Addition made under section 68 based upon surmise and

Addition made under section 68 based upon surmise and conjecture had to be deleted

10th July 2019

Addition made under section 68 based upon surmise and conjecture had to be deleted

Income Tax Act, 1961, Section 68

Income from undisclosed sources—Addition under section 68—Receipt of share capital along with premium from sister concern—AO doubting creditworthiness of share applicant

Conclusion: As balance sheet of share applicant showed ample source of funds, hence, AO’s negative observation about availability of funds with share applicant was factually incorrect and, therefore, addition of share application money along with premium amount made under section 68 only based upon surmise and conjecture had to be deleted.

Assessee-company received share application money along with share premium from its sister concern M/s. ‘I’. AO doubted creditworthiness of said M/s. ‘I’ and accordingly, inferred that assessee had taken accommodation entries from its sister concern. Accordingly, AO made addition under section 68. Held: Assessee had submitted all the necessary details to establish the creditworthiness, identity of investor and genuineness of the transaction such as PAN card, CIN Master data (ROC), Share application Forms, Board Resolution, Confirmation of Account, Balance Sheet of shareholder, Bank statement and, IT Acknowledgement receipt, Assessment Order under section 143(3) of the shareholder, Valuation report of the shares, NAV working of assessee, and balance sheet of the assessee. AO had not pointed out any defect in the documents. As a matter of fact, AO had not even issued a notice under section 133(6) to the share applicant, if he had any doubt regarding creditworthiness of the share applicant. Balance sheet of share applicant showed ample source of funds, hence, AO’s negative observation about availability of funds with share applicant was factually incorrect and addition made under section 68 only based upon surmise and conjecture had to be deleted.

Decision: In assessee’s favour.

Relied: Green Infra Ltd. v. ITO ITA No. 7762/Mum/2012 dated 23-8-2013 for assessment year 2009-10), Asstt. CIT v. Gagandeep Infrastructure (P) Ltd. 2014 TIOL 656 (Mum-Trib), Lovely Exports (P) Ltd. 317 ITR 218 (2008) ITOL 238 (SC)(IT) : 2018 TaxPub(DT) 1826 (SC), Vodafone India Services (P) Ltd. v. Addl. CIT (2014) 368 ITR 1 (Bom) : 2014 TaxPub(DT) 3959 (Bom-HC), CIT v. Goa Sponge and Power Ltd. (Tax Appeal No. 16 of 2012), CIT v. Gagandeep Infrastructure (P) Ltd. (Appeal No. 613 of 2014) and CIT v. Green Infra Ltd. [ITA No. 1162 of 2014) 146 DTR (Bom) 262 (2017) (Asst. yr. 2011-12].

IN THE ITAT, MUMBAI BENCH

SHAMIM YAHYA, A.M. & AMARJIT SINGH, J.M.

ITO v. Sankalp Corporate Services (P) Ltd.

ITA No. 5778/Mum/2017

28 February, 2019

Appellant by: Chaudhary Arunkumar Singh

Respondent by: Prakash Jhunjhunwala

ORDER

Shamim Yahya, A.M.

This appeal by the Revenue is directed against the order of the learned Commissioner (Appeals)-3, Mumbai (‘learned Commissioner (Appeals) for short) dated 30-6-2017 and pertains to the assessment year (A.Y.) 2013-14.

2. The grounds of appeal read as under :–

i. “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 4,30,00,000 made under section 68 of the Income Tax Act with respect to share capital and share premium, by holding that the assessee had proved the transaction within the meaning of section 68 of the Income Tax Act, 1961”.

ii. “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) while deleting the addition under section 68 has erred in not appreciating the fact that the decisions of the Hon’ble Bombay High Court relied upon by him in the case of CIT v. M/s. Gagandeep Infrastructure (P) Ltd. (Appeal No. 613 of 2014) (BHC) and CIT v. Green Infra Ltd. (IT Appeal No. 1162 of 2014) 146 DTR 262 (2017) (BHC) have not been accepted by the Department and SLP proposals have been submitted to the Board by the Commissioner, concerned”.

