14A,Section 144,Section 271(1)(b),Section 142(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD

Before: SHRI SANJAY GARG & SHRI NARENDRA PRASAD SINHA

For Appellant: Shri S. N. Soparkar, Sr. Advocate
For Respondent: Shri Ashesh R Rewar, CIT.DR
Hearing: 08/06/2026Pronounced: 24/08/2026

Per Sanjay Garg, Judicial Member:

The captioned appeal has been preferred by the Revenue against the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] dated 09.05.2025 for the Assessment Year (A.Y.) 2016-17 in the proceeding u/s 144 of the Income Tax Act [hereinafter referred as “The Act”].

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2.

The brief facts of the case are that the assessee had filed its return of income for A.Y 2016-17 on 10.10.2016 declaring loss of Rs. 59,46,650/- under normal provisions and book loss of Rs. 99,30,286/-. The case was selected for complete scrutiny under CASS. In the course of assessment, no compliance was made by the assessee in spite of numerous opportunities provided by the Assessing Officer (in short ‘the AO’). The AO also imposed penalty u/s. 271(1)(b) of the Act for non-compliance and issued notices u/s. 142(1) of the Act on different dates. The assessment was completed ex-parte u/s. 144 of the Act on 19.12.2018 at total income of Rs. 41,87,11,820/- as per normal provision and book profit of Rs. 4,01,362/-, wherein the AO had made various additions.

3.

Aggrieved with the order of the AO, the assessee filed appeal before the first appellate authority, which was decided by the learned CIT(A) vide the impugned order, whereby, the appeal of the assessee was partly allowed.

4.

Now the Revenue is in appeal before us. The following grounds have been taken in this appeal:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the business loss of Rs 59,45,650/- claimed in the return of income, without appreciating the fact that the assessee has not carried out any business relating to infrastructure, land and building and also ignoring that alleged advisory services availed for Rs. 75,00,00,000/- from the related group concern and rendered

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for Rs 1,00,00,000/- to the related group concerns are merely an arrangement." 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs 59,45,650/- made on account of disallowance of loss claimed in the return of income, without piercing the corporate veil behind the amended MOA and the agreements between group companies camouflaging the real nature of the transactions" 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs 1,07,11,817/- made on account of disallowance of interest holding that the assessee has invested the borrowed funds in its subsidiary company for the purpose of commercial expediency without appreciating the fact that the assessee has not furnished any evidence to establish that the borrowed funds were invested in its subsidiary company out of commercial expediency. 4. On the facts and in the circumstances of the case and in law, the Ld CIT (A) has erred in restricting the addition of Rs 1,03,27,680/- made by the Assessing Officer on account of disallowance u/s 14A of the Act to Rs. 15.363/-, without appreciating the provisions of Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962. 5. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.40,80,00,000/- made on account of unexplained cash credit u/s 68 of the Act, without appreciating the fact that the share capital is introduced by way of rotation of funds from group concerns and ignoring the doctrine of “Substance over form”. The appellant craves leave to add, amend or alter the above grounds as may be deemed necessary.” Ground Nos. 1 & 2

5.

These grounds taken by the revenue are against the action of the Ld. CIT(A) in deleting the addition of Rs. 59,45,650/- on account of disallowance of loss claimed in the return of income.

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Shri Ashesh R Rewar, the Ld. CIT-DR, submitted that the assessee did not disclose any sales or gross receipt of business or any other operating revenue in its P&L account. It had only shown interest income of Rs. 35,77,705/- and other income of Rs.1,00,15,371/-. There was no business activity carried on during the year and the plant and machinery was disclosed at Rs. Nil. The other income of Rs.1,00,15,371/- was not related to core business activity of the assessee. The Ld. CIT-DR submitted that this amount was received from a group concern and was merely in the nature of an arrangement to claim the business loss. No material evidence was brought on record by the assessee to establish that it had carried out any business activity during the year. Therefore, the AO had rightly disallowed the business loss of Rs.59,45,650/-. He submitted that the Ld. CIT(A) was not correct in allowing the business loss on the basis of advisory fee and Rs. 1 crore received from a group concern, which was only in the nature of an arrangement.

