Supreme Court Upholds Addition of Bogus Share Capital: Principal Commissioner of Income Tax vs. NRA Iron & Steel Pvt. Ltd. (2019)

Date of the Judgment: March 5, 2019

Citation: 2019 INSC 195

Judges: Uday Umesh Lalit, J., Indu Malhotra, J.

Can a company simply claim that money received as share capital is legitimate, or must they prove it? The Supreme Court of India recently addressed this crucial question in a case involving allegations of bogus share capital. The court clarified that the burden of proof lies on the assessee to prove the genuineness of share capital/premium credited in their books of account. The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Indu Malhotra, with Justice Indu Malhotra authoring the opinion.

Case Background

The case revolves around NRA Iron & Steel Pvt. Ltd. (the Assessee), which declared a total income of Rs. 7,01,870 for the assessment year 2009-10. The Income Tax Department initiated reassessment proceedings under Section 148 of the Income Tax Act, 1961, after noticing that the Assessee had received Rs. 17,60,00,000 as share capital/premium from various companies. The Assessing Officer (AO) questioned the genuineness of these transactions, suspecting that the funds might be unaccounted money being routed through share capital.

The Assessee claimed that the funds were received through normal banking channels and provided documents like income tax return acknowledgments to support their claim. However, the AO conducted independent field inquiries at Mumbai, Kolkata, and Guwahati, where the investor companies were located. These inquiries revealed that many of the investor companies were either non-existent or had very low incomes, raising serious doubts about their creditworthiness and the genuineness of the transactions.

Timeline:

Course of Proceedings

The Assessing Officer (AO) added back the amount of Rs. 17,60,00,000 to the Assessee’s income after finding discrepancies in the investor companies. The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO’s decision, stating that the Assessee had provided sufficient evidence to establish the identity and creditworthiness of the investors. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)’s order. The Delhi High Court also dismissed the Revenue’s appeal, stating that the lower appellate authorities had taken sufficient care to consider the relevant circumstances and no substantial question of law arose for their consideration.

Legal Framework

The core legal provision in question is Section 68 of the Income Tax Act, 1961, which deals with cash credits. The section states:

“68. Cash credits – Where any sum is found credited in the book of an Assessee maintained for any previous year, and the Assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income -tax as the income of the Assessee of that previous year”

This provision allows the tax authorities to treat unexplained credits in a taxpayer’s books as income if the taxpayer fails to provide a satisfactory explanation about the source and nature of the credit. The Supreme Court noted that this section is widely worded and includes investments made through share capital or premium.

Arguments

Arguments of the Revenue:

• The Revenue argued that the Assessee had failed to prove the genuineness of the share capital/premium received.
• The field inquiries conducted by the AO revealed that many of the investor companies were non-existent or lacked the financial capacity to invest such large sums.
• The investor companies did not appear before the AO despite summons, and merely sent written submissions through dak, which raised doubts about their identity and genuineness.
• The Revenue contended that the Assessee had not discharged the primary onus under Section 68 of the Income Tax Act, 1961.

Arguments of the Assessee:

• The Assessee contended that the share capital was received through normal banking channels and that they had provided all necessary documents, including income tax returns and bank statements of the investor companies.
• The Assessee relied on the decision of the Delhi High Court in CIT v. Lovely Exports Pvt. Ltd., which stated that if the assessee provides details of the identity, genuineness of the transaction, and creditworthiness of the investor, the onus shifts to the department.
• The Assessee argued that they had discharged their initial onus by providing the necessary documents and that the AO should have conducted further investigations if they were not satisfied with the explanation.

Issues Framed by the Supreme Court

The main issue framed by the Supreme Court was:

