Foreign parent's share investment in Indian subsidiary recorded in books-s.69 unexplained investment addition to be deleted on verification

The dominant issue was whether investment by a non-resident in its Indian subsidiary could be treated as unexplained investment under s.69. The ITAT held that s.69 applies only where investments are not recorded in the assessee's books or the nature/source is not satisfactorily explained; here the investment was duly recorded and supported by bank statements and audited accounts showing funds received as share investment from the foreign parent, with regulatory disclosures corroborating the transaction. Consequently, the ITAT directed the assessee to produce the annual accounts to the AO, who shall verify the stated source and delete the addition if found in order, and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether an addition under section 69 could be sustained in respect of a non-resident's investment in shares of its Indian subsidiary, when the investment was recorded in the assessee's books and supported by banking and regulatory evidence, but the lower authorities alleged failure to prove "source of investment".

(ii) Whether, on the evidence placed on record (including bank statements, foreign inward remittance certificates, regulatory filings/approvals, and annual accounts), the impugned share-subscription investment could be treated as unexplained investment under section 69, and what verification, if any, was still required.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Sustainability of addition under section 69 for share-subscription investment by a non-resident where investment is recorded and explained

Legal framework (as discussed by the Court): The Court considered section 69 as applicable where (a) investments are not recorded in the books of account, and (b) the assessee offers no explanation about the nature and source of the investments, or the explanation is not satisfactory; in such case, the value of investments may be deemed to be income.

Interpretation and reasoning: The Court found as a fact that the investment was recorded in the assessee's books. It further held that the assessee provided an explanation that the funds were received from its foreign parent/holding company and then invested into the Indian subsidiary. The Court reasoned that, where the investment is duly recorded in the assessee's books and its nature is explained, the lower authorities misapplied section 69 by insisting on "source" in a manner disconnected from the statutory condition that section 69 targets investments not recorded in the books. The Court held that the lower authorities wrongly interpreted section 69 on these facts.

Conclusion: The Court concluded that, on the facts found, the investment could not be treated as unexplained investment chargeable to tax under section 69 in the hands of the non-resident, because the investment was recorded in the books and was explained as sourced from the parent entity's funding reflected in the assessee's accounts and banking trail.

Issue (ii): Adequacy of evidence establishing genuineness and source of funds; effect of remand report; scope of verification directed

Interpretation and reasoning: The Court held that the assessee produced "overwhelming evidence" showing the funding trail and genuineness of the investment, including banking entries showing receipt of funds from the foreign parent and corresponding remittances for share subscription, foreign inward remittance certificates, regulatory filings/approval connected with the allotment, and annual accounts showing capital/share premium funding. The Court also relied on the fact that, in remand proceedings, the assessing authority accepted the assessee's contention after examining bank statements and remittance entries, yet the addition was still sustained by the panel. The Court held that objections regarding valuation and certain certificate particulars were irrelevant to the core question under section 69 once the funding source/capacity and banking trail were demonstrated and the investment stood recorded and explained.

Conclusion and operative direction: While disagreeing with sustaining the addition on the ground of lack of source evidence, the Court directed a limited verification: the assessee was directed to show its annual accounts to the assessing authority to demonstrate that the money came from the foreign parent and was invested in the Indian subsidiary; the assessing authority was directed to verify this and then delete the addition if found in order. The Court accordingly allowed the substantive grounds challenging the section 69 addition, with remaining grounds treated as consequential/general.

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