Recent Judgement of Hon’ble Supreme Court in case of NRA Iron and Steel Pvt Ltd.
Recently, Hon’ble Supreme Court in the case of M/s NRA Iron and Steel Pvt Ltd. (hereinafter referred as “assessee”) redefined the scope of Section 68 and its operating modality by extending the liability of the company issuing shares. Section 68 already casts responsibility on the person in whose name credit entry has been recorded in the books of accounts, failing which the amount shall be liable to be taxed as unexplained cash credit in the hands of receiver. However, this judgement has also increased the scope of responsibilities of the person receiving money. This has overruled earlier judgements of various tribunals and courts. Let us summarize important points of this judgement.
Section 68 of Income Tax Act
Where any sum is found credited in the books 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:
Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.
Facts of the case
i. Some of the companies did not respond.
ii. Some of them were non-existent at the given address
iii. A few of them had reported gross income as NIL or some thousand rupees for the year in which they invested lakhs and crores in the assessee company.
iv. Further, none of the investor companies appeared before AO but only sent a written response.
(1) the identity of the creditor/subscriber;
(2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable cannels;
(3) the creditworthiness or the financial strength of the creditor or subscriber
(4) if relevant details of the address of PAN identity of the creditor/subscriber along with copies of the shareholders register, share application forms, share transfer register, etc, it would constitute acceptable proof or acceptable explanation by the assessee;
(5) The Department would not be justified in drawing an adverse inference only because the creditor / subscriber fails or neglects to respond to its notice;
The Assessing Officer is duty bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation.
The lower appellate authorities ruled in favour of assessee and even High Court dismissed the tax department’s appeal. They considered name, address, income tax returns and proof of amount received through banking channels as sufficient to prove the genuineness of the transaction viz. private placement of shares. However, Hon’ble Supreme Court admitted the appeal of Department and made following observations
Observations of Supreme Court
The verdict was as under-
Implications of the above judgement
1. On closely held companies issuing shares
After this judgement, the authorities would get right to question the integrity of every issue or reissue of share capital, especially those by company in which public are not substantially interested because these companies generally issue shares on private placement basis.
The issuing company will now have to prove 1. Genuineness of transaction and 2. Creditworthiness of creditor / subscriber rather than merely providing primary evidences like identity of investors and amount received through banking channels which may be illusionary in some cases.
2. On Start-ups
3. On Unsecured Loans
The above judgement may have far reaching impact on both pending as well as upcoming litigations. The basic intention is to identify and eradicate shell companies which are the common source of bringing unaccounted money into the books. This judgement will work as power booster for the tax authorities and if that power is used wisely, the menace of shell companies and unaccounted money flow in the market may be reduced substantially. But at the same time, it is also important that tax authorities preserve the interests of assessee in cases where shares have been genuinely issued.
In the nutshell, closely held companies issuing shares on private placement or other modes should maintain a proper and genuine evidences about the source of funds with them so that they can present it to tax authorities whenever required unless they may get into troubles.