Draft — ITA 214/2024

1. At the outset it is submitted that the entire onus which section 68 casts upon the Appellant stands discharged on the record. To escape the rigour of section 68 the assessee is required to establish the identity and creditworthiness of the creditor and the genuineness of the transaction, and it is well settled that once these three ingredients are established, the onus shifts to the Revenue to bring positive material on record to dislodge them.

2. In the present case the identity of each subscriber is established by its PAN and income-tax return, its creditworthiness by its audited balance sheet reflecting sufficient own funds, and the genuineness of the transaction by receipt of the entire consideration through account-payee banking channels duly reflected in the bank statements of both the payer and the payee. Not an iota of evidence has been brought on record to demonstrate that the money so received represents the Appellant's own undisclosed income routed back in the guise of share capital.

3. Reliance is placed on the decision of the Hon'ble Supreme Court in CIT v. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC), wherein it was held as under —

If the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.

The said ratio applies on all fours to the present case, the complete particulars of every subscriber having been furnished; the remedy of the Revenue, if any, lies against the subscribers and not by way of an addition in the hands of the Appellant.

4. It is further submitted that once the initial burden is discharged it shifts to the Revenue, which led no enquiry whatsoever. Reliance is placed on CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC) —

…the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131, did not pursue the matter further. In these circumstances, the assessee could not do anything further.

5. The source of the source, in any event, stands explained by the subscribers' own bank statements placed on record; and it is settled that the assessee is not obliged to prove the source of the source of its creditor, as held in Nemi Chand Kothari v. CIT (2003) 264 ITR 254 (Gau).

6. Reliance is further placed, on identical facts, on PCIT v. Gagandeep Infrastructure (P) Ltd. (2017) 394 ITR 680 (Bom) (the proviso to section 68 being prospective, once identity and genuineness are proved no addition lies) and CIT v. Value Capital Services (P) Ltd. (Del) (a mere inability of the Assessing Officer to trace the source does not convert share money into the assessee's income).

7. Without prejudice to the above, even if any part of the credit were to be sustained, only the peak of the credits and not the aggregate could at best be considered, the additions being liable to be telescoped.

8. In view of the above, it is respectfully submitted that the addition of ₹42,00,000 made under section 68 is unsustainable in law and on the facts on record and is liable to be deleted in its entirety.

1. At the outset it is submitted that the very invocation of Rule 8D is bad in law, the learned Assessing Officer having recorded no satisfaction, with reference to the accounts of the Appellant, as to why the Appellant's own computation of expenditure relatable to exempt income is not correct. Such recording of objective satisfaction is a jurisdictional pre-condition and not an empty formality.

2. Reliance is placed on Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) and Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC) —

The recording of satisfaction by the Assessing Officer, having regard to the accounts of the assessee, that the claim of the assessee that no expenditure or a particular quantum of expenditure was incurred in relation to exempt income is not correct, is a sine qua non before invoking Rule 8D.

No such dissatisfaction having been recorded, the mechanical resort to Rule 8D cannot be sustained.

3. Without prejudice, the disallowance cannot in any event exceed the exempt income earned during the year. Reliance is placed on Joint Investments (P) Ltd. v. CIT (2015) 372 ITR 694 (Del). [note: the exempt income earned in AY 2022–23 is not in the uploaded record — if nil, the disallowance is wholly unsustainable; if positive, it stands capped at that figure.]

4. Without prejudice, only those investments which actually yielded exempt income during the year may enter the average under Rule 8D(2); reliance is placed on ACB India Ltd. v. ACIT (2015) 374 ITR 108 (Del) and Vireet Investment (P) Ltd. (ITAT Delhi, Special Bench), on a correct application of which the disallowance is reduced to nil or a nominal figure. [note: the Rule 8D working filed on 12.03.2023 and the investment schedule as on 31.03.2022 are needed to recompute.]

5. In view of the above, the disallowance of ₹3,10,000 is liable to be deleted; in the alternative, to be recomputed as submitted.