ATUL MARDIA (HUF),NEW DELHI vs. ITO WARD - 46(4), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: E : NEW DELHI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER Assessment Year: 2017-18 Knowlarity Communications India Vs ACIT, Private Ltd., Circle 14(2), Awfis, 7th Floor, Delhi. Ambience Mall, NH-8, Gurgaon, Haryana – 122 002. PAN : AAFCK1875R (Appellant) (Respondent) Assessee by : Shri Salil Kapoor, Shri Shivam Yadav, Shri Sumit Lalchandani & Ms Ananya Kapoor, Advocates Revenue by : Ms Rajinder Kaur, CIT-DR Date of Hearing : 18.03.2025 Date of Pronouncement : 06.06.2025 ORDER PER ANUBHAV SHARMA, JM:

This appeal is preferred by the assessee against the order dated 31.01.2024 of the Ld. Commissioner of Income-tax (Appeals), NFAC, Delhi (hereinafter referred to as the Ld. First Appellate Authority or ‘the Ld. FAA’, for short) in Appeals No.CIT(A), Delhi-5/10229/2019-20 arising out of the appeal before it against the order dated 21.12.2019 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle 14(2), Delhi (hereinafter referred to as the Ld. AO).

1. That the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] erred both in law and in respect of facts of the case on certain issues on which disallowance has been done against the appeal filed by the Appellant. The Ld. CIT(A) erred in not fully allowing the appeal filed by the Appellant vide its order dated 31.01.2024 bearing order no.

2. ITBA/NFAC/S/250/2023-24/1060348370(l) under section 250 of the Income Tax Act, 1961 (‘the Act’) for assessment year 2017-18 and upholding the order passed by the Learned Assessing Officer (‘Ld. AO’).

2. That in view of the facts and circumstance of the case, the ad-hoc disallowance of Rs. 1,39,35,348/- towards exchange difference is illegal, bad in law and deserves to be deleted. The Ld. AO / CIT(A) erred in not appreciating the fact that creation of foreign exchange difference is the statutory requirement imposed by Accounting Standard - 11 ‘The effects of changes in foreign exchange rates’ and no disallowance can be made.

3. That in view of the facts and circumstance of the case, the disallowance of Rs. 1,95,24,984/- towards server hosting charges is illegal, bad in law and deserves to be deleted. The Ld. AO / CIT(A) erred in not appreciating the details submitted by the Appellant which suffice its claim towards expenditure for payments made on account of server hosting charges.

4. That in view of the facts and circumstance of the case, the disallowance u/s 37 of the Act for charges paid towards server hosting has been done while commenting on the authenticity of the books of accounts, thus far exceeding its jurisdiction and without invoking the provisions of Section 145 of the Act. Thus, this disallowance is arbitrary and bad in law.

5. That in view of the facts and circumstance of the case, the Ld. C1T(A) has invoked the provisions of Section 68 of the Act on amounts received by the Appellant towards share capital from non-residents, thus has committed a fundamental error in the application of aforementioned provisions.

6. That in view of the facts and circumstance of the case, the Appellant had discharged its onus to prove the identity and genuineness of the transaction by furnishing the details of share capital money received. Hence, all necessary details and evidence have been duly filed and furnished.

7. That in view of the facts and circumstances of the case and in law, the Ld. AO / CIT(A) has erred in making the addition under Section 68 of the Act and has failed to appreciate that the mandatory preconditions for invoking Section 68 of the Act have not been fulfilled in the present case and thus the invocation of the Section and the addition made therein is illegal, bad in law and liable to be deleted.

8. That in view of the facts and circumstances of the case and in law, the Ld. CIT(A) has far exceeded his authority by challenging the valuation report and the basis of preparation. 3

9. That in view of the facts and circumstances of the case and in law, the Ld. C1T(A) erred in not appreciating the provision of law which allows the Appellant to obtain the valuation report from an accountant for the purposes of satisfying the provisions of Rule 11UA.

