Written Submissions before the Commissioner of Income Tax (Appeals)
In the matter of:
M/s Aurora Infotech Solutions Pvt. Ltd. (PAN: AIAAA1234A)
Vs.
The Deputy Commissioner of Income Tax
Circle – 15(2), Metropolis
Assessment Year: 2019–20
1. Introduction to Grounds of Appeal
These submissions are filed on behalf of the Appellant, Aurora Infotech Solutions Pvt. Ltd., in respect of the appeal preferred against the assessment order dated 15 March 2022 passed by the learned Assessing Officer (“AO”) under section 143(3) of the Income-tax Act, 1961 (“the Act”), whereby certain additions and disallowances aggregating to ₹1,84,50,000 have been made to the returned income of the Appellant.
The AO’s additions primarily relate to:
1) Disallowance of expenses claimed under the head “Professional and Consultancy Fees”;
2) Disallowance under section 14A of the Act read with Rule 8D; and
3) Addition on account of alleged unexplained cash credits under section 68 of the Act.
The Appellant most respectfully submits that the said additions and disallowances are unjustified, contrary to law and facts, and liable to be deleted for reasons stated herein.
2. Statement of Facts
1) The Appellant is a company incorporated under the Companies Act, 2013, engaged in the business of IT-enabled services and custom software development. The Appellant maintains regular books of accounts, duly audited under section 44AB of the Act.
2) For the assessment year under consideration, the Appellant filed its return of income on 29 September 2019 declaring a total income of ₹42,75,000. The return was selected for scrutiny, and notices under sections 143(2) and 142(1) were duly complied with.
3) During the scrutiny proceedings, the AO issued various queries regarding the nature and justification of expenses debited in the Profit & Loss account, the source and creditworthiness of amounts credited to the books, and the computation of disallowance under section 14A. The Appellant furnished detailed explanations along with documentary evidences, including invoices, agreements, bank statements, confirmations, and computation workings.
4) Notwithstanding the comprehensive submissions, the AO proceeded to disallow:
i. ₹78,00,000 out of the “Professional and Consultancy Fees” claimed, alleging non-business nexus;
ii. ₹14,25,000 under section 14A read with Rule 8D(2)(iii), stating that indirect administrative expenses were attributable to exempt income; and
iii. ₹92,25,000 as unexplained cash credits under section 68, alleging that the Appellant failed to prove the creditworthiness of certain corporate lenders.
5) These disallowances have been made despite the fact that:
i. All professional and consultancy payments were supported by agreements and tax invoices, and recipients were identifiable and assessed to tax;
ii. The disallowance under section 14A was mechanically computed without recording the requisite satisfaction as mandated by section 14A(2); and
iii. The alleged cash credits were through normal banking channels, with PAN, ITR acknowledgments, and financial statements of the creditors furnished.
6) Being aggrieved, the Appellant has filed the present appeal before the Hon’ble CIT(A) challenging the aforesaid additions in their entirety.
3. Detailed Submissions with Legal Arguments
The Appellant respectfully submits that the impugned additions made by the learned AO are untenable in law and on facts for the reasons detailed hereunder.
I. Disallowance of Professional and Consultancy Fees – ₹78,00,000
(a) Business Nexus and Evidence Furnished
The Appellant had, during the relevant previous year, availed of professional and consultancy services from various domain experts for specialised assignments, including systems integration design, cybersecurity compliance audits, and process automation consulting. The services were rendered under duly executed agreements, and payments were made through banking channels after deduction of applicable tax at source under section 194J.
All the following documentary evidence were produced before the AO:
i. Service agreements specifying the scope of work;
ii. Tax invoices raised by the consultants;
iii. Proof of payment via NEFT/RTGS;
iv. TDS challans and Form 26Q acknowledgments;
v. Copies of the consultants’ income tax returns evidencing inclusion of the receipts in their taxable income.
Despite such comprehensive evidence, the AO, without identifying any specific defect in the documents or disputing the rendering of services, proceeded to disallow the expenditure on vague assertions of “absence of business necessity.”
(b) Legal Position
It is a settled principle that the commercial expediency of expenditure is to be judged from the perspective of the businessman and not the tax authorities. The Hon’ble Supreme Court in S.A. Builders Ltd. v. CIT [2007] 158 Taxman 74 (SC) laid down that once it is shown that the expenditure was incurred for the purpose of business, the AO cannot question its necessity or sufficiency.
Further, the jurisdictional High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 121 Taxman 706 (Del) held that the AO is not to sit in the armchair of a businessman to determine what expenses are reasonable.
(c) AO’s Lack of Specific Findings
The disallowance is wholly unsustainable as the AO has not:
Pointed to any instance of bogus service;
Brought any adverse material to suggest that the payments were a colourable device;
Denied that the consultants were competent professionals engaged for business purposes.
In absence of such findings, the blanket disallowance of ₹78,00,000 is arbitrary and contrary to law.
II. Disallowance under Section 14A read with Rule 8D – ₹14,25,000
(a) AO’s Failure to Record Satisfaction
The AO has invoked Rule 8D mechanically without recording the mandatory satisfaction under section 14A(2) that the claim of the Appellant (of having incurred no expenditure to earn exempt income) is incorrect. The Hon’ble Supreme Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2017] 81 taxmann.com 111 (SC) has categorically held that recording such satisfaction is a sine qua non for application of Rule 8D.