6.

Per contra, Shri S. N. Soparkar, the Ld. Senior Counsel, appearing for the assessee submitted that the advisory fee of Rs. 1 crore received by the assessee during the year was a business receipt and the Ld. CIT(A) had rightly held that business of the assessee had commenced during the year. A service agreement for the receipt of advisory fee was duly brought on record by the assessee and even if the advisory service was an ancillary business activity, it was certainly covered within the scope of business

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activity as outlined in the Memorandum of Association and this fact was duly acknowledged by the AO in his remand report. The Ld. Senior Counsel submitted that the AO in his remand report did not object to allowing the claim for business loss and had submitted that the assessee’s claim was in order. He, therefore, strongly supported the order of the Ld. CIT(A) on this issue.

7.

We have carefully considered the rival submissions and perused the material available on record. It is an admitted position that during the course of assessment proceedings, the assessee failed to furnish any explanation or supporting evidence before the Assessing Officer. No compliance was made despite the opportunities granted by the Assessing Officer. It has not been explained as to why the relevant facts and evidences, which were subsequently produced before the learned CIT(A), could not have been produced during the assessment proceedings. The assessee had submitted before the Ld. CIT(A) that it had earned income from ancillary business activities and advisory fee of Rs. 1 crore was received during the year. Further, that for the purpose of earning this income, the assessee had also incurred certain expenditure. In support of these contentions, the ledger account, the service agreement and various invoices/expense were filed before the Ld. CIT(A); who had called for a remand report from the AO on the additional evidences filed before him. The AO in his remand report had acknowledged the additional evidences brought on record and observed that the assessee's claim was

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found to be in order. The Ld. CIT(A) on the basis of the submissions of the assessee and the remand report of the AO had held that the loss incurred by the assessee was in the nature of business loss. However, the contention of the Department is that the mere fact that the Assessing Officer, in the remand proceedings, observed that the documents appeared to be in order, cannot be construed as a conclusive verification of the genuineness and commercial substance of the transactions.

8.

The principal issue to be decided here is whether the loss claimed by the assessee can be regarded as a business loss incurred in the course of carrying on any business during the current year. From the P&L Account, brought on record in the paper-book, it is noticed that the assessee had disclosed "Other Income" of Rs.1,35,93,076/-, comprising advisory fee of Rs.1,00,00,000/-, interest income of Rs.35,77,705/- and dividend income of Rs.15,634/-. The assessee has claimed that the advisory fee represented income from ancillary business activities. The assessee had also claimed advisory fee expense of Rs. 75,00,000/- in the P&L account. From the details of this receipt and expense brought on record, it is found that the advisory fee of Rs.1 crore was received from M/s Universal Mine Developers and Service Providers Pvt. Ltd. ("UMD"), which is a subsidiary company of the assessee. Simultaneously, the assessee claimed advisory service expenditure of Rs.75,00,000/- payable to Samalpatti Power Company Private Limited ("SPCPL"), another group concern.

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Thus, both the receipt and the corresponding expenditure arose entirely within the same group of companies.

9.

A copy of service agreements for receipt and payment of advisory fee has been brought on record in the paper-book. A careful examination of the service agreements reveals that both the agreements were executed on the very same date i.e. on 09.06.2015, and covered the identical period of service from June 2015 to March 2016. The agreement between the assessee and UMD required the assessee to provide liaisoning and advisory services relating to execution of Energy Purchase Agreement, liaison with TANGEDCO, procurement of capital goods and transportation, and corporate services. However, on the very same day, the assessee had entered into another agreement with SPCPL, whereby SPCPL had agreed to provide the very same services to the assessee. The terms and conditions of both agreements are identical, differing only in the identity of the parties and the amount of consideration. These facts unmistakably demonstrate that the assessee itself neither possessed nor deployed any independent infrastructure, expertise or resources for rendering the services for which it purportedly earned the advisory fee. The entire activity was, in substance, undertaken by SPCPL. In fact, the agreement between the assessee and UMD does not contain any clause authorising the assessee to sub-contract or assign the services to any third party. The assessee had merely interposed itself as an intermediary between two related entities without itself

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carrying on any real business activity. Such an arrangement lacks commercial purpose insofar as the assessee is concerned and does not establish that the assessee itself conducted any business during the year.

