Section 68 share capital relief, vacancy allowance and exempt-income disallowance recalculated on evidence and actual fund use.

Documentary evidence, foreign remittance records, RBI/FDI filings and treaty exchange-of-information material were treated as sufficient to establish the investor's identity, genuineness of the share capital transaction and the immediate source of funds, so the section 68 addition on share capital and premium was deleted. For the vacant property, section 23(1)(c) was applied because the unit remained unlet and vacant during the year, and annual value was directed to be taken at nil. On section 14A, the interest disallowance was deleted where own funds were available, the exempt-income-linked component was to be recomputed only with reference to exempt-income investments, and the mechanical rule 8D approach for book profit under section 115JB was set aside for fresh consideration.

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Issues: (i) whether the addition made under section 68 on account of share capital and share premium was sustainable; (ii) whether annual letting value of the vacant unit was liable to be taken at nil under section 23(1)(c); (iii) whether disallowance under section 14A and the corresponding computation under section 115JB were correctly made.

Issue (i): whether the addition made under section 68 on account of share capital and share premium was sustainable.

Analysis: The share subscriber was a Mauritius-based group company. The record included foreign inward remittance, RBI and FDI-related filings, tax residency material, and information received through exchange of information under the relevant treaty framework. The source of funds of the subscriber was traced to a loan from another group entity, and the tribunal treated the source of source as sufficiently established for the purposes of the assessee's onus under section 68. The objections that the subscriber was a mere pass-through entity and that the upstream Bahamas entity was tainted were held to be unsupported by material evidence.

Conclusion: The addition under section 68 was deleted in favour of the assessee.

Issue (ii): whether annual letting value of the vacant unit was liable to be taken at nil under section 23(1)(c).

Analysis: The unit remained vacant during the relevant year and was not let out, although efforts were made to make it suitable for occupation. Section 23(1)(c) specifically provides vacancy allowance where the property or part thereof is let and remains vacant for the whole or part of the year, resulting in lower actual rent. On the facts found, the provision was applied to the vacant unit and the annual value was directed to be computed accordingly.

Conclusion: The annual letting value was directed to be taken at nil in favour of the assessee.

Issue (iii): whether disallowance under section 14A and the corresponding computation under section 115JB were correctly made.

Analysis: For the normal computation, the tribunal accepted that interest disallowance could not be made where sufficient own funds were available and directed deletion of the interest component under rule 8D(2)(ii), while the exempt-income-linked component under rule 8D(2)(iii) was to be recomputed only with reference to investments yielding exempt income. For book profit under section 115JB, the mechanical application of rule 8D was held impermissible and the matter was remanded for fresh determination on the basis of actual expenditure relatable to exempt income.

Conclusion: The assessee succeeded on the interest component under section 14A, the disallowance under section 115JB was set aside for fresh consideration, and the issue was decided partly in favour of the assessee.

Final Conclusion: The assessee obtained relief on the share-capital addition and the house-property issue, partial relief on the section 14A computation, and the revenue's challenge to the related 14A relief failed.

Ratio Decidendi: Where documentary and treaty-based exchange-of-information material establishes the investor's identity, the genuineness of the transaction, and the immediate source of funds, a section 68 addition on share capital cannot be sustained merely on suspicion of an upstream foreign entity; and for house property vacancy, section 23(1)(c) prevails where the property remained vacant and the actual rent was nil.

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