iii. “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in holding that shares are stock in trade of the assessee without appreciating the fact that the assessee itself while computing the disallowance under section 14A, read with rule 8D at Rs. 1,64,222 had considered the shares, as its investment”.

iv. “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in estimating the disallowance under section 14A at Rs. 50,380 being 20% of the exempt income of Rs. 2,51,899 without appreciating the fact that the formula prescribed under rule 8D does not suggest that net interest has to be considered, while computing the disallowance under section 14A of the Income Tax Act, 1961”.

v. “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in estimating the disallowance under section 14A at Rs. 50,380, being 20% of the exempt income of Rs. 2,51,899 without appreciating the fact that in the presence of rule 8D formula, estimation of disallowance is not justified and legal”.

Apropos addition for share capital :–

3. Brief facts of the case are that the assessee e-filed its return of income on 29-9-2012 declaring loss at Rs. 14,39,508. The same was processed under section 143(1) of Income Tax Act. The case was selected for scrutiny and notice under section 143(2) of Income Tax Act dated 2-9-2014 was issued and duly served on the assessee. Subsequently, notice under section 142(1) was issued along with questionnaire and duly served upon the assessee. The assessee is engaged in the business of trading in shares and securities.

The assessing officer while passing the assessment order, an amount of Rs. 4,01,988 on account of disallowance under section 14A read with rule 8D and Rs. 4,30,00,000 on account of disallowance under section 68 were added to the total income of the assessee. Thereafter, the total income of the assessee was calculated at Rs. 4,30,00,000

4. The details of addition made are as follows :–

During the course of assessment, the assessee received the share application money of Rs. 43,00,000 i.e. 4,30,000 shares of Rs. 10 and Rs. 3,87,00,000 as share premium during the previous year which at a premium of Rs. 90 per share from its business associate company named M/s. Illusion Securities (P) Ltd. Since, Assessee has not offered any explanation with respect to valuation report dated 29-7-2011, the same was not accepted, by the assessing officer.

The assessing officer made addition of the entire share capital and premium received during the year under section 68 of the Income Tax Act, 1961, treating the share capital and premium as unjustified and from undisclosed source. He inferred that the assessee has taken accommodation entries from one of its associate concern M/s. Illusion Securities (P) Ltd. and the nature and the source both cannot be proved by any means. Thus share premium remains unjustified and hence an amount of Rs. 4,30,00,000 received during the year on account of issue of shares at a high premium is hereby added back to the total income of the assessee under section 68 of the Act.

The assessing officer observed that the assessee company had disclosed the losses in Balance Sheet and held that the projected financials furnished by assessee on following Discounted Cash Flow (DCF) method is not correct. Accordingly, assessing officer held that such investor company is not genuinely doing any business but is providing the accommodation entries of share premium in garb of genuine business activity. Thus, assessing officer treated the share capital and premium money received from M/s. Illusion Securities (P) Ltd. of Rs. 4,30,00,000 as accommodation entry and made the addition under section 68 of Income Tax Act.

5. Upon the assessee’s appeal, the learned Commissioner (Appeals) noted the following submissions of the assessee :–

The assessee had filed the PAN card, CIN Master Data (ROC), Certificate of incorporation and Memorandum of Association of M/s. Illusion Securities (P) Ltd. which establishes the identity of the shareholder. The assessee had furnished the copies of Share Application Forms, Board Resolution and Confirmation of Account to prove the genuineness of the transaction. The assessee had filed the I.T. Acknowledgement Receipt, Balance Sheet as on 31-3-2013, Bank Statements and Assessment Order under section 143(3) of the Income Tax Act, 1961 for assessment year 2013-14 of M/s. Illusion Securities (P) Ltd. to prove the credit worthiness of such shareholder. The assessing officer had not disputed the correctness of the above stated documents furnished on record which reasonably establishes the identity and genuineness of the transaction and proves the credit worthiness of the shareholder. Further, once the Assessment Order under section 143(3) of the Income Tax Act, 1961 for the same year i.e. assessment year 2013-14 is passed in case of M/s. Illusion Securities (P) Ltd. (shareholder), then correspondingly the transaction cannot be held as in-genuine in case of the appellant.

