Bogus Share Premium/Share Capital – Responsibility of Assessee to Prove with Cognet Evidence

Bogus Share Premium/Share Capital – Responsibility of Assessee to Prove with Cognet Evidence –  Landmark Judgement of SC – NRA Iron & Steel (P) Ltd.

Facts in Brief

• The assessee company filed its original return of income on 29.09.2009 declaring a total income of Rs. 7,01,870/-.
• Notice was issued u/s 148 of the Act to reopen the case on 13.04.2012 for the reasons recorded therein. Further, the assessee filed submissions and objections. The objections rejected by A.O and a show cause notice was issued on 13.01.2014 in response of which detailed written submitted by the assessee on 22.01.2014.
• The assessee company in its return showed that money aggregating to Rs. 17.60 Crores had been received through share capital/premium during the F.Y 2009-10 from 19 companies situated at Mumbai (6), Kolkata(11) and Guwhati(2).
• The face of share was Rs. 10 per share only, which were subscribed by the investor companies at premium of Rs. 190 per Share.
• The assessee was called upon to furnish details of the amounts received, and provide evidence to establish the identity of the investor companies, credit worthiness of the creditors, and genuineness of the transaction.
• The assessee submitted that the entire share capital had been received by the assessee through normal banking channels by account payee cheque and produced documents like ITR-V to establish the identity and genuineness of the transaction.
• The AO issued summons to the representatives of the investor companies but nobody appeared on behalf of the investor companies. The department only received submissions through dak, which created doubt about the identity of the investor companies.
• The AO independently got field enquiries of investor companies at Mumbai, Kolkata and Guwahati where these companies were stated to be situated.
• Result of enquiries was as follows: –
  • Out of 6 Companies in Mumbai 2 companies were non-existent, address of one company was incorrect and no response received in respect of notice served at other 3 companies.
  • In respect of Kolkata companies no one appeared, nor they produced any bank statement to substantiate source of fund and the response came through dak only.
  • In respect of Guwahati Companies all companies found to be non-existent at given addresses.
• The AO held that Assessee Company had failed to discharge the onus by cogent evidence either of the credit worthiness of the so called investor companies, or genuineness of the transaction. As consequence, the amount of Rs. 17.60 Crores added back to the total income of the assessee for the assessment year in question.
• The assessee filed an appeal with CIT (Appeals), where CIT (Appeals) deleted the additions made by AO.
• Further, the revenue filed an appeal before the ITAT. The ITAT dismissed the appeal and confirmed the order of CIT (Appeals).
• Further, the revenue filed an appeal before the Delhi High Court to challenge the order of the Tribunal. The respondent assessee company did not appear before court. The court passed ex-parte order and dismissed the appeal of revenue and affirmed decision of Tribunal on the grounds of absence of substantial question of law.
• Aggrieved by the order of High Court the revenue filed the SLP before the Supreme Court. However, after several notices the apex court passed ex-parte order in the favour or revenue.

Revenue’s Contention

• None of the investor – companies which had invested amounts ranging between Rs. 90 Lacs and Rs. 95 Lacs as share capital in the Respondent Company – Assessee during the A.Y. 2009-10, could justify making investment at such a high premium of Rs. 190 for each share, when the face value of the shares was only Rs. 10.
• Some of the investor companies were found to be non-existent
• Almost none of the companies produced the bank statements to establish the source of funds for making such huge investment in the shares, even though they were declaring a very meager income in their returns
• None of the investor-companies appeared before the A.O., but merely sent a written response through dak.

The AO held that the Assessee had failed to discharge the onus by cogent evidence either of the credit worthiness of the so-called investor-companies, or genuineness of the transaction.

Ruling by Supreme Court

• Issue which arises for determination is whether the respondent assessee had discharged the primary onus to establish the genuineness of the transaction required under sec – 68 of the said Act.
• After making reference to number of judicial precedents the apex court placed some principles where sums of money are credited as share capital/premium which are as follows:
  • The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus.
  • The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders.
  • If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Sec – 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. 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.

Conclusion

Merely because assessee company had filed all primary evidence, it could not be said that onus on assessee to establish credit worthiness of investor companies stood discharged u/s 68 of the Income Tax Act, 1961.