Facts

The instant case pertains to the Assessment Year of 2009–10, for which the Assessee had filed the original Return of Income on 29.09.2009 declaring a total income of Rs.7,01,870. A Notice was issued under section 148 of the Act to re-open the assessment on 13.04.2012 for the reasons recorded therein. The issue before the “AO” was whether the amount of  Rs.  17,60,00,000 allegedly raised  by the Respondent through share capital/premium were  genuine transactions  or not. On the basis of the detail filed, enquiries conducted, the A.O. held that     the Assessee had failed to prove the existence of the identity of the investor companies and genuineness of the transaction. 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. As a consequence, the amount of Rs. 17,60,00,000 was added back to the total income  of the Assessee for the assessment year in question. The Commissioner of Income Tax (Appeals) 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 their bank account    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. The Revenue filed an Appeal before the “ITAT”.  The ITAT  dismissed the appeal, and confirmed the order of  the CIT(A) 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 beingassessed.. The

 

 

Revenue filed an Appeal under section. 260A of the Act before the Delhi High Court to challenge the order of the Tribunal. The Assessee did not appear before  the High Court. Hence, the matter proceeded ex-parte. The High Court dismissed the Appeal filed by the Revenue vide the Impugned Order dated 26.02.2018, and affirmed the decision of the Tribunal  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. (C) No. 29855/2018 before this Court. Since assessee did not appear before Apex court, matter was decided ex-parte by the court, after hearing revenue’s counsel.

 

Issue

The issue which arises for determination is whether the Respondent/Assessee had discharged the primary onus to establish the genuineness of the transaction required under Section 68 of the said Act. The issue which arises for consideration is that in a case where Share Capital/Premium is credited in the books of account of the Assessee company, the onus of proof is on the assessee to establish by cogent and reliable evidence of the identity of the investor companies, the credit-worthiness of the investors, and genuineness of the transaction, to the satisfaction of the Assessing Officer.

 

Views

One of the primary judicial views on Share capital vis-a-vis its treatment in section 68 (unexplained cash credit) which has held the field for long was in  case of CIT v. Stellar Investment Ltd (1991) 192 ITR 87 (Delhi) (HC) : civil appeal Dismissed by Apex court in CIT v. Steller Investment Ltd. (2001) 251 ITR  263 (SC) holding that share capital can never be income of recipient company concerned and only addition can be made in hands of share holder subscribing      to share capital which was later rationalised in case of full bench decision of delhi high court in CIT v. Sophia Finance Ltd (1994) 205 ITR 98 (Delhi) (HC) holding that if share holder identity is established on facts and it is not in doubt that share holders have invested in share capital of company concerned then share capital being capital receipt cant be assessed as income in hands of assessee company being capital receipt non chargeable to tax. Later in a very detailed order Delhi high court after reviewing entire case law on subject of share capital    in context of section 68 has propounded detailed tests to examine share capital genuineness in case of CIT v.  Divine Leasing and Finance Ltd (2007) 299 ITR   268 (Delhi) (HC) where although assessee was asked to first establish primary details on identity of share holders and receipt of share capital by acceptable documentary evidence still AO was put under corresponding onus to repudiate   the assessee’s case by detailed follow up investigation and scrutiny nature sans which adverse inference in section 68 was held nottenable in law. In this order

 

 

notably a suggestion was made by Hon’ble court to government in following words “…In our opinion, it is for Parliament to introduce legislation if the duty presently resting on the Department is thought to be too onerous. We ought not to twist the language of a statute to remove the burden of proof altogether from the Department even though it has the necessary wherewithal to discharge it. The  malaise can also be arrested if unclaimed share subscriptions are taken over by the State and/    or if the assessee concerned is precluded from distributing dividends, bonus shares etc. against such share subscriptions unless they are duly claimed by the original subscribers within a prescribed period, perhaps not exceeding three years. Thereafter the shares could automatically stand transferred to the State on the principle of escheat. For these events to happen, requisite amendments to the IT Act may be required.” This order of Delhi High court in Lovely Exports Pvt Ltd came up for dismissal by Apex court in CIT v.  Lovely Exports (P.)  Ltd SLP in (2009) 319 ITR      5 (St)/(2008) 216 CTR (SC) 195 where while dismissing revenue SLP, Apex court observed that : “2. Can the amount of share money be regarded, as undisclosed income under s. 68 of I. T. Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given tothe

A.O. then the Department is free to proceed to reopen their individual assessments   in accordance  with law.  Hence,  we find no infirmity with the  impugned  judgment…..