6. Considering the above, the learned Commissioner (Appeals) observed as under :–

5.5 I have carefully considered the rival submission and facts of the case and the prevailing legal preposition. The assessing officer made the addition under section 68 of share capital of Rs. 43,00,000 i.e. 4,30,000 shares of Rs. 10 and Rs. 3,87,00,000 as share premium during previous year which at a premium of Rs. 90 per share from its business associate company named M/s. Illusion Securities (P) Ltd. Therefore, applicability of section 68 of the Income Tax Act, 1961 in respect of share premium need to be examined. Section 68 of the Income Tax Act, 1961 read as under :–

“Section 68- where any sum is found credited in the books of an assessee maintained for any previous year, & the assessee offers no explanation about the nature & 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.”

Thus, it can be seen from the above definition that following are the basic requirement to invoke section 68 of the Income Tax Act, 1961 :–

(i) Any sum should be credited in the books of the assessee.

(ii) Assessee offers no explanation about the nature & source of the said sum.

(iii) Explanation offered by the assessee is not satisfactory in the opinion of the assessing officer.

5.6 In the instant case, the appellant filed necessary details of shareholder, their JAN, I.T. Acknowledgement, CIN Master data, Certificate of Incorporation, Share application Forms, Board Resolution, Confirmation of Account, Balance Sheet, Bank statements and Assessment Order under section 143(3) of M/s. Illusion Securities (P) Ltd. (Share Holder Company) to prove the Identity, Genuineness and Credit Worthiness of Share-holders in question.

5.7 During the year, the appellant in its audited Balance Sheet had disclosed the allotment of shares to its associate company named M/s. Illusion Securities (P) Ltd. and received the share application money of Rs. 43,oo,ooo i.e. 4,30,000 shares of Rs. 10 and Rs. 3,87,00,000 as share premium received during the previous year which at a premium of Rs. 90 per share. The assessing officer disputed the share capital and premium money of Rs. 4,30,00,000. The assessing officer observed that the appellant company had disclosed the losses in balance sheet and held that the projected fmancials furnished by appellant on following Discounted Cash Flow (DCF) method is not correct. Accordingly, assessing officer held that such investor company is not genuinely doing any business but is providing the accommodation entries of share application in garb of genuine business activity. Thus, assessing officer treated the share application money received from M/s. Illusion Securities (P) Ltd. of Rs. 4,30,00,000 as accommodation entry and made the addition under section 68 of Income Tax Act.

5.8 The appellant had discharged its onus to prove the transaction. The assessing officer had not brought any contrary documentary evidence on record to disprove the transaction and involvement of unaccounted money belonging to the appellant. It is observed that assessing officer did not even issue the notice under section 133(6) of the Income Tax Act, 1961 to the shareholder or to the banker of such shareholder to verify the source of funds.

Thus, assessing officer treated the share application money received from M/s. Illusion Securities (P) Ltd. of Rs. 4,50,00,000 as accommodation entry and made the addition under section 68 of Income Tax Act. The appellant had furnished adequate documents to prove the Identity, Genuineness and Credit Worthiness of the Share-Holder, the assessing officer is not justified in simply brushing aside such documents, thus the addition made in assessment under section 68 of the Income Tax Act, 1961 needs to be deleted.

5.11 The Learned ARs further argued that the addition under section 68 cannot be made of the share premium money since such is a receipt on capital account and is not of revenue nature. The ARs further argued that the share premium cannot be taxed under section 56(2)(viib) nor under section 68 nor under section 2(24), since such amount received as Share premium is a capital in nature and is required to be held as capital receipt ; and in the above cases, it has held that addition made by the assessing officer under section 68 of the Income Tax Act, 1961 on account of share premium received by the assessees was deleted by observing that:. —

(a) Issue of shares at premium is always a commercial decision which does not require any justification.

