2023 (9) TMI 1035 - AT - Income Tax

Addition u/s 68 - genuineness creditworthiness of foreign entities/ ultimate investors were not properly established by the assessee - assessee failed to discharge its onus to prove the genuineness of these transactions as the Cleartrip Inc. (Mauritius) did not have its own fund to invest and money trial revealed that main source of these funds were routed through various accounts - HELD THAT - To show the creditworthiness of the private equity investors in Cleartrip incorporation Cayman Island assessee submitted their profile and the annual financial statements of Cleartrip incorporation Mauritius. The learned assessing officer did not have any material, which controverts above submission and information. There is information about FT7TR reference made by LD AO. For this assessment year assessee has proved identity and creditworthiness of investor as well as the genuineness of the transaction of investment in equity shares of the company. Apparently, assessee has discharged its initial onus cast upon the assessee under the provisions of section 68 of the income tax act. Therefore, we find that the assessee has fairly demonstrated the identity, creditworthiness and the genuineness of the transition by producing extensive material independently for this year also. Proviso to section 68 does not apply to a non-resident investor. Even otherwise assessee has shown nature and source of funds in the hands of Nonresident 100% holding company investor also independently. Hence, we confirm the order of the learned CIT (A) deleting the above addition. No merit in the appeal of the learned Assessing Officer. Hence, the solitary ground of appeal against the deletion of addition is dismissed. Disallowance of advertisement and sales promotion expenses - As stated that the even if there is an incidental indirect third-party benefit, it would not result into characterization of expenditure as not incurred wholly and exclusively for the business of the assessee, no disallowance in the hands of the assessee can be made - HELD THAT - AO despite having the complete detail of such expenditure could not give any independent finding on examination of such detail that the expenditure incurred by the assessee is not wholly and exclusively incurred for the purpose of the business of the assessee. Though assessee denied that there is any benefit to the third parties, however, even if there is an incidental indirect benefit to the some other parties, that would not entitled to revenue to disallow the expenses incurred by the assessee for its own business purposes. We find that if the expenditure is incurred by the assessee for the purposes of the benefit of the third party or its overseas sister concern, it becomes an international transaction which could not have been resulted into disallowance u/s 37 (1) but determination of Arm/s length price of such transaction under Chapter X of The Act. In absence of any evidence placed by the learned assessing officer that these expenditure has resulted into benefit to the third-party and these are not incurred wholly and exclusively for the purposes of the business of the assessee, we do not find any reason to sustain the disallowance. Disallowance of expenditure of advertisement and sales promotion expenditure being 20% of the total expenditure of advertisement and sales promotion expenses incurred by the assessee is allowed.

Summary

Issues Involved:
1. Deletion of addition under Section 68 of the Income-tax Act, 1961.
2. Disallowance of advertisement and sales promotion expenses under Section 37 of the Act.
3. Disallowance of employee stock option expenses.
4. Disallowance of payments made to certain entities.

Summary of Judgment:

Issue 1: Deletion of Addition under Section 68
The learned Assessing Officer (AO) added Rs. 33,33,15,000/- under Section 68, questioning the genuineness and creditworthiness of the share premium received from Cleartrip Inc. Mauritius. The assessee provided extensive documentation to prove identity, creditworthiness, and genuineness, including tax residency certificates, bank statements, and valuation reports. The ITAT found that the issue was covered in favor of the assessee by earlier decisions and confirmed the deletion of the addition by the CIT (A).

Issue 2: Disallowance of Advertisement and Sales Promotion Expenses
The AO disallowed 20% of the advertisement and sales promotion expenses, amounting to Rs. 20,77,70,391/-, based on past assessment years. The CIT (A) confirmed this disallowance. However, the ITAT, referencing its earlier decision, found that the AO did not provide independent findings for the current year and directed the deletion of the disallowance, emphasizing that each assessment year should be independently analyzed.

Issue 3: Disallowance of Employee Stock Option Expenses
For AY 2018-19, the AO disallowed Rs. 6,065,232/- claimed as employee stock option expenses, treating it as capital expenditure. The CIT (A) upheld this disallowance. The ITAT, referencing decisions from various High Courts, held that such expenses are revenue in nature and directed the deletion of the disallowance.

Issue 4: Disallowance of Payments to Certain Entities
The AO disallowed payments made to Techprocess Payment Services Ltd and Avenues India Pvt Ltd, totaling Rs. 198,284,197/-, due to non-filing of returns by these entities and lack of confirmations. The CIT (A) upheld the disallowance. The ITAT set aside the issue back to the AO, directing the assessee to substantiate the payments within 90 days with necessary evidence and confirmations.

Conclusion:
- The appeal by the AO regarding the addition under Section 68 was dismissed.
- The appeal by the assessee regarding the disallowance of advertisement and sales promotion expenses was allowed.
- The disallowance of employee stock option expenses was deleted.
- The issue of disallowance of payments to certain entities was remanded back to the AO for further verification.