Section 68 and ad hoc expenditure disallowance: non-resident share capital addition and unsupported expense cut both fail.

Section 68 addition on share capital and share premium received from a non-resident holding company was not sustainable where the investor's identity, the transaction's nature, and the explained source of funds were accepted; the proviso to Section 68 was treated as inapplicable to a non-resident investor, so the deletion of the addition was upheld. An ad hoc 10% disallowance of business expenditure also failed because the assessee furnished supporting details and the Assessing Officer identified no specific defect, inflation, non-business use, or rational basis for the percentage adopted; the deletion of that disallowance was likewise upheld.

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Issues: (i) Whether addition under Section 68 could be sustained in respect of share capital and share premium received from a non-resident holding company. (ii) Whether deletion of an ad hoc disallowance of 10% of business expenditure was justified.

Issue (i): Whether addition under Section 68 could be sustained in respect of share capital and share premium received from a non-resident holding company.

Analysis: The investment was received from the assessee's foreign parent company. The concurrent findings recorded that the identity of the investor, the nature of the transaction, and the source of the funds as explained by the assessee had been accepted. The proviso to Section 68, which deems the explanation unsatisfactory unless the resident shareholder explains the nature and source, was held not to extend to a non-resident investor. The Court also noted that the object of Section 68 is to bring unaccounted income into the tax net, which was not the case on the facts found.

Conclusion: The addition under Section 68 was rightly deleted, and the issue was decided in favour of the assessee.

Issue (ii): Whether deletion of an ad hoc disallowance of 10% of business expenditure was justified.

Analysis: The assessee had furnished break-up details, supporting documents, and justification for variations in expenses. The Assessing Officer did not identify any specific defect, abnormality, inflation, or non-business use of the , nor did he state why 10% was chosen. The concurrent findings held that an ad hoc disallowance without a specific basis could not be sustained.

Conclusion: The deletion of the ad hoc disallowance was upheld, and the issue was decided in favour of the assessee.

Final Conclusion: No substantial question of law arose from the Tribunal's order, and both revenue appeals failed.

Ratio Decidendi: The proviso to Section 68 does not apply to share capital or share premium received from a non-resident investor, and an ad hoc disallowance of expenditure cannot stand without a specific factual basis or identifiable defect in the assessee's records.

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