10.

The manner in which the transactions were accounted for also supports this conclusion. No actual payment was received by the assessee from UMD, nor was any payment made by the assessee to SPCPL during the relevant previous year. The advisory income of Rs.1 crore was recognised merely through a journal entry dated 31.03.2016, while the corresponding expenditure of Rs.75 lakhs was claimed on the basis of a debit note issued by SPCPL. The absence of any actual flow of funds, coupled with the back-to-back agreements between related parties and the identical nature of services, clearly indicates that the accounting entries were passed only to create the appearance of business transactions. The assessee itself has admitted that no core business activity was undertaken during the current year. Form No. 3CD describes the nature of the assessee's business as trading, contractors and service sector, and no material has been brought on record to establish that any such business was actually carried on during the year. Apart from the journal entries relating to advisory services between group entities, there is no evidence of any independent business operations undertaken by the assessee. This is apparently a colourable device to show that the assesse has carried out some

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business activity during the year under consideration, whereas factually, it is not correct.

11.

It is a settled principle that the allowability of a business loss presupposes the existence of a genuine business activity carried on by the assessee. Mere execution of agreements or passing of accounting entries between related parties cannot, by themselves, establish that the assessee had carried on business. The taxability of a transaction has to be determined on the basis of its real substance and not merely on its form. Where the surrounding circumstances demonstrate that the transaction between two group concerns were so devised to show that the amount was routed through assesse by way of passing general entries, and showing that the assessee merely acted as a conduit between related entities without itself rendering any services or undertaking any commercial activity, the arrangement cannot be accepted as constituting genuine business operation. In the present case, the following cumulative circumstances, lead to the irresistible conclusion that the advisory fee arrangement was devised only to create the appearance of business activity:

(i) Complete absence of compliance during the assessment proceedings & production of evidence only at the appellate stage, (ii) Back-to-back and mirror-image agreements executed on the same day between related parties,

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(iii) Absence of any authority permitting sub-contracting of the services, (iv) Lack of any evidence that the assessee independently rendered services, (v) Absence of actual receipt or payment of consideration, and (vi) Recognition of income and expenditure merely through journal entries at the end of the year.

Considering the above facts, the arrangement lacks commercial substance and cannot be regarded as genuine business activity carried on by the assessee.

12.

In view of the above discussion, we hold that the learned CIT(A) had erred in treating the impugned loss as a business loss. The assessee had failed to establish that it carried on any business during the current year. We, therefore, reverse the findings of the learned CIT(A) on this issue and restore the action of the Assessing Officer in rejecting the claim of business loss. The grounds raised by the Revenue are, accordingly, allowed.

13.

Ground No. 3 pertains to deletion of addition of Rs.1,07,11,817/- made on account of disallowance of interest. The Ld. CIT-DR submitted that there was huge difference in the interest earned and interest paid during the year vis-à-vis the preceding year. The AO had, therefore, required the assessee to

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explain the claim for disproportionate interest payment made in the current year. As no compliance was made by the assessee and no explanation for inordinate increase in interest expense was brought on record, the AO had made proportionate disallowance of interest of Rs.1,07,11,817/- u/s. 36(1)(iii) of the Act. The Ld. CIT- DR submitted that the Ld. CIT(A) was not correct in allowing relief to the assessee on the ground that the borrowed funds were used for making investments in its 100% subsidy, by merely relying on the submissions of the assessee and without verifying the actual facts.