(b) Share premium is a capital receipt which has to be dealt with in accordance with section 78 of the Companies Act, 1956.

(d) Share premium by its very nature is a capital receipt and is not income in its ordinary sense.

(e) Even though the amount of share premium may defy all commercial prudence, it cannot be ignored that it is a prerogative of the Board of Directors of the Company to decide the premium amount & is the wisdom of the shareholders whether they want to subscribe at such a heavy premium.

(f) The revenue authorities cannot question the charging of huge premium without any bar from any legislative law of the land.

(g) When the details of the shareholders are given by the Company, the burden of proof rested on the assessee is successfully discharged by the assessee.

(h) Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt & not in the revenue field.

(i) Once the identity of the shareholder is proved, no addition can be made under section 68 of the Income Tax Act, 1961–

And in view of the above, the assessing officer was not justified in invoking the provisions of section 68 of the Income Tax Act, 1961 on any count.

5.12 Hon’ble Supreme Court in Lovely Export (P) Ltd. (supra) has held that if the share application money is received by the assessee company from alleged bogus shareholder, whose names are given to the assessing officer, then the department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee company. It was held that there is no onus on the company to prove the source of money in the hands of shareholder or the persons making payment of share application money. If company identified the persons from whom money has been received, then section 68 cannot be involved in the hands of company.

7. Thereafter, he referred to several case laws and granted relief to the assessee by holding as under :–

5.18 Respectfully following the Jurisdictional High Court Bombay’s decision in the cases namely;

(a) Vodafone India Services (P) Ltd. v. Union of India & Ors. (2014) 368 ITR 1 (Bom) : 2014 TaxPub(DT) 3959 (Bom-HC)

(b) CIT v. M/s. Gagandeep Infrastructure (P) Ltd. (Appeal No. 613 of 2014)

I am of the considered opinion that share premium amount received by the appellant is in the nature of capital and same cannot be assessed under section 68 of the Income Tax Act and therefore addition made by the assessing officer is deleted.

5.19 In view of the above discussion and also following the judicial decisions stated above, I hold that the share premium money received by appellant is of capital nature and does not constitute a revenue receipt, thus addition under section 68 of the Income Tax Act, 1961 deserves to be deleted. The. appellant had filed sufficient documentary evidences to establish the identity of the shareholder, genuineness of the transactions and capacity of the share holder. Further, the assessment order of the shareholder M/s. Illusion Securities (P) Ltd. had been completed under section 143(3) of Income Tax Act, 1961, thus transactions made by such company with the appellant cannot be treated as ingenuine. Accordingly, addition of Rs. 4,30,00,000 made in assessment which include share application money of Rs. 43,00,000 (i.e. 4,30,000 shares of Rs. 10) and Rs. 3,87,00,000 as share premium (i.e. 4,30,000 shares of Rs. 90 per share) cannot be sustained and is hereby deleted. I direct assessing officer to delete the addition of Rs. 4,30,00,0000 made under section 68 of the Income Tax Act, 1961. In view of the above, Ground No. 1 is allowed.

8. Against the above order, the assessee is in appeal before us.

9. We have heard both the counsel and perused the records. The learned Departmental Representative relied upon the order’s of the assessing officer He submitted that the assessing officer has not accepted the share valuation papers for the purpose of share premium. Hence, he submitted that the addition has been correctly made by the assessing officer under section 68 of the Act. The learned Departmental Representative further placed reliance upon the decision of the Hon’ble Apex Court in the case of Sumati Dayal (1995) 214 ITR 801 (SC) : 1995 TaxPub(DT) 1173 (SC) and Durga Prasad More (1971) 82 ITR 540 (SC) : 1971 TaxPub(DT) 0375 (SC). He submitted that the disproportionate share premium is not justified.