1. Whether the Respondent/Assessee had discharged the primary onus to establish the genuineness of the transaction required under Section 68 of the said Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered several cases and legal provisions while deciding the issue:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court, while deciding the case, relied on several authorities to come to a conclusion. The Supreme Court followed Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1* and Roshan Di Hatti v. CIT [1977] 107 ITR (SC)* which laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. The Court also relied on CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal)* which held that the assessee is expected to establish to the satisfaction of the Assessing Officer proof of identity of the creditors, capacity of creditors to advance money, and genuineness of transaction. The Court distinguished the case of CIT v. Lovely Exports Pvt. Ltd. (2008) 299 ITR 268 (Delhi)* stating that the assessee has to prove the genuineness of the transaction, and credit-worthiness of the investors. The Supreme Court followed CIT v. Oasis Hospitalities Pvt. Ltd. 333 ITR 119 (Delhi)(2011)* which held that the initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68: identity of the investors, their creditworthiness/investments, and genuineness of the transaction. The Court also relied on Shankar Ghosh v. ITO [1985] 23 TTJ (Cal.)* where the assessee failed to prove the financial capacity of the person from whom he had allegedly taken the loan. The Court referred to CIT v. Kamdhenu Steel & Alloys Limited and Other (2012) 206 Taxaman 254 (Delhi)* stating that it is necessary to link the assessee with the source when that link is missing. The Supreme Court also relied on Sumati Dayal v. CIT [1995] 214 ITR 801 (SC)* wherein it was held that if the explanation offered by the assessee about the nature and source thereof is not satisfactory, there is prima facie evidence against the assessee. The Court also relied on CIT v. P. Mohankala 291 ITR 278* which held that the burden is on the assessee to take the plea that, even if the explanation is not acceptable, the material and attending circumstances available on record do not justify the sum found credited in the books being treated as a receipt of income nature. The Court followed PR.CIT -6, New Delhi v. NDR Promoters Pvt. Ltd. 410 ITR 379* where it was held that additions can be made by the Assessing Officer on account of introducing bogus share capital. The Court also relied on Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (Gau.)* which held that merely because a transaction takes place by cheque is not sufficient to discharge the burden. The Court also relied on CIT v. N.R. Portfolio (P.) Ltd. [2014] 42 taxmann.com 339/222 Taxman 157 (Mag.) (Delhi)* which held that credit-worthiness or genuineness of a transaction regarding share application money depends on various factors. The Court also referred to CIT v. Divine Leasing & Financing Ltd. (2007) 158 Taxman 440* and CIT v. Value Capital Service (P.) Ltd. [2008]307 ITR 334* where the issue of share application money received by an assessee was examined in the context of Section 68.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the failure of the Assessee to provide credible evidence regarding the identity and creditworthiness of the investor companies. The court emphasized the importance of independent verification by the Assessing Officer (AO) and the need for the Assessee to provide satisfactory explanations for the share capital/premium received. The Court noted that the field inquiries conducted by the AO revealed that many of the investor companies were either non-existent or had very low incomes, which contradicted their claims of having invested large sums of money in the Assessee Company. The court also found that the investor companies did not appear before the AO despite summons, which raised serious doubts about their genuineness. The Court held that the mere fact that the transactions were done through banking channels was not sufficient to prove the genuineness of the transactions, and that the Assessee had failed to discharge the onus under Section 68 of the Income Tax Act, 1961.

Logical Reasoning:

The Court rejected the argument that the Assessee had discharged its onus merely by providing documents and banking details. It emphasized that the Assessee had to prove the genuineness of the transaction and the creditworthiness of the investors, which it failed to do. The Court held that the lower appellate authorities had erred in ignoring the findings of the AO, and that the AO was justified in adding back the amounts to the Assessee’s income.

The court quoted the following from the judgment:

“The use of the words “any sum found credited in the books” in Section 68 of the Act indicates that the section is widely worded, and includes investments made by the introduction of share capital or share premium.”

“As per settled law, the initial onus is on the Assessee to establish by cogent evidence the genuineness of the transaction, and credit -worthiness of the investors under Section 68 of the Act.”

“The practice of conversion of un -accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the Assessee since the information is within the personal knowledge of the Assessee.”

Key Takeaways

• The onus of proving the genuineness of share capital/premium lies on the assessee.
• Merely routing funds through banking channels is not sufficient to prove the genuineness of the transaction.
• The assessee must prove the identity and creditworthiness of the investors.
• Assessing Officers have a duty to conduct independent inquiries to verify the genuineness of transactions.
• The practice of converting unaccounted money through share capital/premium will be subjected to careful scrutiny.

Directions

The Supreme Court set aside the judgments of the High Court, the ITAT, and the CIT(A), and restored the order passed by the Assessing Officer.

Development of Law

The ratio decidendi of this case is that the assessee has the primary onus to prove the genuineness of the share capital/premium credited in their books of accounts, and the creditworthiness of the investors. This judgment reinforces the existing legal position that the assessee cannot simply claim that money received as share capital is legitimate, but must provide cogent evidence to prove the same. The judgment also clarifies that the Assessing Officer has a duty to conduct independent inquiries, and that the practice of converting unaccounted money through share capital/premium will be subjected to careful scrutiny.

Conclusion

The Supreme Court’s judgment in Principal Commissioner of Income Tax vs. NRA Iron & Steel Pvt. Ltd. reinforces the principle that the onus of proving the genuineness of share capital/premium lies on the assessee. The court emphasized that mere transactions through banking channels are not sufficient to discharge this onus. The assessee must provide credible evidence of the identity and creditworthiness of the investors. This ruling serves as a stern warning against the practice of converting unaccounted money through the cloak of share capital/premium, and highlights the importance of thorough scrutiny by tax authorities.