14.

Per contra, Ld. Senior Counsel of the assessee submitted that the loans were received by the assessee from the parent holding company over a period and also during the year, which were partially converted into equity capital at the end of the year. Further, the funds received by the assessee were utilized for making investments in the wholly owned subsidiary company of the assessee. Thus, the funds received from wholly owned parent company were mostly invested in wholly owned subsidiary of the assessee; and the balance loan of Rs. 8.50 crores was utilized for giving loan to another group concern, on which interest income was duly received and offered to tax. The Ld. Senior Counsel explained that the assessee had paid interest of Rs.1,18,97,110/- to the parent company which was rightly claimed as deduction against the income earned. The Ld. Senior Counsel explained that the borrowed funds were advanced to sister concern by way of

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commercial expediency and, therefore, the interest on borrowed funds cannot be disallowed u/s. 36(1)(iii) of the Act. In this respect, he relied on the following decisions:

i. Sharp Business System v. CIT [2025] [181 Taxmann 657 (SC)], S.A Builders Ltd. [288 ITR 1 (SC)] ii. iii. B. Nanji & Co. [124 taxmann.com 357 (Gujarat)] iv. Phil Corpn. Ltd. [14 taxmann.com 58 (Bombay)]

15.

We have considered the rival submissions and gone through the materials available on record. The AO had made comparison of interest expenditure and interest income for the AY 2015-16 and 2016-17 and made proportionate disallowance of interest expenditure for the current year by considering the following data:

16.

Before the Ld. CIT(A), the assessee had explained that it had obtained loan of Rs. 28.25 crores from its holding company ‘SPICCPL’, out of which loan amount of Rs.19.75 crores was

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converted into equity shares on 12.03.2016 and only balance amount of Rs. 8.50 crores was outstanding as on 31.03.2016. The interest payment of Rs. 1,18,97,110/- was thus not on the outstanding loan of Rs. 8.50 crores but was on the total loan of Rs. 28.25 crores taken from the holding company and interest thereon was computed on part loan till the date of conversion into equity shares. Therefore, the percentage comparison of outstanding loan and interest payment as worked out by the AO was erroneous. The assessee had advanced the balance loan of Rs. 8.50 crores to another group concern on which interest was duly received and accounted for. In view of these facts, the moot question is to be decided is whether the interest on loan of Rs. 19.75 crores borrowed from the holding company in October 2015 to February’16; which was converted into equity capital in February, 2016 was allowable to the assesse?

17.

As explained by the assessee, the loan obtained from the holding company was utilized for making investment in wholly owned subsidiary of the assessee viz. UMD. According to the assessee the borrowed fund was invested in the subsidiary company for commercial expediency and, therefore, the interest paid on the borrowed fund was allowable as deduction.

18.

We note that the Ld. CIT(A) had merely accepted the submission of the assessee without examining as to how the investment made by the assessee in its subsidiary company was for

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the purpose of commercial expediency. In the case of Sharp Business System v. CIT (supra), the assessee had invested Rs. 2,587.10 lakhs in the shares of subsidiary company M/s Ceylon Glass Compnay Ltd., Sri Lanka. The shares were acquired, not as an investment for earning income but to acquire controlling interest in the company. The Hon’ble Supreme Court had held in that case that the investment made for controlling the interest in the associate concern by purchase of shares was for commercial expediency and the interest on the funds invested in the sister concern for acquiring the controlling interest, was an allowable deduction. This judgment was delivered, considering the earlier judgment of the Hon’ble Apex Court in the case of S.A. Builders Ltd (supra).

