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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & SHRI SIDDHARTHA NAUTIYAL
O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
Both appeals have been filed by the Revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide orders dated 31.03.2023 passed for A.Ys. 2017-18 & 2018-19. Since common facts and issues for consideration are involved in both the years under consideration before us, both the appeals filed by the assessee for the aforesaid Assessment Years are being taken up together.
The Revenue has raised the following grounds of appeal:
“1. Whether on facts and circumstances and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 96,34,99,801/- made u/s 68 of Income Tax Act 1961, even when the assessee has failed to prove creditworthiness and genuineness of transaction.
Whether on facts and circumstances and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 14,30,00,000/- made by the AO @ 10% of total expenses, as assesssee could not established the genuineness of such expenses incurred wholly and exclusively for the business purposes. No proper justification or verification is done.
The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.
It is, therefore, prayed the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored.”
The brief facts of the case are that the assessee company engaged in the business of manufacturing candies, chocolate, paste and noodles trading of butter bookies etc. The assessee filed return of income for A.Y. 2017-18 declaring loss of Rs. 77.45 lakhs. During the course of assessment, the AO observed that the assessee had issued 1,47,34,962 equity shares to it’s foreign holding company Mayora Singapore Pte. Ltd. and received premium of Rs. 81,61,15,181/- @ Rs. 55-56 per share on various dates during the year. The AO held that the valuation report submitted by the assessee in respect of share premium was unreliable since the company had been incurring losses regularly. The AO further held that the assessee failed to produce the previous three years Income Tax Return of foreign shareholder to substantiate it’s creditworthiness. The AO further observed from the bank statement of &419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 3– M/s. Mayora Singapore Pte. Ltd. that the said share applicant / investor company received amounts from M/s. United Brands International Ltd. as loans which has been invested in the assessee company and therefore, was of the view that the assessee was unable to explain the source of source of the amount invested in the assessee company. Accordingly, the AO was of the view that the share application money was liable to be added, as income of the assessee under Section 68 of the Act.
In appeal, Ld. CIT(A), on the basis of submissions and documents furnished by the assessee allowed the appeal of the assessee primarily on the ground that the assessee was able to substantiate the creditworthiness of the investor company and also since the investor is a non-resident, as per Proviso to Section 68 of the Act, since the investment was being made by a non- resident company, the source of investment is not required to be proved to the satisfaction of the AO. While passing the appellate order Ld. CIT(A) made the following observations:
“6.2 The various submissions made by the appellant have been perused. It is clear from the documents filed that the appellant has been able to establish the identity of the investor and genuineness of the transaction. As regards the credit-worthiness of the investor, the sources have been claimed to be loans raised by the investor. Since the investor i's a non-resident and as per the proviso to Section 68 of the Act, its source for investing is not required to be mandatory proved to the satisfaction of the Assessing Officer. Therefore, insisting on the particulars of the loan creditors of the non-resident share holder is contrary to the law. In the case of ACIT Vs. Kansur Developers India Pvt .Ltd., the ITAT Bengaluru in &144(2)/Bng/2018 dated 28.10.2022 has held that the proviso is applicable only to the resident shareholders and not to the non-resident shareholders. Similar decision was delivered in the case of DCIT-Vs Karmeshwar Exim (P) Ltd., by the Surat Bench of ITAT reported in [2022] 138 taxmann.com 560 (Sutat-Trib). Further, even if the consideration received for shares exceeds the fair market value, the same is not liable to be added as income/of the company, if the amount is received from a nonresident. In the present case even if the valuation of shares is not reliable, no addition can be made as the amounts are received from NRI. Considering the above, the addition made by the AO under section 68 of the Act is deleted. Hence, Ground No. 1 is allowed.”
&419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 4– 5. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A).
Before us, the Ld. D.R. primarily placed reliance on the observations made by the AO in the assessment order. The Ld. D.R. submitted that proviso to Section 68 does not preclude the applicability of the main provision of Section 68 to non-resident shareholders, which requires the nature of source of any amount found in the books of the assessee to be proved to the satisfaction of the AO. The Ld. D.R. submitted that even if source of source is not proved at least the source of receipts in the hands of the non-resident shareholder needs to be proved to the satisfaction of the AO.