10. Per Contra, the learned counsel of the assessee submitted that assessee has accepted shares along with share premiums from a sister concern. He submitted that all the necessary documents establishing the identity creditworthiness and genuineness of the transaction has been duly submitted to the assessing officer He submitted that the assessing officer has not found any fault in these documents. He submitted that the assessing officer has solely based the addition on the basis that valuation of share was done in earlier year and, hence, it was not applicable for the current assessment year. The learned counsel of the assessee submitted that identical share application with similar valuation along with premium were accepted by the assessee from the same sister concern in the earlier assessment year. He submitted that the addition of share capital and share premium for that year was duly deleted by the learned Commissioner (Appeals) and the same was confirmed by the ITAT vide Order, dt. 14-2-2018. The learned Counsel of the assessee submitted that the facts and circumstances are identical. Hence, the learned Counsel of the assessee submitted that in identical circumstances, the ITAT in assessee’s own case has upheld the learned Commissioner (Appeals)’s order deleting the addition for share premium from the same concern. He submitted that addition for the present year has rightly been deleted by the learned Commissioner (Appeals). In this regard, the learned counsel of the assessee further placed reliance upon the order of this ITAT in the case of Dy. CIT v. Piramal Realty (P) Ltd. in ITA No. 2317/Mum/2017 vide Order, dt. 16-11-2018).

11. Upon careful consideration we find that the assessee in this case has taken shares along with share application from the sister concern. The assessee has submitted all the necessary details to establish the creditworthiness, identity and genuineness of the transaction. The documents submitted are as under :–

(a) PAN card

(b) CIN Master data (ROC)

(d) Board Resolution

(e) Confirmation of Account

(f) Balance Sheet of shareholder

(g) Bank statement of shareholder

(h) I.T. Acknowledgement receipt

(i) Assessment Order under section 143(3) of the shareholder

(j) Valuation report of the shares

(k) NAV working of the assessee

(l) balance sheet of the assessee

12. The assessing officer has disregarded all the documents submitted on the sole basis that the share premium is not justified inasmuch as he has rejected the share valuation report on the basis that the same was obtained in an earlier year. The learned Commissioner (Appeals) has given a finding that the assessee filed necessary details of shareholder, their PAN, I.T. Acknowledgement, CIN Master data, Certificate of Incorporation, Share application Forms, Board Resolution, Confirmation of Account, Balance Sheet, Bank statements and Assessment Order under section 143(3) of M/s. Illusion Securities (P) Ltd. (Share Holder Company) to prove the Identity, Genuineness and Credit Worthiness of Share-holders in question.

13. The learned Commissioner (Appeals) observed that the assessee had discharged its onus to prove the transaction. That the assessing officer had not brought any contrary documentary evidence on record to disprove the transaction and involvement of unaccounted money belonging to the assessee. He further noted that the assessing officer did not even issue the notice under section 133(6) of the Income Tax Act, 1961 to the shareholder or to the banker of such shareholder to verify the source of funds. He held that the assessee had furnished adequate documents to prove the Identity, Genuineness and Credit Worthiness of the Share-Holder, the assessing officer is not justified in simply brushing aside such documents. Hence, the learned Commissioner (Appeals) held that the addition made in assessment under section 68 of the Income Tax Act, 1961 needs to be deleted.

14. In this regard, the learned Commissioner (Appeals) placed reliance upon several case laws as under :–

1. Green Infra Ltd. v. ITO (in ITA No. 7762/Mum/2012 dated 23-8-2013 for assessment year 2009-10);

2. ACIT v. M/s. Gagandeep Infrastructure (P) Ltd. 2014 TIOL 656 ITAT Mum

3. Lovely Exports (P) Ltd. 317 ITR 218 (2008) ITOL 238 (SC)(IT) : 2018 TaxPub(DT) 1826 (SC)

4. M/s. Vodafone India Services (P) Ltd. v. Addl. CIT (2014) 368 ITR 1 (Bom) : 2014 TaxPub(DT) 3959 (Bom-HC)

5. CIT v. Goa Sponge and Power Ltd. (Tax Appeal No. 16 of 2012);

6. CIT v. Gagandeep Infrastructure (P) Ltd. (Appeal No. 613 of 2014)

7. CIT v. Green Infra Ltd. (IT Appeal No. 1162 of 2014) 146 DTR (Bom) 262 (2017) (A.Y. 2011-12)

15. We find that ITAT in assessee’s own case for earlier assessment year for similar addition for share capital and share premium from the same sister concern has upheld the order of the learned Commissioner (Appeals) deleting the said addition.