(b) No Nexus with Exempt Income
During the relevant year, the Appellant earned exempt dividend income of merely ₹2,10,000 from mutual fund investments, which were made out of surplus own funds. No borrowed funds were utilised, and investment operations were carried out directly by the treasury team without additional administrative cost.
(c) Judicial Support
The jurisdictional High Court in CIT v. Taikisha Engineering India Ltd. [2014] 370 ITR 338 (Del) has held that disallowance under Rule 8D(2)(iii) cannot be made in absence of satisfaction and without establishing nexus between expenditure and earning of exempt income.
(d) Excessive and Disproportionate Disallowance
Even assuming without admitting that some expenditure is to be disallowed, the mechanical application of 0.5% of average investments, resulting in ₹14,25,000, is grossly disproportionate to the exempt income earned and runs contrary to the principle laid down in PCIT v. Caraf Builders & Constructions (P.) Ltd. [2019] 413 ITR 122 (Del) that disallowance should not exceed exempt income.
III. Addition under Section 68 – ₹92,25,000 as Alleged Unexplained Cash Credits
(a) Primary Onus Discharged
The Appellant had received unsecured loans from two corporate entities – Helios Ventures Pvt. Ltd. and Zenith Capital Advisors Pvt. Ltd. – aggregating to ₹92,25,000 during the year. For each creditor, the following were furnished:
Name, address, and PAN;
Confirmation letters;
Bank statements reflecting the transaction;
Income tax return acknowledgments;
Audited financial statements establishing creditworthiness.
These documents discharge the threefold onus under section 68 as per CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78 (SC): identity of creditor, genuineness of transaction, and creditworthiness of creditor.
(b) AO’s Rejection on Generalised Grounds
The AO rejected the explanation solely on the ground that the creditors had low profit margins in their financial statements and that they had allegedly advanced funds without sufficient commercial rationale. This reasoning is contrary to law, as it is not the AO’s prerogative to question the commercial wisdom of the creditors, once their creditworthiness is established.
(c) Legal Position
The Hon’ble Delhi High Court in CIT v. Kamdhenu Steel & Alloys Ltd. [2014] 361 ITR 220 (Del) has held that once the assessee has furnished all primary evidence to prove the transaction, the AO cannot make additions merely on suspicion or doubts regarding the creditor’s source, unless there is material to indicate that the transaction is bogus.
(d) Source of Source Not Required
It is trite law that the assessee is not obliged to prove the source of source, as reiterated by the Hon’ble Supreme Court in Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (SC). The AO’s insistence on tracing funds further upstream is therefore misplaced.
4. Consolidated Case Law Table
Below is a summary of the key judicial precedents relied upon by the Appellant, which directly support the deletion of the impugned additions:
Case Citation
Facts in Brief
Ratio / Decision
S.A. Builders Ltd. v. CIT [2007] 158 Taxman 74 (SC)
Assessee advanced funds to a sister concern; AO disallowed on grounds of no necessity.
Commercial expediency must be judged from the businessman’s perspective; AO cannot substitute his own opinion of necessity.
CIT v. Dalmia Cement (Bharat) Ltd. [2002] 121 Taxman 706 (Del)
AO disallowed certain marketing expenses as excessive.
AO is not the arbiter of business prudence; genuine expenses for business must be allowed.
Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2017] 81 taxmann.com 111 (SC)
Rule 8D applied without recording satisfaction.
Recording of satisfaction under section 14A(2) is mandatory before invoking Rule 8D.
CIT v. Taikisha Engineering India Ltd. [2014] 370 ITR 338 (Del)
AO disallowed administrative expenses without nexus to exempt income.
Disallowance under Rule 8D requires satisfaction and proof of nexus.
PCIT v. Caraf Builders & Constructions (P.) Ltd. [2019] 413 ITR 122 (Del)
Disallowance under section 14A exceeded exempt income.
Disallowance cannot exceed exempt income.
CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78 (SC)
Cash credit addition challenged.
Once identity, genuineness, and creditworthiness are proved, burden shifts to Revenue.
CIT v. Kamdhenu Steel & Alloys Ltd. [2014] 361 ITR 220 (Del)
AO doubted lender’s financial capacity despite documents.
Suspicion cannot replace evidence; addition u/s 68 requires concrete proof of bogusness.
Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (SC)
AO sought source of source for cash credits.
Assessee is not required to prove source of source under section 68.
5. Prayer
In light of the facts of the case, the detailed submissions made hereinabove, and the binding judicial precedents cited, it is most respectfully prayed that this Hon’ble Commissioner of Income Tax (Appeals) may be pleased to:
Delete the disallowance of ₹78,00,000 towards professional and consultancy fees, as the expenditure was wholly and exclusively incurred for the purposes of the Appellant’s business and is supported by unimpeachable evidence.
Delete the disallowance of ₹14,25,000 under section 14A read with Rule 8D, as the AO has failed to record the mandatory satisfaction, and the disallowance is excessive and disproportionate to the exempt income earned.
Delete the addition of ₹92,25,000 made under section 68, as the Appellant has conclusively established the identity, creditworthiness, and genuineness of the transactions, and the AO’s rejection is based on conjectures.
Grant such other relief(s) as may be deemed fit in the interests of justice.
The Appellant craves leave to add to, alter, amend, or withdraw any grounds or submissions at any time before the disposal of the appeal, in the interest of justice.
Place: Metropolis
Date: [Date of filing]
For the Appellant
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