Assessee legally obliged to prove receipt of share capital/premium to the satisfaction of AO, failure of which justify addition – Supreme Court summarises emerging principles
ABCAUS Case Law Citation:
ABCAUS 2814 (2019) (03) SC
Important Case Laws Cited/relied upon by the parties
CIT v. Lovely Exports Pvt. Ltd (2008) 299 ITR 268 (Delhi)
CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal)
Kale Khan Mohammad Hanif v. CIT (1963] 50 ITR 1 (SC)
Roshan Di Hatti v. CIT  107 ITR (SC)
Sumati Dayal v. CIT  214 ITR 801 (SC)
CIT v. P. Mohankala 291 ITR 278
PR.CIT -6, New Delhi v. NDR Promoters Pvt. Ltd. 410 ITR 379
Roshan Di Hatti v. CIT (1992) 2 SCC 378
Nemi Chand Kothari v. CIT  264 ITR 254 (Gau.)
CIT v. N.R. Portfolio (P.) Ltd.
CIT v. Divine Leasing & Financing Ltd. (2007) 158 Taxman 440
CIT v. Value Capital Service (P.) Ltd 307 ITR 334
In the instant case the issue for consideration before the Hon’ble Supreme Court was 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.
The return of the respondent company showed huge amount having been received through Share Capital/Premium from the several companies situated at different States. Whereas the shares had a face value of Rs. 10 per share, which were subscribed by the investor companies at Rs. 190 per share.
A Notice was issued u/S. 148 of the Act to re-open the assessment.
The AO conducted detailed enquiries and 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 was added back u/s 68 of the Act 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.
The ITAT dismissed the appeal of the Revenue 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 being assessed.
The High Court dismissed the Appeal filed by the Revenue vide the Impugned Order 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.
This is how the matter travelled to the Hon’ble Supreme Court on the instance of the Revenue.
The Hon’ble Supreme Court stated that as per settled law, the initial onus is on the Assessee to establish by cogent evidence the genuineness of the transaction, and credit-worthiness of the investors under Section 68 of the Act. The assessee is expected to establish to the satisfaction of the Assessing Officer:
- Proof of Identity of the creditors;
- Capacity of creditors to advance money; and
- Genuineness of transaction
The Hon’ble Supreme Court, on the issue of unexplained credit entries /share capital examined several judgments and summarised the emerging principles where sums of money are credited as Share Capital/Premium as under:
(i) 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.
(ii) 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.
(iii) 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.
The Hon’ble Supreme Court pointed out that in the above circumstances, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.
The Hon’ble Supreme Court further observed that in the instant case, the A.O. had conducted detailed enquiry which revealed that :
(i) 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.
- Two companies were found to be non-existent at the address given, and the premises was owned by some other person.
- The companies at Kolkatta did not appear before the A.O., nor did they produce their bank statements to substantiate the source of the funds from which the alleged investments were made.
- Two more companies were found to be nonexistent at the address provided.
Thus, the genuineness of the transaction was found to be completely doubtful.
(ii) 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 huge funds for purchase of shares at such a high premium.
(iii) There was no explanation whatsoever offered as to why the investor companies had applied for shares of the Assessee Company at a high premium per share, even though the face value of the share was nominal.
(iv) Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested.
(v) 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.
The Hon’ble Supreme Court opined that the lower appellate authorities 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.
The Hon’ble Supreme Court observed that 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 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 Hon’ble Supreme Court emphasised 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 Hon’ble Supreme Court opined that 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 Hon’ble Supreme Court held that on the facts of the case, clearly the Assessee Company failed to discharge the onus required under Section 68 of the Act and hence the Assessing Officer was justified in adding back the amounts to the Assessee’s income.