16. We further note that the ITAT in the case of Piramal Realty (P) Ltd. (supra) has held as under :–

14. The learned Counsel for the assessee made another argument that the power of carrying valuation is not envisaged by the Legislature for the purpose of section 68 of the Act. He argued that, wherever the Legislature intended to give the power to determine the value to the assessing officer, it either prescribes Rule for valuation of a particular thing or vested upon the assessing officer the power to refer to the Valuation officer. The power of assessing officer to make a reference to the Valuation Officer is contained in section 142A of the Act. Section 142A of the Act as it stood for the year under consideration reads as under:

“142. (1) For the purposes of making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in section 69 or section 6911 or the value of any bullion, jewellery or oilier valuable article referred to in section 69A or section 6911 or fair market value of any property referred to in sub-section (2) of section 56 is required to be made, the assessing officer may require the Valuation Officer to make an estimate of such value and report the same to him”.

15. We have considered the issue and find that this section does not cover section 68 of the Act. Thus, the Legislature does not envisage any sort of valuation for the purpose of section 68 of the Act. Indeed, valuation of preference shares is a completely different exercise as compared to valuation of equity shares. The assessing officer makes the mention of the reserves and loss while challenging the charge of share premium on preference shares. “Reserves” could be relevant for valuing equity shares. They are not relevant for valuing preference shares. Preference shareholders get priority over the equity shareholders in terms of payment of dividend and during winding up. They get only a fixed rate of dividend. The redemption amount depends on the terms of issue. The conversion depends on the terms of issue. The terms of issue are relevant for valuing preference shares. Even the present Rule 11UA of the Income Tax Rules 1962 are applicable only to section 56(2) of the Act, requires valuation of preference shares by the merchant bankers. The assessing officer has not even attempted to do any sort of valuation of preference shares. His addition is based entirely on conjectures and surmises. It is a settled law that the assessment cannot he made on mere suspicion, conjectures and surmises. 16. Even amendment to section 68 brought by Finance Act, 2012 does not refer to valuation. The insertion of the proviso to section 68 of the Act by Finance Act, 2012 casts an additional onus on the closely held companies to prove source in the shareholders subscribing to the shares of companies. During the course of the hearing, the learned Counsel explained that the explanatory memorandum to the Finance Bill 2012 makes it clear that the additional onus is only with respect to source of funds in the hands of the shareholders before the transaction can be accepted as a genuine one. Even the amended section does not envisage the valuation of share premium. This is further evident from a parallel amendment in section 56(2) of the Act which brings in its ambit so much of the share premium as charged by a company, not being a company in which the public are substantially interested, as it exceeds the fair market value of the shares. If one accepts the learned Commissioner-DR’s contentions that section 68 of the Act can he applied where the transaction is proved to be that of a share allotment that here the valuation for charging premium is not justified, it will make the provisions of section 56(2)(viib) of the Act redundant and nugatory. This cannot be the intention of the Legislature especially when the amendments in the two sections are brought in at the same time. In view of the matter, the learned Counsel explained that it is a settled law that where two views are possible, the view favorable to the assessee should be adopted as held by Hon’ble Supreme Court in case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) : 1973 TaxPub(DT) 0421 (SC). In view of the above facts and circumstances, we are of the view that the assessee has discharged its onus by adequately disclosing the transaction in its books of accounts, filing statutory forms as regards allotment of shares, providing name, address and PAN of the shareholders, etc. the assessee has sufficiently discharged the onus cast upon it for the purpose of section 68 of the Act and no addition can be made on this account. Hence, we are of the view that the Commissioner (Appeals) has rightly deleted the addition and we confirm the same. This issue of Revenue’s appeal is dismissed.