“ This order of Hon’ble Apex court held the field for long on the subject of share capital and widely followed in all judicial forums.

With  due respect it is humbly submitted that both these long standing decisions   of Stellar Capital (supra) and Lovely exports (supra) of Apex court have remained unconsidered in the present case of NRA Iron (Supra) probably because no representation was there to assist the court from side of assessee. Even Apex court dictum in case of G. S. Homes & Hotels Ltd v. Dy. CIT (2016) 387 ITR 126 (SC) that amount received on issue of share capital including share premium are  on capital account and can not be considered as income, seems to be not cited       in the case of NRA Iron before the court. So one may explore the doctrine of per-incuriam to this decision in the case of NRA Iron vis-a-vis Apex court decisions in cases of Stellar Capital; Lovely exports; G. S. Homes (supra).

 

Held

After considering various previous decisions (refer note 1 below), the court summed up principles governing applicability of section 68 of the Act qua share capital issue/share premium issue as under:

“The principles which emerge where sums of money are credited as Share Capital/Premium are :

1. 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.

1. 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 In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act”

After repeatedly noting that in present case some of the investor companies were non-existent as per field enquiry conducted by the AO which as per noting made by the court revealed that “… in several cases the investor companies were found to be non-existent, and the onus to establish the identity of the investor companies, was not discharged by the assessee”. Whereas at one place the court   also mentioned that “…Clearly the onus to establish the credit worthiness of the investor companies was not discharged. The entire transaction seemed bogus, and lacked credibility..” So at one place it is observed by the court that assessee has    not established its onus qua identity of the investor companies whereas at other place it held that assessee company failed to prove the identity of the investor companies which two findings seems on different tangents. On discharge of onus under section 68 of the Act, it seems that significant findings (ratio/principle emerging from the order) of court are contained in paragraph 13 where it holds  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 Respondent Company – Assessee had filed all the primary evidence, the onus on the Assessee stood discharged.” At closure, some passing observations  are made by the court that “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.”, which observations of the court seems in nature of obiter dicta only. Finally the court held that “…On the facts of the present case, clearly the Assessee Company

– Respondent failed to discharge the onus required under Section 68 of the Act,

the Assessing Officer was justified in adding back the amounts to the Assessee’s income.” So revenue appeal was allowed reversing three concurrent orders of CIT-A, ITAT and High court. (AY. 2009 10) (CA No. 2463 of 2019, dt. 25.10.2019)

Editorial : PCIT v. NRA Iron & Steel Pvt. Ltd. (Delhi)(HC) (ITA No. 244 of 2018  dt. 26-2-2018) Ratio is explained in PCIT v. Alag Securities Pvt. Ltd. (Formerly known as Mahasagar Securities and Richmond Securities Pvt. Ltd. (2020) 425 ITR 658 (Bom) (HC), PCIT v. Ami Industries (India) P. Ltd. (2020) 424 ITR 219 (Bom) (HC) In CIT v. Sun Engineering Works (1992) 198 ITR 297 (SC) the Court held that the judgment of the Court to be read as a whole in the contest it was delivered. It is neither desirable nor permissible to pick out a word or a sentence from the judgement. Also refer Oriental Insurance Co Ltd. v.  Rajkumari (Smt)     & ors AIR 2008 SC 403.