18.1 In the present case, the investment made by the assessee in UMD is not found to be investment in an associate concern or a subsidiary company. As per the balance sheet, the assessee was having an investment of Rs. 10,000 only in the shares of UMD as on 31.03.2015. During the current year the assessee had acquired additional equity shares of Rs. 40.40 crores in UMD. Thus, the company UMD cannot be held as a subsidiary company of the assessee prior to acquisition of shares of Rs. 40.40 crores during the current year. Further, no other evidence has been brought on record to establish that the business activities of UMD were in the same line, in which the assessee was operating, so as to establish that the shares were acquired for commercial

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expediency. How the acquisition of shares of UMD was helpful to the business of the assesse, has not been explained at all. Moreover, as observed, the assesse company did not carry out any business during the year.

18.2 In the case of S.A. Builders Ltd (supra), the assessee had borrowed funds from the bank and lent it to its sister concern as interest-free loan which was claimed as a measure of commercial expediency. The Hon’ble Supreme Court had held in that case that since the issue of commercial expediency was not examined by any of the authorities, the matter was remanded back for a fresh decision as per law. The finding of the Hon’ble Supreme Court in that case was as under:

“35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 36. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above.”

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In the present case the assessee has not explained as to how it was having any deep interest in UMD or how UMD was a subsidiary company and for what purpose the amount advanced by the assessee to UMD was utilized by the said company.

19.

The facts of the other cases relied upon by the assessee are also found to be different. In the case of B. Nanji & Co.(supra), the assessee was engaged in business of real estate and the borrowed funds were utilized for acquiring a housing finance company in order to make funds readily available, when required, for the development of a housing project or to fund any acquisition of real estate. In view of these facts, investment in shares in that case was held to be on account of commercial expediency for expansion of real estate business of the assessee. In the case of Phil Corpn. Ltd. (supra), the investment was made in the shares of a subsidiary company in order to have control over the company which was an integral part of the business of the assessee. Thus, the facts of all the cases relied upon by the assessee are distinct & different and the ratio of those decisions can’t be applied to the present case at this stage. Reliance in this respect can also be placed on the decision of the Co-ordinate Bench of the Tribunal in the case of “M/s. Davanam Constructions Pvt. Ltd.” In ITA No.314/Bang/2019.

20.

In the present case, neither it has been pleaded or demonstrated before the lower authorities nor before us that the

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investment in the third company was related in any manner to the business activity of the assessee. No commercial expediency has been explained except that the assessee had purchased shares of the third company and gained controlling interest in the said company. As per the provisions of section 37 of the Act, any expenditure laid out or expanded wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head ‘profits and gains of business and profession’. Further as per the provision of section 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed for the purpose of business or profession is an allowable deduction. The investment made by the assessee in this case in purchasing the shares of a third company, unrelated to the business activity of the assessee is not an allowable deduction either under section 37 or section 36(1)(iii) of the Act. In view of the detailed discussion, as made above, this issue is decided against the assessee and in favour of the Revenue. The addition made by the Assessing Officer on this issue is hereby confirmed.

21.

Ground No. 4 pertains to restricting the addition of Rs. 1,03,27,680/- made by the AO u/s. 14A of the Act to Rs. 15,363/- only by the Ld. CIT(A).

As observed above, the assessee had made investment in Associated concern M/s. Universal Mine Developers & Service Provider Pvt. Ltd. (in short, ‘UMD’) to the tune of

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Rs.40,40,10,000/-. It was claimed by the assessee that the same was made from the equity capital. The Assessing Officer observed that the assessee had failed to demonstrate that it had not used interest bearing funds for earning of tax exempt income and further that, the proportionate expenditure was required to be disallowed, which has been incurred for earning of tax exempt income. He, therefore, disallowed an amount of Rs.1,03,31,648/- u/s 14A of the Act read with Rule 8D of the IT Rules. During appellate proceedings, the Ld. CIT(A) called for remand report from the AO. The AO, in the remand report, reported that the assessee had received dividend income from investment in mutual funds and, that the assessee has not provided sufficient evidences and reasons for not making any disallowance in the ITR on this issue. He, therefore, observed that the addition on this issue was warranted. The Ld. CIT(A), however, held that the assessee has claimed total exempt income of Rs. 15,363/- only. He, therefore, restricted the disallowance u/s 14A of the Act to the extent of exempt income earned by the assessee.