In response, the Counsel for the assessee placed reliance on the observations made by Ld. CIT(A) in the appellate order. The Counsel for the assessee submitted that so far as the facts are concerned, various details and documentary evidence in respect of such funds received by the assessee from it’s foreign holding company were submitted during the course of proceedings before the Department, which inter alia included statement of share capital / premium received, Board Resolution for allotment of shares, KYC of foreign holding company issued by Standard Chartered Bank, Valuation Report by M/s. T.R. Chadha & Co. dated 02.03.2016 determining fair value of shares at Rs. 65.23, bank statement of foreign holding company and financial statement of the foreign holding company for the past three years. Accordingly, so far as the source of investment is concerned, the assessee has been able to establish the genuineness of the transaction and the creditworthiness of the deposit.
&419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 5– 8. We have heard the rival contentions and perused the material on record.
On going through the facts of the instant case, the following factual aspects are noteworthy. Similar assessment order was passed for A.Y. 2013- 14 under Section 263 r.w.s. 143(3) of the Act in which after verifying the details through the FT&TR Report of the share application money received from the same foreign holding company, no further additions were made. Secondly, in this case, we observe that the investor is the foreign holding / parent company of the assessee itself and therefore, the identity creditworthiness and genuineness of the transaction per se are not under doubt. It is not a case where shares have been issued by the assessee to a third party for the first time, but in this case shares have been only issued to the foreign parent / holding company of the assessee, based out of Singapore. Thirdly, it would be useful to reproduce the Section 68 of the Act:
“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. Provided further that] where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:”
&419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 6– 10. On bare perusal of proviso to Section 68 inserted by Finance Act, 2012 w.e.f. 01.04.2013, whereby proviso has been inserted qua the deeming fiction on share application money, share capital, share premium or any such credit, has been made applicable to resident entity only and not to non-resident entity. This inter alia means that deeming fiction cannot be extended to non- resident entities. Be it as may be, under the amended law also the onus stands discharged as the investor company has explained the nature and source of credit, that is, the share application money/share capital has been given out of the parent company’s declared sources, in its books of account. Thus, under amended provision also the addition could not have been made and Ld. CIT(A) has rightly accepted the assessee’s explanation. Therefore, it is seen that the deeming fiction as per proviso to Section 68 of the Act on the reading of the Section 68 does not get extended to a non-resident. In the instant case, share application and share premium have been received from a non-resident, being the parent of the assessee company itself. Hence, proviso to Section 68 will not be applicable since funds have been received from non-resident foreign of the assessee company. In the case of Bycell Telecommunications India (P.) Ltd. vs. PCIT 90 taxmann.com 268 (Delhi), the ITAT held that where in respect of share capital received from holding company located abroad, assessee proved that money was flowing from books of investor as certified by Swiss Tax Authorities from their financial accounts including source of their funds for investing in Indian company, transactions in question could not be regarded as bogus or sham transactions and thus, impugned addition made under Section 68 was to be set-aside.
ITA Nos. 418&419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 7– 11. In the case of ACIT vs. M/s. Veritas India Ltd. in the ITAT again reiterated that the proviso to Section 68 will not apply to funds received from non-resident shareholders:
“22. As contended by learned AR, proviso to section 68, inserted w.e.f. 1.4.2013, requires that assessee to prove sources of source. The above said proviso shall apply to funds collected by a closely held company from resident shareholders. Hence, the same will not be applicable to the assessee as the assessee is a publicly held company and investors are non-resident assesses. Further, the said proviso shall take effect from AY 2013-14 onwards only.”
Accordingly, since the proviso to Section 68 excludes the applicability of Section 68 to non-resident investors / depositor, in our view, the provisions of Section 68 would not come into play, looking into the instant facts.
In the result, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference.
Ground No. 2:- Ad-hoc disallowance of business expenditure @ 10% of Rs. 14,30,00,000/-.
The brief facts in relation to this ground of appeal are that the AO made disallowance of 10% of the expenses on the ground that the assessee had not provided supporting evidences for various expenses claimed in the return of income.