17. Examining the present case on the above factual details and case laws, we note that the assessee has submitted all the necessary details in support of the share applicant and share premium receipt. The assessing officer has not pointed out any defect in the documents. As a matter of fact, the assessing officer has not even issued a notice under section 133(6) of the Act to the share applicant, if he had any doubt about the identity, genuineness and creditworthiness of the share applicant.

18. In fact, the share applicant is the sister concerned of the assessee, from whom similar share application with premium were received in the earlier year. The identical addition in that year by the assessing officer was deleted by the learned Commissioner (Appeals) and confirmed by the ITAT. It is not the case that the Hon’ble Jurisdictional High Court has reversed the said ITAT decision. The facts in the present assessment year are identical as in the earlier year. It is further noted that the assessment of the share applicant has also been completed under section 143(3) of the Act and no adverse comment has been made by the assessing officer in that case. The balance sheet of the share applicant shows ample source of funds. Hence, the assessing officer’s negative observation about share applicant’s availability of funds is factually incorrect. The funds obtained by the share applicant appearing in its balance sheet cannot be disregarded. No adverse observation is noted in the assessment order of the said share applicant. Hence, the veracity of share applicant’s fund position remains undoubted by the assessing officer of the said concern itself. It is not the case that the assessing officer had wanted some information from the share applicant and which the assessee or the share applicant failed to provide.

19. The case law relied upon by the learned Departmental Representative are not applicable on the facts of the present case, as all the necessary documents in support of the identity, creditworthiness and genuineness are on record. Hence, the addition by the assessing officer under section 68 is only based upon surmise and conjucutre and has rightly been deleted by the learned Commissioner (Appeals). Hence, we upohold the order of the learned Commissioner (Appeals).

Apropos deduction under section 14A :–

20. Brief facts of the case are as under :–

During the course of assessment proceedings, the assessing officer has observed that the appellant had claimed income of Rs. 2,51,899 as exempt income under section 10 of the Income Tax Act and also claimed expenses against earning this exempt income and hence it called for disallowance under section 14A read with rule 8D. the assessing officer has recomputed the disallowance of Rs. 3,14,339 under rule 8D(2)(ii) and Rs. 87,649 under rule 8D(2)(iii) and thus made disallowance of Rs. 4,01,988 under section 14A of the Income Tax Act.

21. Upon the assessee’s appeal, the learned Commissioner (Appeals) noted the following submissions :–

The appellant has not made any investment in shares for the purpose of earning dividend income. The appellant has used the borrowed funds from IIFL (NBFC) for the purpose of earning divided income. Interest of Rs. 3,35,376 has been paid for day to day running of the business of the company. We have earned the dividend income on the shares and securities held as stock in trade only,

6.2 Without prejudice to the above, the appellant has earned the total interest of Rs. 20,74,233 and paid Rs. 13,83,441. Thus, the appellant has received the interest income of Rs. 6,90,792, on net basis. The appellant has relied upon the decision of Mumbai ITAT in the case of Morgan Stanley India Securities (P) Ltd., v. ACIT, Yatish Trading Co. (P) Ltd. v. ACIT and also CIT v. Reliance Utility and Power Ltd. It was also submitted that provision of rule 8D were attracted only in case of shares and securities held as investments and not as stock in trade. It is also submitted that while calculating the disallowance under section 14A, interest income should be taken on net basis. Thus, we have not incurred any interest expenses, so disallowance under section 14A read with rule 8D(2) would not arise,

