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2025 (6) TMI 1525 - AT - Income TaxDisallowance u/s. 14A r.w. rule 8D - Sufficiency of own funds - assessee submitted that it did not earn any income exempt under the Act during the year and therefore there cannot be any disallowance u/s.14A r.w. rule 8D and there is no satisfaction arrived at by the AO as required u/s.14A for the purpose of invoking and making the disallowance - HELD THAT - The issue in hand is no longer res integra as assessee did not earn any exempt income during the year and therefore no disallowance can be made u/s. 14A r.w. rule 8D for the year under consideration i.e. AY 2012-13. The amendment brought in Section 14A by way of explanation in this regard is effective from 01.04.2022 i.e. AY 2022-23 as held in the case of Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT Considering the facts on record and the said judicial precedent as well as the position of law we do not find any reason to interfere with the findings arrived at by the ld. CIT(A) who deleted the disallowance made by the AO u/s. 14A r.w. rule 8D. Accordingly ground no. 1 raised by the revenue is dismissed. Unexplained income towards share capital and share premium u/s. 68 - as per revenue mere filing of confirmation letter PAN bank statement will not discharge the assessee s onus in this case where AO has established non- existence of credit worthiness of the applicant companies - HELD THAT - As going by the records placed by the assessee of both the share subscribing companies it can be safely held that the assessee has discharged its initial burden and the burden shifted on the ld. AO to enquire further into the matter which he failed to do so. It is also noted from their audited financial statements that all the investing companies have sufficient own funds available with them to make investment in the assessee. From the perusal of paper book and documents placed therein it is vivid that both the share applicants are (i) income tax assessees (ii) they are filing their income tax returns (iii) share application form and allotment letter is available on record (iv) share application money was made by account payee cheques (v) details of the bank accounts belonging to share applicants and their bank statements (vi) in none of the transactions there are any deposit of cash before issuing cheques to the assessee (vii) all the share applicants having are substantial represented by their capital and reserves. In the course of assessment proceeding. ld. AO directed the assessee to produce the subscriber companies along with relevant documentary evidences and details which was not complied with. Ld. Counsel submitted that mere non-appearance of directors is no basis for invoking provisions of section 68. See Orissa Corporation (P) Ltd. 1986 (3) TMI 3 - SUPREME COURT Decided against revenue.
Two primary issues are presented and considered by the Tribunal in this appeal filed by the revenue against the order of the Commissioner of Income Tax (Appeals):
1. Whether the addition of Rs. 5 crores on account of share application money and share premium received from two share subscribers can be sustained under section 68 of the Income-tax Act, 1961, given the assessee's submission of documents to establish the identity, creditworthiness, and genuineness of the transactions. 2. Whether the disallowance of Rs. 36,43,646 under section 14A read with Rule 8D of the Income-tax Rules, relating to expenditure incurred in relation to exempt income, is justified when the assessee did not earn any exempt income during the relevant assessment year. Issue 1: Addition of Rs. 5 crores under section 68 on account of share application money and share premium Relevant legal framework and precedents: Section 68 of the Income-tax Act deals with unexplained cash credits. The three essential ingredients for invoking section 68 are: identity of the creditor, creditworthiness of the creditor, and genuineness of the transaction. The burden initially lies on the assessee to prove these elements, failing which the amount can be treated as unexplained income. Judicial precedents emphasize that once the assessee produces credible documentary evidence establishing these ingredients, the burden shifts to the revenue to disprove the same. The Supreme Court decision in CIT v. Orissa Corporation (P) Ltd. (1986) is pivotal, holding that mere non-appearance of creditors or inability to produce them before the Assessing Officer (AO) is not sufficient to invoke section 68 if the assessee has otherwise discharged the burden through documentary evidence. Court's interpretation and reasoning: The Tribunal, affirming the CIT(A), noted that the assessee had produced comprehensive documentary evidence including PAN cards, bank statements, audited financial statements, share application forms, Board resolutions, and bank account details of the two share subscribers. Both subscribers responded to notices