M/S LEADING FRONTIER PRIVTE LIMITED,MUMBAI V. THE ASSISTANT COMMISSIONER OF INCOMET TAX CIRCLE 10(2)(1), MUMBAI

ITA 2638/MUM/2025

AI Insights

M/s Leading Frontier Private Ltd. appealed against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, which confirmed the addition of Rs. 10,00,00,000 as unexplained cash credit under section 68 of the Income Tax Act, 1961, and upheld an adhoc disallowance of 10% on business expenditures. The Tribunal examined the legality of the foreign direct investment (FDI) received by the assessee and the applicability of RBI regulations. The Tribunal concluded that the assessee had provided sufficient evidence to prove the legitimacy of the share capital received and that the business activities of the assessee fell within the permissible scope for FDI under RBI guidelines.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 717646 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2017-2018
• Appeal Filed On: 17-04-2025
• Other Referred Cases: Shri Bhageeratha Pattina Sahakara Sangha Niyamitha vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LEYAQAT ALI AAFAQUI
• Assessee Lawyers: NITESH JOSHI; ANSH
• Keywords: Business expenditure; Corroborative evidences; Unexplained cash credit; Capital receipt; Competent authority
• Section: 143(3); 142(1); 68

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE MS PADMAVATHY S, AM & SHRI RAJ KUAMR CHAUHAN, JM I.T.A. No. 2638/Mum/2025 (Assessment Year: 2017-18) M/s Leading Frontier Private Ltd., Plot No. 61/2A, The Icon Project Highland Garden Road, Dhokali, Village Road, Chitalsar Manpada B.O. Thane, Maharashtra-400607. PAN: AADCL2382G Vs. Assistant Commissioner of Income Tax, Circle-10(2)(1), Aayakar Bhavan, M.K. Road, Mumbai-400020. Appellant) : Respondent) Appellant /Assessee by : Shri Nitesh Joshi & Shri Ansh Khajanchi, AR Revenue / Respondent by : Shri Leyaqat Ali Aafaqui, Sr. DR Date of Hearing : 16.07.2025 Date of Pronouncement : 14.08.2025 O R D E R Per Padmavathy S, AM: This appeal by the assessee is against the order of the Commissioner of Income Tax(Appeals)/ National Faceless Appeal Centre (NFAC), Delhi [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 28.03.2025 for Assessment Year (AY) 2017-18. The assessee raised the following grounds of appeal: Printed from counselvise.com 2 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. “1. The Learned Commissioner of Income Tax (Appeals)-NFAC (\"Ld. CIT(A)\") has erred in confirming addition of Rs. 10,00,00,000/- by treating the share capital received during the year under appeal as an unexplained cash credit under section 68 of the Act. On the facts and circumstances of the case and in law, addition of Rs. 10,00,00,000/- confirmed by the CIT(A) ought to be deleted. 2. The Ld. CIT(A) has erred in confirming the action of the Ld. AO in disallowing, on ad hoc basis, Rs. 7,55,306/-being 10% of the business expenditure incurred during the year. On facts and circumstances of the case and in law, disallowance of Rs. 7,55,306/-confirmed by the CIT(A) ought to be deleted.” 2. The assessee is a company and is engaged in the business of development and construction of Township, construction of residential and commercial premises building, mixed use development of the land. The assessee was incorporated on 02.02.2017. The assessee did not have any turnover for the AY 2017-18 and filed the return of income on 31.10.2017 declaring a total business loss of Rs. 77,55,186/. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) issued notice under section 142(1) and also a show cause notice to provide details of the shares issued by the assessee to the following shareholders: (i) Smart Dream Management Pte. Ltd. - 90,00,000 shares of Rs. 10/- each – Rs. 9,00,00,000/-. (ii) Bright Sunshine Singapore Holding Pte. Ltd. – 10,00,000 shares of Rs. 10/- each - Rs. 1,00,00,000/- 3. Since the assessee did not respond to the notices the AO completed the assessment ex-parte by adding the entire share capital of Rs. 10,00,00,000/- as unexplained under section 68 of the Act. The AO also made an adhoc disallowance of 10% of expenses claimed by the assessee amounting to Rs. 7,55,306/-. Aggrieved Printed from counselvise.com 3 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. the assessee filed further appeal before the CIT(A). With regard to the addition made under section 68 towards share capital the CIT(A) held that “5 Findings and Decision: I have carefully considered Form 35, statement of facts, order u/s 143(3). submission/details uploaded in the system and the Grounds of Appeal raised. The present appeal is filed against the order u/s 143(3) dated 15/12/2019. Under the circumstances, based on the material on record the pending appeal is decided and ground raised is adjudicated as under: Ground No. 1. Unexplained cash credit - Considered the equity share capital issued by the Company of INR 10,00,00,000 as unexplained cash credit and taxed under income from other sources u/s 68. The appellant's contention is that the addition made of capital receipts amounting to Rs. 10,00,00,000/- by the AO within the meaning of section 68 being unexplained cash credit is not valid and needs to be deleted. The appellant claimed that the money received was towards the share capital money only, and the same was received from the registered companies of Singapore (FDI). The AO has erred in making the addition of unexplained credits of INR 10,00,00,000/- received from shareholders towards the share capital. In the Memorandum Of Association Of Leading Frontier Private Limited, the Objectives to be Pursued by the Company are stated and the same is reproduced below:- 1. To carry on and engage into the business of providing property management, design, marketing, construction, consultancy, advisory service, as well as various services in real property/estate sector/industry, including, inter alia, providing consultancy and management services, property management, land, property and development projects, purchase or lease of land and property. institutional advisory services, strategic information and marketing research, facilities management services. To carry on the business of construction, development, administration and management of real property. 