6.3 I have carefully considered the rival submissions and facts of the case. The moot question in this case is whether rule 8Dwill be applied to investments held as stock in trade during the year under consideration. The appellant had received dividend income of Rs. 2,51,899 from such investment. The question as to whether while computing disallowance under rule 8D, stock-in-trade should be taken into account or not. There is no finality with regard to the said question, as various Tribunals and Courts had given different decisions in respect of this question. However, the majority of Tribunals/Courts have held that as far as disallowance under rule 8D(2)(i) relating to Direct Expenses is valid. As regards disallowance under rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules, 1962 are concerned, this disallowance has become void when the Investment in the accounts has been taken as Nil and stock-in-trade has not been treated as investment, since in the computation, denominator of the Average Investment is taken as Nil, the entire computation resulted into Nil. Since section 14A provides for disallowance for expenditure incurred in relation to exempt income, which reads as under :–

“For the purposes of computing the total income under this Chapter, no deduction hall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

In Section 14A of the Act, the language “expenditure incurred in relation to income which does not form part of the total income under the Act” appears to have wider implications as the word “in relation to income” has not been defined under the Income Tax Act. The expression “in relation to” used by the legislature in section 14A of the Act is a broader expression having regard to the object behind the introduction of the provisions of section 14A, which is inserted with an object (i) to disallow expenditure incurred in respect of exempt income against taxable income, (ii) to allow the expenses incurred only to the extent they are relatable to the earning of taxable income and (iii) to allow the exemption in respect of the net income. The expression “in relation to” used in section 14A of the Act has both direct significance as well as indirect significance having regard to the context in which it is used.”

6.4 The provisions of section 14A do confirm the disallowance, whereas if we consider the formula in computing the disallowance under rule 8D(2)(ii) and (iii) needs Average Investment which in the case of the stock-in-trade yielding Nil disallowance. To overcome such situation and the fact that the appellant has not even identified Direct Expenses to earn the dividend income and the fact that the computation in accordance with the formula given in Rule 8D does not yield any figure due to mathematical concepts it is imperative to make disallowance on estimate basis which is incurred by the appellant to earn the dividend income. The estimation should be fair and justifiable to earn the exempt income and fulfill the requirement of provision of section 14A, In view of the above facts and circumstances of the case, I hereby estimate 20% of the exempt income Rs. 2,51,899 i.e. disallowance Rs. 50,380 s 14A read with rule 8D on estimate basis and the appellant gets a relief of Rs. 3,51,608, and an amount of Rs. 50,380 is confirmed.

22. Against the above order, the Revenue is in appeal before us.

23. We have heard both the counsel and perused the records. The learned Departmental Representative submitted that the assessing officer has rightly applied Rule 8D and made the necessary disallowance.

24. Per contra, the learned Counsel of the assessee submitted that though the learned Commissioner (Appeals) has sustained 20% of the exempt income as disallowance. He pleaded that the addition is not at all justified. He submitted tha the assessee has self owned fund comprising the share capital and reserve and surplus of Rs. 8,73,31,485. He further stated that against the same investments in shares is Rs. 1,07,65,920 and shares held in stock-in-trade are Rs. 1,51,39,311. Hence, the learned Counsel of the assessee pleaded that on the touch stone of the Hon’ble Jurisdictional High Court decision in the case of Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) : 2009 TaxPub(DT) 1275 (Bom-HC), no disallowance was called for, as investments are fully covered by non interest bearing own funds.

25. Upon careful consideration, we find that the submissions of the learned Counsel of the assessee with regard to the availability of the non interest bearing own funds being more than investments made are found to be correct. Hence, no disallowance is justified with regard to disallowance under section 8D(2)(ii). Furthermore, as regards the disallowance under section 8D(2)(iii) is concerned, the assessing officer has computed the disallowance of Rs. 87,649. The learned Commissioner (Appeals) has sustained a disallowance of Rs. 50,380 out of exempt income of Rs. 2,51,899. When this is considered under the context of the fact that majority of the shares are held as stock-in-trade and the fact that not all the investments have yielded exempt income during the year, the sustenance of the addition by the learned Commissioner (Appeals) meets the ends of justice. Accordingly, we uphold the same.

26. In the result, this appeal by the Revenue stands dismissed.

10th July 2019

Addition made under section 68 based upon surmise and conjecture had to be deleted

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