22.

We have heard the rival contentions of the Ld. Representative of the parties on this issue. The Ld. CIT(A) had restricted the disallowance u/s. 14A of the Act to the extent of exempt income earned by the assessee during the year. He, in this respect, has relied upon the decision of the Hon’ble Gujarat High Court has held in the case of CIT v. Corrtech Energy Pvt. Ltd, [2014] 45 taxmann.com 116/223 Taxman 130/[2015] holding

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that the disallowance u/s. 14A of the Act cannot exceed the amount of exempt income.

23.

The Ld. DR, however, has relied upon the explanation inserted in Section 14A of the Act by the Finance Act, 2022 w.e.f. 01.04.2022, which for the sake of ready reference is reproduced as under:

“[Explanation.-For the removal of doubts, it is hereby clarified that notwith- standing 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 the income, not forming part of the total income under this Act, 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 income not forming part of the total income.]” The Ld. DR has submitted that the aforesaid explanation is clarificatory and it has been specifically mentioned that the ‘provisions of this Section (Section 14A) shall apply and shall be deemed to have always applied for disallowance of expenditure incurred in relation to yielding of exempt income, whether or not such other income has actually accrued or arisen. He, therefore, has submitted that since the aforesaid explanation has retrospective application, therefore, disallowance u/s 14A of the Act has rightly been made by the AO.

24.

We note that the issue as to whether the explanation inserted to Section 14A of the Act by Finance Act, 2022, has retrospective application or prospective application has come for consideration

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before the Hon’ble Delhi High Court in the case of PCIT Vs. Era Infrastructure (India) Ltd. (ITA 204/2022) judgment dt. 20/07/2022, wherein, it has been held that the aforesaid explanation inserted to Section 14A of the Act is applicable prospectively.

25.

Respectfully abiding by the principle of judicial hierarchy, the Hon'ble Delhi High Court being a Higher Court, and as no decision of the Hon'ble Jurisdictional High Court or Hon'ble Supreme Court is available on this issue as yet, hence applying the said decision of the Hon'ble Delhi High Court, we uphold the decision of the Ld. CIT(A) in principle, to the effect that the disallowance u/s 14A of the Act is to be restricted up to the extent of exempt income earned by the assessee. However, the AO will verify the amount of exempt income earned by the assessee during the year and restrict the disallowance to that extent.

26.

Ground No. 5: The Revenue vide this Ground is aggrieved by the action of the Ld. CIT(A) in deleting the addition of Rs. 40.80 crores made by the AO u/s 68 of the Act on account of unexplained cash credits.

26.1 We have heard the ld. Representatives of both the parties and gone through the record. The brief facts, relevant to the issue are that the assessee company, had during the year under consideration allotted 4,08,00,000 equity shares of the face value

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of Rs.10/- each to its holding company SPICCL, and received share capital of Rs.40,80,00,000/-. The AO called upon the assessee to furnish the details of subscribed and paid-up share capital along with confirmation in duplicate, copy of return of income and source of income and also to furnish the details of application of such new share capital raised for the year under consideration. In its submission dated 20.08.2018, the assessee furnished only the name of the shareholder company and the number and amount of the shareholding. The AO, thereafter, issued a further notice under section 142(1) dated 11.12.2018, in which he specifically recorded the particulars which remain to be furnished by the assessee viz. contra confirmation, copy of return of income and source of income of the subscriber and also application of such new share capital raised for the year under consideration, and called upon the assessee to show cause why the share capital of Rs.40,80,00,000/- should not be treated as cash credit under section 68 of the Act. However, the assessee did not furnish the information sought by the AO. The AO, under the circumstances, passed best judgement Assessment order u/s 144 of the Act, treating the share capital claimed by the assessee of Rs. 40,80,00,000/- as unexplained cash credits and added the same into the income of the assessee.

