Hon’ble Supreme Court Ruling on Section 68 (Cash Credits)
Hon’ble Supreme Court Ruling on Section 68 (Cash Credits)
Summary of Hon’ble Supreme Court ruling on Section 68 of Income Tax, 1961
Recently two judges’ bench of Hon’ble Supreme Court in the case of NRA Iron & Steel Pvt. Ltd. vs. Principal Commissioner of Income Tax (Central) – 1 (SLP (Civil) No. 29855 of 2018), by its judgment dated 5th March, 2019 restored the order of Assessing Officer by confirming the addition to the taxable income made under Section 68 of Income Tax Act, 1961 (and thus liable to Income Tax at applicable rates). It was held that “in the case of private placement of shares, 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 facts of the case are based on Proviso to Section 68 of Income Tax Act, 1961. The aforesaid Proviso (in bold) and facts are reproduced below:
Section 68: Cash credits.
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—
- 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
- such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
In Assessment Year of 2009–10, the respondent company – Assessee filed original Return of Income (‘ROI’) on 29.9.2009 declaring a total income of Rs.7,01,870. The ROI showed that money aggregating to Rs. 17.60 Crores had been received through Share Capital/Premium from the companies situated at Mumbai, Kolkatta and Guwahati ranging from 90 to 95 lacs. from each investor company. It is pertinent to mention here that the shares had a face value of Rs. 10 per share, which were subscribed at the premium of Rs. 190 per share.
A Notice was issued u/s 148 of the Act to re-open the assessment.
The Assessee inter alia submitted that the entire Share Capital had been received by the Assessee through normal banking channels by account payee cheques/demand drafts, and produced documents such as income tax return acknowledgments to establish the identity and genuineness of the transaction. It was submitted that, there was no cause to take recourse to Section 68 of the Act, and that the onus on the Assessee Company stood fully discharged.
The AO had issued summons to the representatives of the investor companies. Despite the summons having been served, nobody appeared on behalf of any of the investor companies. The Department only received submissions through dak from few investor companies.
Thereafter, the AO independently got field enquiries conducted with respect to the identity and credit-worthiness of the investor companies, and to examine the genuineness of the transaction. The results of the sending notices to the investor companies were either that:
- No reply was received of the notice served to the investor companies; or
- Incorrect addresses of the investor companies were given by respondent; or
- Notice could not be served to investor companies as the premises is owned by some other person; or
- Replies from 3 investor companies through dak were received, that the companies had applied for 45,000 equity shares of Rs. 10/- at a premium of Rs. 190/- each. No reason for paying such a high premium was given; or
- Replies were received that the companies had applied for shares but the reply had not specified ‘no of shares’, ‘amount of premium’, ‘bank statements not enclosed’, etc.
It is to be further noted that in last 2 cases, returned income of investor companies was few thousands of Rupees.
Adverse Finding: Consequently, adverse order was passed by Assessing Officer since the Assessee had failed to prove the existence of the identity of the investor companies and genuineness of the transaction. The amount of Rs. 17,60,00,000/- was added back to the total income of the Assessee.
Appeals: The respondent company filed appeal before the CIT (Appeals) which deleted the addition made by the A.O. on the ground that the Respondent had filed:
- Confirmations from the investor companies, their Income Tax Return, acknowledgments with PAN numbers;
- Copies of investor companies’ bank accounts to show that the entire amount had been paid through normal banking channels
and hence discharged the initial onus under Section 68 of the Act, for establishing the credibility and identity of the shareholders.
Thereafter, Revenue filed an Appeal before the Income Tax Appellate Tribunal (hereinafter referred to as “ITAT”). The ITAT dismissed the appeal, and confirmed the order of the CIT(A) vide Order dated 16.10.2017 on the ground 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.
Again, Revenue filed an Appeal before the Delhi High Court to challenge the order of the Tribunal. The Respondent Company – Assessee did not appear before the High Court. Hence, the matter proceeded ex-parte. The High Court dismissed the Appeal filed by the Revenue and affirmed the decision of the ITAT on the ground that the issues raised before it, were urged on facts, and the lower appellate authorities had taken sufficient care to consider the relevant circumstances. Hence no substantial question of law arose for their consideration.
Aggrieved by the Order passed by the High Court, the Revenue filed the present S.L.P. before this Court.
Proceeding before the Hon’ble Supreme Court:
The respondent assessee did not appear before the Supreme Court and the matter proceeded ex-parte.
After referring to the catena of the case laws and their ratios on the subject, Hon’ble Supreme Court summarized the principles to be applied in the facts of the cases where sums of money are credited as Share Capital/Premium:
- 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.
- Thereafter, 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 the facts of the present case, by applying the above principles, Supreme Court observed that the A.O. had conducted detailed enquiry which revealed that:
- There was no material on record to prove, or even remotely suggest, that the share application money was received from independent legal entities. The survey revealed that some of the investor companies were non-existent, and had no office at the address mentioned by the assessee.
- The enquiries revealed that the investor companies had filed returns for a negligible taxable income, which would show that the investors did not have the financial capacity to invest funds ranging between Rs. 90,00,000 to Rs. 95,00,000.
- There was no explanation whatsoever offered as to why the investor companies had applied for shares of the Assessee Company at a high premium of Rs. 190 per share, even though the face value of the share was Rs. 10/- per share.
- Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested.
- The mere mention of the income tax file number of an investor was not sufficient to discharge the onus under Section 68 of the Act.
Therefore, the Appeal filed by the Appellant – Revenue is allowed.