2. Development of townships, construction of residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure. 3. To carry on the business of property development, investment and the purchase, lease, exchange or other means of acquisition, solely or by joint Printed from counselvise.com 4 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. venture with others, lands, estates and buildings, or interests therein, by preparing for building purposes, demolishing, altering, constructing, building estates, houses, condominiums, commercial complexes and buildings of all kinds, landscaping and by advancing money to and entering into contracts and arrangements of all kinds which may or may not incorporate interest charges, management charges or profit sharing schemes with builders, property developers and others. 4. To carry on business as contractor and structural engineers, mechanical, electrical and civil engineers, masons and masonry and building contractors and as general and civil contractors whatsoever known to engineering, steel, fabricators, iron founders, welders, tool makers, brass, in copper, aluminum and other metal founders, sheet metal workers, boiler makers, mill wrights, machinists, iron and steel converters, smiths, wheel wrights, metallurgists, castings, pressings, forgings, stamping, water supply engineers, steel makers, wire drawers, tube pipe and tool manufacturers, moulders, fitters, saddlers, galvanizers, enamellers, electroplaters, painters, vulcanisers, packing case makers, containers drums, pressure vessel and etc. 5. To purchase any movable or immovable property including industrial, commercial, residential, or plots, buildings, houses, apartments, flats or areas within or outside the limits of Municipal Corporation or other local bodies, anywhere within the Domain of India, to divide the same into suitable plots, and to rent or sell the plots for building/constructing residential houses, bungalows, business premises, and colonies and rent or sell the same and realize cost in lump sum or easy instalments or by hire purchase system and otherwise. The Appellant's company was incorporated on February 02, 2017 with authorised capital of INR 25,00,00,000 and an amount of INR 10,00,00,000 was received from its's shareholders from Singapore towards the issuance of share capital through FDI on March 2017. According to RBI's Master Circular on Foreign Investment in India in No. RBI/2011-12/15 Master Circular No. 15/2011-12 July 1, 2011, it was stated that some of the sectors are not eligible to receive FDI. The relevant portion of the Circular is reproduced below :- c) \"Prohibition on foreign investment in India (i) Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities: Printed from counselvise.com 5 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. (a) Business of chit fund, or (b) Nidhi company, or (c) Agricultural or plantation activities, or (d) Real estate business, or construction of farm houses, or (e) Trading in Transferable Development Rights (TDRs). (ii) It is clarified that \"real estate business\" means dealing in land and immovable property with a view to earning profit or earning income there from and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. As per the guidelines of the above mentioned circular, the FDI amount of Rs. 10,00,00,000/- received for the development of real estate business is not acceptable. Thus it is evident from the appellant's Memorandum Of Association Of Leading Frontier Private Limited, the Objectives of the company is engaged in the rent/sell the plots for building/constructing residential houses, bunglows, business premises & colonies etc and not in the government's infrastructure i.e. Road, Dam's, Canal etc., development which were utilized for public welfare. As per the conditions laid down by the RBI Act, FDI is not permitted for the real estate sector and prior permission or approval of the FIPB is required which was provided but the permission or certificate issued by the Bank does not state whether it is allowable for FDI investment in shares of company, when such investment is prohibited by the RBI and Government policy. Therefore, the appellant's contention is not acceptable. It is observed that the appellant has brought on record permission from the competent authority to obtain the FDI in India for the appellant company, however, it is evident from the circular the investment in shares of company engaged in real estate business is not allowable. Therefore, the appellant company has violated the provisions of RBI Act for obtaining the FDI from these various companies. Therefore, the addition made by the AO of investment from foreign companies in the hands of the appellant within the meaning of section 68 as unexplained cash credit is found to be justifiable and correct. In view of the above, the appellant's contention that the addition was wrongly made of FDI in the hands of the appellant is not acceptable.” 4. With regard to the adhoc disallowance the CIT(A) upheld the decision of the AO for the reason that the assessee failed to produce any evidences substantiating Printed from counselvise.com 6 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. the claim of expenses. The assessee is in appeal before the Tribunal against the order of the CIT(A). 