26.2 During the appellate proceedings before the Ld. CIT(A), the assessee furnished additional evidences, whereupon the remand report was called for from the AO. During the remand

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proceedings, the assessee submitted that in the year under consideration equity capital was invested by the holding company M/s Shapoorji Pallonji Infrastructure Capital Company Pvt. Ltd to the tune of Rs. 40,80,00,00,000 against allotment of 4,08,00,000 equity shares of face value of Rs. 10. It was further explained that out of this total amount, an amount of Rs. 19,75,00,000 was received in the form of loan from the holding company and on which interest amount was also paid and further this loan amount was converted into equity. The assessee also furnished the documents relating to the identity and creditworthiness of the subscriber/holding company and the source of investment was explained as under:

S.no. Source of the fund Amount (in Rs.) 1. Redemption of mutual fund invested in IDFC 16,75,00,000 (earlier given Cash Fund by the SPICCPL i.e. Holding company in the form of loan to the assessee company) 2. Loan taken by the SPICCPL i.e. Holding company 3,00,00,000 from another group concern namely M/s Shapoorji Pallonji Energy (Gujarat) Pvt Ltd and given to the assessee company as loan 3. Loan taken by the SPICCPL i.e. Holding company 1,00,00,000 from another group concern namely Shapoorji Pallonji Energy (Gujarat) Pvt Ltd and given to the assessee as advance against share capital 4. Loan taken by the SPICCPL i.e. Holding company 19,65,00,000 from another group concern namely Shapoorji Pallonji Energy (Gujarat) Pvt Ltd and given to the assessee an advance against share capital 5. Redemption of mutual fund investment of BNP 40,00,000 Paribas by the SPICCPL i.e. Holding company Total 40,80,00,000

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26.3 The AO reported in the remand report that group company M/s Shapoorji Pallonji Energy (Gujarat) Pvt Ltd (SPEPL) had extended a loan to SPICCPL (holding company), which in turn, was invested in the assessee company as share capital. The AO relying upon the aforesaid information held that assessee had furnished the details regarding the source of the capital in the hands of SPICCPL and further requested the Ld. CIT(A) to decide the issue on merits accordingly.

27.

The Ld. CIT(A), accordingly, observed that the source of the investment in the hands of the subscriber company was explained as out of the redemption proceeds of mutual fund investment and out of the funds borrowed from other group companies. He therefore, deleted the addition so made by the AO on this issue.

28.

Before us, the Ld. DR submitted that the movement of funds amongst the group concerns was nothing but a rotation of the same funds and that the genuineness of the transaction was not established. The Ld. AR, on the other hand, submitted that the identity of the subscriber, being the holding company of the assessee and its creditworthiness stood established from its audited accounts, therefore, the Ld. CIT(A) rightly deleted the addition of the share capital made by the AO.

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29.

We have considered the rival contentions of both the Ld. Representatives of the parties and gone through the record. It is settled law that Under Section 68 of the Income Tax Act, 1961, when a sum is credited in a taxpayer's books, the legal burden of proof lies entirely on the assessee to prove three three limbs concurrently i.e. the identity of the creditor, their creditworthiness, and the genuineness of the transaction. Failing to establish any single limb allows the department to treat the sum as unexplained income. Reliance in this respect can be placed on various case laws including of the Hon’ble the Delhi High Court notes in the case of “CIT v. T.S. Kishan & Co. Ltd” [2014] 50 taxmann.com 368; the Calcutta High Court in the case of “CIT v. Precision Finance (P.) Ltd.”, [1994] 208 ITR 465; Madras High Court in the case of “M/s. B.R. Petrochem Pvt. Ltd vs. Income Tax Officer” Tax Case (Appeal) No. 1498 OF 2007 decided vide order dated 24.04.2017.