issued under section 133(6), confirming the investments and furnishing their financial details. The AO did not point out any defect or discrepancy in these documents nor did he undertake further investigation beyond demanding personal appearance of the directors/shareholders of the subscriber companies. The Tribunal observed that the AO's adverse conclusion was based on surmises and suspicion without any substantive evidence. There was no cash trail indicating bogus transactions, and the investments were made through account payee cheques, with no cash deposits involved. The Tribunal relied on the decision of the Hon'ble Bombay High Court in PCIT v. Paradise Inland Shipping Pvt. Ltd. (2017), which held that once documentary evidence establishing the existence and creditworthiness of the subscriber companies is produced, the burden shifts to the revenue to establish otherwise, which was not done here. Key evidence and findings: The assessee produced:
Application of law to facts: The Tribunal held that the assessee discharged the initial burden under section 68 by establishing identity, creditworthiness, and genuineness of the transactions through credible documentary evidence. The AO failed to rebut this evidence or conduct further enquiries. Mere non-appearance of directors of the subscriber companies was not a valid ground to treat the amounts as unexplained income. Treatment of competing arguments: The revenue argued that the AO had established non-existence of creditworthiness and that the transactions were accommodation entries. However, the Tribunal found that the AO did not substantiate these claims with evidence and relied only on the absence of personal appearance. The Tribunal rejected the revenue's reliance on the ratio in Sumati Dayal and Durga Prasad More, as these were distinguishable on facts and the AO's findings were based on suspicion rather than evidence. Conclusion: The addition of Rs. 5 crores under section 68 was rightly deleted by the CIT(A) and the Tribunal upheld this deletion, dismissing the revenue's ground. Issue 2: Disallowance under section 14A read with Rule 8D in respect of expenditure relating to exempt income Relevant legal framework and precedents: Section 14A of the Income-tax Act permits disallowance of expenditure incurred in relation to income that does not form part of total income (exempt income). Rule 8D provides a method for computing such disallowance. Judicial precedents have held that disallowance can be made only if the assessee has earned exempt income during the relevant year and the AO is satisfied that expenditure relates to such income. The amendment to section 14A by way of explanation, effective from assessment year 2022-23, clarified that disallowance can be made even if no exempt income is earned, but this amendment is prospective and not applicable to the assessment year under consideration. Court's interpretation and reasoning: The Tribunal noted that the assessee did not earn any exempt income during the relevant assessment year. The AO had made a disallowance of Rs. 36,43,646 on the ground that income on certain assets aggregating Rs. 11,71,95,236 was exempt and therefore, interest and other expenses relating to these assets should be disallowed. However, the Tribunal found that the AO did not record any satisfaction as required under section 14A before making the disallowance. The CIT(A) rightly deleted the disallowance, relying on the fact that no exempt income was earned and the position of law prior to the amendment. Key evidence and findings: The assessee's income included commission and interest on fixed deposits, with no exempt income. The AO's disallowance was based on the balance sheet showing investments and assets whose income was exempt, but the Tribunal found no evidence that exempt income was actually earned in the year. Application of law to facts: Since the assessee had not earned exempt income during the year, the legal requirement for invoking section 14A disallowance was not met. The amendment effective from AY 2022-23 was inapplicable to AY 2012-13. The Tribunal relied on the decision of the Hon'ble Delhi High Court in PCIT vs. Era Infrastructure (India) Ltd. (2022), which held similarly. Treatment of competing arguments: The revenue contended that disallowance under section 14A could be made even if no exempt income was earned, relying on the AO's assessment. The Tribunal rejected this argument, emphasizing the temporal applicability of the amendment and the absence of satisfaction by the AO. Conclusion: The deletion of the disallowance under section 14A read with Rule 8D was upheld by the Tribunal, dismissing the revenue's ground on this issue. Significant holdings and core principles established: On the addition under section 68, the Tribunal held:
On the disallowance under section 14A, the Tribunal reaffirmed the principle that:
Final determinations:
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