Assessee company failed to prove genuineness of investor – provisions of section 68 of the Income-tax Act attracted – Supreme Court

The Apex court in the case of NRA Iron and Steel Pvt Ltd (SLP 29855 of 2018) held that the assessee company is under a legal obligation to prove the source of receipt of share capital and/or premium to the satisfaction of the assessing officer. Mere filing of primary evidence of investors does not discharge the onus cast on the assessee company by virtue of section 68 of the Income-tax Act, 1961 (‘the Act’)

Section 68 of the Act (prior to amendment by Finance Act, 2012) provides where any sum is found credited in the books of an assessee, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the AO, the sum so credited is chargeable to tax as the income of the assessee.

Assessee’s contentions

  • Normal banking channels were involved and the entire amount was received by account payee cheques/demand drafts.
  • Assessee argued that the onus cast on it is fully discharged and there is no cause to take recourse to section  68 of the Act since the income tax returns and acknowledgements of the investor companies were provided to  establish the identity of the investors and genuineness of the transaction.
  • Prima facie reliance was placed on the case of Lovely Exports Pvt Ltd 299 ITR 286 Supreme Court (2008) where proofs were submitted to substantiate identity of the subscriber, genuineness of the transaction, credit worthiness of the subscriber, details such as address, PAN and identity of the subscriber.

AO’s contentions

  • Nobody appeared physically on behalf of the investor companies and only submissions were received through post even after issuing summons to the representatives of the investors
  • None of the companies could justify the high premium at which the investments were made, some companies were found to be non-existent at  the addresses furnished and almost none of them produced bank statements to establish the  source of funds of the investment made.
  • Investor companies who acted as subscribers were filing their return of income declaring substantially lower income

The appeal which was filed by the Assessee with the CIT(A) was admitted and ruled in favour of the Assessee. Even the Tribunal allowed the appeal of the Assessee placing reliance on Lovely Exports (supra). Tribunal also declared that the assessee had discharged their primary onus to establish the identity and credit worthiness of the investors, especially when the investor companies had filed their returns and were being assessed. The Delhi High Court was also in agreement with the ruling of the Tribunal.

Supreme Court’s ruling

The Apex court took a view of substance over form of the transaction and ruled that:

  • The lower appellate authorities appear to have ignored the detailed findings of the AO from the field enquiry and investigations carried out by his office. The authorities below have erroneously held that merely because the Assessee had filed all the primary evidence, the onus on the Assessee stood discharged.
  • The lower appellate authorities failed to appreciate that the investor companies which had filed income tax returns with a meagre or nil income had to explain how they had invested such huge sums of money in the Assesse Company. Clearly the onus to establish the credit worthiness of the investor companies was not discharged. The entire transaction seemed bogus, and lacked credibility.
  • 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. The Assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the Assessee.
  • The Apex court also held on the facts of the present case that the Assessee Company failed to discharge the onus required under Section 68 of the Act, and therefore it held that the Assessing Officer was justified in adding back the amounts to the Assessee’s income.
  • The Appeal filed by the Appellant i.e. the Revenue, is allowed.

Our Comments

The Supreme Court pronounced its ruling based on facts of the case in  totality which led the Supreme Court to hold that the assessee has not  discharged its onus cast upon it under section 68 of the Act without making any reference or distinguishing the judgement of Lovely Exports (Supra). There was also no reference made to the newly inserted proviso to section 68 of the Act, by the Assessee or the AO, where the explanation offered shall be deemed to be unsatisfactory unless the investor also offers a  satisfactory explanation about the nature and source of the sum and such explanation is found to be satisfactory in the opinion of the AO.

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Company: Wadhwa & Shah, Chartered accountants
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March 2021