29.1 So far as the identity of the subscriber is concerned, we find no infirmity whatsoever in the finding of the Ld. CIT(A). However, so far as genuineness of the transaction is concerned, in our view, the Ld. CIT(A) has failed to look into the relevant facts of the case. As observed above, the AO, during the assessment proceedings, had called for the "application of such new share capital raised for the year under consideration", however, the assessee, neither during the assessment proceedings, nor during the remand proceedings even not during the appellate proceedings

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has addressed this query of the AO, which in our view, in the peculiar facts and circumstances, is vital to look into the third limb of genuineness of transaction. On perusal of the record, it reveals that the same amount, which is stated to have been received by the assessee as share capital has travelled back to the subscriber, namely SPICCPL, on the very same dates on which they were received by the assessee, which can be gathered from the following accounting entries:

(i) On 09.10.2015, SPICCPL received the redemption proceeds of the IDFC Cash Fund of Rs.17,00,00,000/-; SPICCPL, on the same date, transferred Rs.16,75,00,000/- to the assessee; the assessee, on the same date, transferred the identical sum of Rs.16,75,00,000/- to M/s Universal Mine Developers & Service Provider Pvt. Ltd. ("UMDSPPL") as advance against share capital; and the bank account of SPICCPL records, on that very date, a receipt of Rs.16,75,05,700/- from UMDSPPL, whereupon SPICCPL, again on the same date, transferred Rs.17,50,00,000/- to the IDFC Mutual Fund collection account.

(ii) On 24.02.2016, the bank account of SPICCPL records a receipt of Rs.19,00,00,000/- from M/s Shapoorji Pallonji Energy (Gujarat) Pvt. Ltd., bringing the balance in that account to Rs.20,27,54,518.45; on the same date SPICCPL transferred Rs.19,65,00,000/- to the assessee, reducing the balance to Rs.62,54,518.45; the assessee, on the same date, transferred the

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identical sum of Rs.19,65,00,000/- to UMDSPPL; and the said account of SPICCPL records, on that very date, a receipt of exactly Rs.19,65,00,000/- from UMDSPPL, whereupon the balance stood restored to the identical figure of Rs.20,27,54,518.45.

29.2 The above data shows that the almost equal/identical amount was transferred back to the subscriber on the very same dates on which they were received through circular transactions routed through Group Companies. The bank account of the assessee, it may be noticed, carried a closing balance of Rs.42,290/- as on 31.10.2015 and of Rs.38,413/- as on 31.03.2016, so that on no date did the assessee retain any part of the monies said to have been subscribed to its capital. Therefore, prima facie, the said transaction which has been given the colour of share subscription, does not appear to be so, rather, it seems to be a case of rotation of funds through circular transactions through group companies. The genuineness of the transaction thus is not established. This aspect has not been verified properly at any stage of the proceedings even when it was specifically raised by the AO in the notice issued u/s 142(1) of the Act. Neither the said rotation of funds has been examined during the remand proceedings, nor during the appellate proceedings before the ld. CIT(A). In view of the above facts and circumstances, the genuineness of the transaction, which is a vital limb, has remained to be examined by any of the lower authorities.

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29.3 In view of the foregoing discussion, we set aside the finding of the Ld. CIT(A) on this issue and restore the matter to the file of the AO for examination a fresh. The assessee shall be afforded adequate opportunity of hearing, and shall be at liberty to raise all contentions available to it. The AO, after considering the explanation and details furnished by the assessee including the purpose and manner of rotation of funds, will pass the assessment order a fresh on this issue by way of a speaking order.

29.4 Ground No.5 of the Revenue is, accordingly, treated as allowed for statistical purposes.

30.

It the result, the appeal of the Revenue is treated as allowed for statistical purposes.

This Order is pronounced on 24/08/2026

Sd/- Sd/- (NARENDRA PRASAD SINHA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 24/08/2026 S. K. SINHA True Copy आदेश क� �ितिल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. 2. ��यथ� / The Respondent. संबंिधत आयकर आयु� / Concerned CIT 3. आयकर आयु�(अपील) / The CIT(A)- 4. �वभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad

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