15. In appeal, Ld. CIT(A) deleted the additions on the ground that the AO has not pointed out how these expenses are abnormal and has not mentioned any specific failure on the part of the assessee to part of the requisite details and therefore, the ad-hoc disallowances made by the AO would not be liable to be sustained.
&419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 8– 16. While allowing the appeal of the assessee Ld. CIT(A) made the following observations:
“7.1 The AO has disallowed only on the ground that the substantial amounts have been incurred and details have not been provided. The A.O. has not pointed out as to how these expenses are abnormal and has also not pointed out any abnormality. It is also not mentioned in the assessment order, the details which have not been furnished when called for. Under the given circumstances, the ad-hoc disallowance cannot be sustained. Various courts and Tribunals have held that ad-hoc disallowances are not sustainable unless the A.O. is able to pin-point the deficiencies in the Accounts and further able to establish that the expenditure is excessive/inflated with some reliable evidence or able to establish that the bills issued by bogus entities for expenses. Such a huge ad-hoc - disallowance without any basis when the accounts are duly audited and no abnormality has been expressed by the Auditor is not permissible under the law. Therefore, the addition is deleted and Ground No. 2 is allowed.”
Before us, the Ld. D.R. placed reliance on the AO in the assessment order.
Before us, the Counsel for the assessee submitted that the assessee had furnished detailed reply before AO giving reasons for lower income, giving comparative analysis of GP and NP ratio, giving reasons for variation / comparative analysis and giving reason for variations in NP ratio. Further, the assessee vide letter dated 13.05.2021 submitted party-wise details of expenses with documentary evidences (Refer Pages 433-477 of Paper Book). Further, it has been pointed out before us that there is no specific allegation that expenses in question have not been incurred wholly and exclusively for the purpose of business or expenses in question have not been duly recorded in the books of accounts. It was submitted that books of accounts of the assessee are duly audited and no discrepancies have been found in the audited financial statements of the assessee. The AO has also not pointed any specific abnormality in these expenses and there is no allegation also that expenses have been inflated.
&419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 9– 19. We have heard the rival contentions and perused the material on record.
On going through the facts of the instant case, we observe that the assessee has given break-up of expenses alongwith supporting evidences, as and when called for by the AO. The assessee, in the instant facts has given as many details as possible with respect to these expenses and had also furnished justification for increase / decrease in expenses wherever applicable. The AO has not found any specific fault in such details / evidences / justification furnished by the assessee for these expenses. Further, from the contents of the assessment order, we observe that the AO has not given any reason for adopting 10% rate of tax for making the disallowance in the hands of the assessee.
In the case of R.G. Buildwell Engineers Ltd. 99 taxmann.com 284 (SC), in course of assessment, assessee claimed deduction of expenses towards bricks, machinery repair, cartage, labour expenses etc. The Assessing Officer disallowed 10 per cent of said expenses on ground that insufficient evidence was adduced. The Tribunal set aside said ad hoc disallowance on two grounds, firstly, assessee's books of account were not rejected and secondly, such expenses were allowed consistently in the past in scrutiny assessments. The High Court upheld order passed by Tribunal. The Hon'ble Supreme Court held that SLP filed against view taken by High Court was to be dismissed.
In the case of Mitsui & Co. India (P.) Ltd.155 taxmann.com 19 (Delhi - Trib.), the Tribunal held that if expenditure is not incurred for &419/Ahd/2023 ACIT vs. Mayora India Pvt. Ltd. Asst. Years –2017-18 & 2018-19 - 10– business purpose, there has to be a specific finding in this regard unless expenditure is for personal use and business purpose are mixed and cannot be segregated, where this was not case, expenditure could not be disallowed on ad-hoc basis.
Accordingly, looking into the instant facts in view of the judicial precedents on the subject, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference.
In the result, the appeals of the Department are dismissed.
Since similar facts and issues for consideration are involved for A.Y. 2018-19 as well, the appeal of the Department is dismissed for A.Y. 2018-19 as well.
In the result, both the appeals of the Department are dismissed. This Order is pronounced in the Open Court on 16/12/2024