10. That in view of the facts and circumstances of the case and in law, the Ld. AO / CIT(A) has erred in not appreciating that Section 115BBE is not applicable which is in consequence to wrong invocation of Section 68 of the Act.

4. Heard and perused the record. In regard to grounds No.1 and 11, we find that the same are general in nature and grounds No.12, 13 and 14 are consequential, thus, require no separate adjudication.

5. Ground No.2: In regard to this ground, we find that the AO has made a disallowance of Rs.1,39,35,348/- which pertains to the restatement of balances pursuant to Accounting Standard-11 which require to give effects on changes in foreign exchange rates as notified u/s 133 of the Companies Act, 2013. The AO has found the same to be on higher side. The case of the assessee is that the AO has ignored the fact that it is the legal requirement to adjust the foreign receivables and payables in the balance sheet on the closing date according to the exchange rate in force. The ld. AR has pointed out that in fact, after observing the 90% of Rs.1,39,35,348/- is disallowed and added back to the income of the assessee which comes to Rs.1,25,41,813/- in the final calculation the complete amount of Rs.1,39,35,348/- is disallowed. The case of the assessee is that in response to notice issued by the AO, the assessee had submitted ledger details of expenses along with the copy of invoices on sample basis and without raising any further questions, the disallowance was made on ad hoc basis. In this context, we find that the CIT(A) had called for a remand report from the AO wherein again the AO had asserted that the assessee has not provided any information as to why there is such huge increase in this head of expense, i.e., exchange difference. At page 119 of the paper book, the assessee has provided the ledger of unrealized foreign exchange gain which has been debited to Knowlarity Communications Holdings Pte Ltd. by way of a general voucher. Thus, we consider it an appropriate issue to be set aside to AO with a direction to the assessee to file complete details. AO shall give an opportunity for same. Accordingly, this ground is sustained for statistical purposes.

6. Grounds No.3 and 4: The AO has made an ad hoc disallowance of 18% of business expenditure for server hosting charges amounting to Rs.2,85,58,037/- paid to various independent vendor not related to the assessee company. The AO has considered the same to be on higher side. Ld. AR has submitted that the AO has incorrectly recorded that evidences were not filed. The ld.CIT(A) has given a partial relief to the assessee on the basis of limited evidences in the form of sample invoices filed. He has observed that some of the entries of payment pertained to AY 2017-18. Thus, this issue is also requires to be restored to the files of the AO with a direction to give an opportunity to the assessee to file complete details and not just a sample invoice. Due opportunity shall be given by the AO for the same. The grounds are sustained for statistical purposes.

7. Ground No.5 to 10; The AO had examined the receipt of Rs.51 crores from share premium during the year and found that the assessee has failed to substantiate the source of the source of these funds. Allegedly, the assessee failed to submit copy of ITR, balance sheet, any confirmations, balance confirmation during the course of assessment proceedings and, thus, the genuineness and credit worthiness of these transactions were allegedly not established. The claim of the assessee is that the amount was received from holding company and, after necessary and statutory compliances and approval from the Reserve Bank of India and other regulators of remittances of foreign exchanges. The ld. AR has also submitted that addition u/s 68 had been made without an opportunity of hearing.

8. In this context, we find that at page 345 of the paper book, the assessee has provided copy of notice u/s 142(1) of the Act and in annexure attached to it 6 by way of query No.8, the AO had called for providing details of the parties from whom share application money was received and with query No.9, valuation report for share application received was sought. The assessee, vide the reply, copy of which is available at page 349 of the paper book, had provided the necessary details including Form PAS-3, copy of foreign inward remittance certificate and copy of valuation reports. At page 596 of the paper book Vol.II, copy of show cause notice is provided by the assessee which shows that the assessee was questioned specifically with regard to examining the receipt for the purpose of section 56(2)(viib) of the Act and the assessee was directed to provide complete valuation report of the shares, source of such funds along with confirmations, source of source along with confirmations and balance sheets for AYs 2016-17, 2017-18 and 2018-19. At page No.601, copy of assessee’s reply is provided wherein all the relevant details were provided including mentioning that the fair value have been derived on DCF method.