This ex-parte decision of NRA Iron where reversal of addition deletion was made restoring order of ‘AO’ (under section 68 of the Act, for share capital/share premium for Assessment Year 2009-2010) came up for recall prayer before the apex court which recall prayer of assessee/respondent has been hitherto dismissed by the apex court (CIT v.  NRA Iron & Steel Pvt. Ltd. (2019) 311 CTR 263/183   DTR 60 (SC)); Court held that the applicant company having failed to  make out any credible or cogent ground for re-call of the judgement dt. 5-3-2019, the application for recall is dismissed. One interesting jurisdictional aspect in revenue special leave petition before apex court in NRA Iron  case  (supra) which was  not debated or contended or argued is, whether in a case where high court in impugned appeal under section 260A of the Act holds that no substantial question    of law arose due to concurrent findings of CIT-A and ITAT, can sans substantial question of law being identified at the apex court level and so asked to be framed under section 260A of the Act by the apex court, such straight reversal of the   high court order can be made in such circumstances, bypassing jurisdictionalfilter of section 260A of the Act? This remains an open question. Further now this decision on section 68 is cited in every matter from side of revenue before various judicial forums and so it has been subject matter of abundant interpretation as       to its true ratio/principle emerging from the same. One important decision from Bombay high court in case of CIT v. Ami Industries Pvt Ltd (2020) 424 ITR 219 (Bom) (HC) where it is held that even after NRA Iron (supra) assessee receiving share capital/share premium (before amendment made by Finance act 2012 (with prospective effect from assessment year 2013-2014)) is not supposed to prove source of source of share holder. In this case Bombay high court noted that    “2. In NRA Iron & Steel (P) Ltd (supra), the Assessing Officer had made independent and detailed inquiry including survey of the investor companies. The field report revealed that the shareholders were either non-existent or lacked credit-worthiness. It is in these circumstances, Supreme Court held that the onus  to establish identity of the investor companies was not discharged by the assessee. The aforesaid decision is, therefore, clearlydistinguishable on facts of the

 

 

present case.” Further very recently Bombay high court in case of PCIT v. Alag Securities Pvt Ltd (2020) 425 ITR 658 (Bom) (HC) has distinguished revenue reliance on NRA Iron (supra) where case of entry provider was in consideration  and it was held that it should be assessed on commission income only. Recently Karnataka high court in a matter relating to section 68 (share capital) while reversing the ITAT order and deleting the addition  sustained at ITAT  level, in the case of Kumar Nirman and Nivesh Pvt Ltd v. ACIT (2020) 425 ITR 486 (Karn) (HC), has distinguished NRA Iron case (supra). One important reference which requires special mention is decision of Bombay high court (Nagpur bench)  in case of PCIT v. Apeak Infotech (2017) 397 ITR 148 (Bom) (HC) where on  issue of applicability of section 68 to share capital and share premium aspect it      is perspicaciously held that prior  to assessment year 2013-2014 such treatment     is not tenable, relying on cases of (i) Bombay high court CIT v. Gangadeep Infrastructure (P) ltd (2017) 394  ITR  680  (Bom) (HC) (ii) Bombay high court  in Vodafone India Services Pvt.Ltd. v. Addl. CIT (2014) 368 ITR 1 (Bom)

• Hon’ble Apex Court in S. Homes & Hotels P. Ltd. v. Dy.  CIT (2016) 387  ITR 126 (SC). This Bombay high court decision for period prior to assessment  year 2013-2014 significantly holds the position that addition under section 68 of the Act for alleged unexplained share capital/share premium is not tenable where sufficient basic documents are placed on records by assessee company which is    on basis of due consideration of subsequent prospective amendments made in section 68 and section 2(24) of the Act from Finance Act 2012. Further various ITAT benches have distinguished NRA Iron (supra) one notable order which is worth mentioning here is Ahmedabad bench of ITAT  in recent decision in case     of D. J. Stock broking Pvt Ltd (ITA  313/Ahd/2017 order dated 3-3-2020: Mere  low income in ITR vis-a-vis investment was jettisoned by the ITAT to hold that creditworthiness is not restricted to income returned by share applicant which is very important finding of Ahmedabad bench of ITAT after considering NRA Iron and Bombay high court Ami Industries (supra))

• “The difference between what we do and what we are capable of doing would suffice to solve most   of the world’s problems.”

  – Mahatma Gandhi