5. The ld. AR submitted that the only reason for treating the entire share capital as addition under section 68 is that the investments made by the overseas investors are in violation of RBI Regulations. The ld. AR further submitted that the condition for making an addition under section 68 is that when assessee fails to prove the identity, creditworthiness and the genuineness of the transaction and that in an assessee's case all the said three elements are well substantiated by submission of the documents such as Foreign Inward Remittance Certificate (FIRC). The ld. AR further submitted that there is no restriction towards Foreign Direct Investment (FDI) in the nature of business of the assessee which is clear from the findings of the CIT(A) itself mentioning the FDI restrictions. The ld. AR also submitted that the same shareholders made further investment during the financial year relevant to AY 2018-19 and the AO raised similar questions with regard to the said investments. The ld. AR brought to our attention that the assessee made a detailed written submission and after considering the same, the AO did not make any addition for AY 2018-19 while completing the assessment under section 143(3) of the Act. The ld. AR further took the Bench through the Memorandum of Association (MOA) wherein the objects of the company are mentioned and the relevant regulations of the Reserve Bank of India to submit that the prohibition on FDI is only with respect to the Real Estate Business or Construction of Farm House where real estate business has been defined to mean dealing in land and immovable property with a view to earning income there from and does not include development of township, construction of residential/commercial premises, roads or bridges, educational institution, recreational facilities, city and regional level infrastructure township. The ld. AR submitted that from the main objects of the company it is clear that the Printed from counselvise.com 7 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. assessee is not engaged in the business where there is prohibition on FDI. Without prejudice the ld. AR argued that violation of Regulations of RBI cannot lead to addition under section 68 of the Act. In this regard the ld. AR placed reliance on the decision of the Co-ordinate Bench in the case of Shri Bhageeratha Pattina Sahakara Sangha Niyamitha vs. ITO (ITA No. 346/Bang/2021 dated 18.02.2022). 6. The ld. DR on the other hand submitted detailed written submission and placed reliance on the order of the lower authorities. 7. We heard the parties and perused the material on record. During the year under consideration, assessee has received share capital from two Singapore entities. The AO called on the assessee to furnish the details pertaining to the same and since the assessee did not respond, the AO proceeded to treat the entire amount as unexplained under section 68 of the Act. Before the CIT(A), the assessee submitted the necessary details pertaining to the investment of share capital including FIRC copy etc. The assessee has also submitted source for making the investments in the hands of M/s. Smart Dream Management Pte. Ltd and M/s. Bright Sunshine Singapore Holding Pte Ltd such as Bank statements, declaration from the directors, Balance Sheet of the parent company etc. Though the CIT(A) did not record any adverse findings with regard to the documents filed with regard to source, confirmed the addition made by the AO on the ground that there is a restriction for investment in the nature of business assessee is engaged in as per RBI regulations. From the perusal of the Master Circular of Foreign Direct Investment (FDI) in India dated 01.07.2011 issued by RBI, we notice that there is a prohibition for FDI in real estate business. However we further notice that there is an exception provided in the Circular to the business of development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational Printed from counselvise.com 8 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. facilities, city and regional level infrastructure, townships. We also notice from the perusal of the MOA of the assessee that the nature of business assessee is engaged in falls in the above described exception category. Accordingly we see merit in the submission of the ld AR that there is no restriction for investment under automatic route as per the RBI circular. The issue of whether, violation of RBI regulations if any can be the sole reason for treating the investment as unexplained has been considered by the coordinate bench in the case of Shri Bhageeratha Pattina Sahakara Sangha Niyamitha where it has been held that the contraventions if any of the nitifications issued by RBI cannot attract the provisions of section 68. It is an admitted fact that the revenue has not disputed the identity, credit worthiness or genuineness of the impugned transaction in the hands of the assessee and this is further substantiated by the fact that further investments from the same parties have been accepted by the revenue in the subsequent AY i.e. AY 2018-19. In view of these discussions we hold that the addition towards share capital sustained by the CIT(A) for sole reason that it is in violation of RBI regulations is not tenable since the assessee has discharged the onus of proving the identity, credit worthiness or genuineness of the impugned transaction which is not questioned by the revenue while making addition under section 68 of the Act. The AO is accordingly directed to delete the addition made in this regard. Ground No.1 of the assessee is allowed 8. Ground No.2 pertains to adhoc disallowance of 10% of other expenses claimed by the assessee. The reason for making the disallowance is that the assessee has not carried out any business and that no supporting evidences were submitted. The ld AR in this regard submitted that the impugned expenses are incurred in the normal course of business and that these are not related to any projects. The ld AR prayed one more opportunity to substantiate the claim with proper supporting documents before the lower authorities. The ld DR though supported the orders of Printed from counselvise.com 9 ITA No. 2638/Mum/2025 M/s Leading Frontier Private Ltd. the lower authorities did not raise any objection to the prayer of the ld AR. Since the claim of the assessee with regard to the impugned expenditures need factual verification, we are remitting the issue back to the AO for the limited purpose to examine the deduction claimed by the assessee towards other expenses, by calling for necessary evidences and allow the claim in accordance with law. The assessee is directed to provide the required details as may be called for in this regard and cooperate with the assessment proceedings. It is ordered accordingly. Ground No.2 of the assessee is allowed for statistical purposes. 9. In result, appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 14-08-2025. Sd/- Sd/- (RAJ KUAMR CHAUHAN) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "