PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL)-I versus NRA IRON & STEEL PVT. LTD. on 5 March 2019

[2019] 4 S.C.R. 163

PRINCIPAL COMMISSIONER OF INCOMETAX (CENTRAL) - I

v.

NRA IRON & STEEL PVT. LTD.

(Civil Appeal No. 2463 of 2019)

MARCH 05, 2019

[UDAY UMESH LALIT AND INDU MALHOTRA, JJ.]

Income Tax Act, 1961 – s.68 – Cash credits – Money receivedthrough Share Capital/Premium from various companies – AssessingOfficer (A.O.) issued show cause notice to respondent-assessee toestablish the genuineness of the transaction – Assessee inter aliasubmitted that the entire Share Capital was received through normalbanking channels by account payee cheques/demand drafts, andproduced documents such as income tax return acknowledgmentsto establish the identity and genuineness of the transaction – A.O.issued summons to the representatives of the investor companies –None appeared on behalf of any of the investor companies – A.O.independently got field enquiries conducted with respect to theidentity and credit-worthiness of the investor companies – Enquirieswere made at Mumbai, Kolkatta, and Guwahati where theseCompanies were stated to be situated – On the basis of the enquiriesconducted, A.O. held that the assessee had failed to prove thegenuineness of the transaction – On appeal, held: The assessee isunder a legal obligation to prove the genuineness of the transaction,the identity of the creditors, and credit-worthiness of the investorswho should have the financial capacity to make the investment inquestion, to the satisfaction of the A.O., so as to discharge theprimary onus – If the enquiries and investigations reveal the identityof 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 primary onus contemplated by s.68 of the Act isnot discharged – In the instant case, the survey conducted by A.O.revealed that some of the investor companies were non-existent,and had no office at the address mentioned by the assessee – Thecompanies at Kolkatta did not appear before the A.O., nor did theyproduce their bank statements to substantiate the source of the funds A

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Afrom which the alleged investments were made – Also, there was noexplanation whatsoever offered as to why the investor companieshad applied for shares of the assessee Company at a high premiumof Rs. 190 per share, even though the face value of the share wasRs. 10/- per share – Furthermore, none of the so-called investorcompanies established the source of funds from which the high shareBpremium was invested – Assessee failed to discharge the onusrequired under s.68 – Therefore, A.O. was justified in adding backthe amounts to the assessee’s income.

Allowing the appeal, the Court

CHELD: 1. The use of the words “any sum found creditedin the books” in Section 68 of the I.T. Act (prior to the FinanceAct, 2012) indicates that the section is widely worded, andincludes investments made by the introduction of share capitalor share premium. As per settled law, the initial onus is on theAssessee to establish by cogent evidence the genuineness ofDthe transaction, and credit-worthiness of the investors underSection 68 of the Act. The assessee is expected to establish tothe satisfaction of the Assessing Officer, the proof of identity ofthe creditors; capacity of creditors to advance money; andgenuineness of transaction. With respect to the issue ofEgenuineness of transaction, it is for the assessee to prove bycogent and credible evidence, that the investments made in sharecapital are genuine borrowings, since the facts are exclusivelywithin the assessee’s knowledge. [Paras 8.1, 8.2 and 8.3][176-C-E; 177-A]

FKale Khan Mohammad Hanif v. CIT (1963) 50 ITR1(SC); Roshan Di Hatti v. CIT (1977) 107 ITR (SC) –affirmed.

CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465(Cal); CIT v. Oasis Hospitalities Pvt. Ltd. 333 ITR 119G(Delhi) (2011); Shankar Ghosh v. ITO (1985) 23 TTJ(Cal.); CIT v. Kamdhenu Steel & Alloys Limited andOther (2012) 206 Taxman 254 (Delhi) – approved.

2. In the instant case, the Assessing Officer made anindependent and detailed enquiry, including survey of the so-calledinvestor companies from Mumbai, Kolkata and Guwahati to verifyH

the credit-worthiness of the parties, the source of funds invested,and the genuineness of the transactions. The field reportsrevealed that the share-holders were either non-existent, orlacked credit-worthiness. The A.O. had conducted detailedenquiry which revealed that there was no material to prove thatthe share application money was received from independent legalentities. The survey revealed that some of the investor companieswere non-existent, and had no office at the address mentionedby the assessee. The companies at Kolkatta did not appear beforethe A.O., nor did they produce their bank statements tosubstantiate the source of the funds from which the allegedinvestments were made. The two companies at Guwahati werefound to be non-existent at the address provided. Thegenuineness of the transaction was found to be completelydoubtful. The enquiries revealed that the investor companies hadfiled returns for a negligible taxable income, which would showthat the investors did not have the financial capacity to investfunds ranging between Rs. 90,00,000 to Rs. 95,00,000 in the A.Y2009-10, for purchase of shares at such a high premium. Therewas no explanation whatsoever offered as to why the investorcompanies had applied for shares of the Assessee Company at ahigh premium of Rs. 190 per share, even though the face valueof the share was Rs. 10/- per share. Furthermore, none of theso-called investor companies established the source of funds fromwhich the high share premium was invested. The mere mentionof the income tax file number of an investor was not sufficient todischarge the onus under Section 68 of the Act. The entiretransaction seemed bogus, and lacked credibility. The practiceof conversion of un-accounted money through the cloak of ShareCapital/Premium must be subjected to careful scrutiny. This wouldbe particularly so in the case of private placement of shares, wherea higher onus is required to be placed on the Assessee since theinformation is within the personal knowledge of the Assessee.[Paras 9, 12 and 14][178-A, B; 180-F-H, 181-A-D, F-H,182-C-E]

Sumati Dayal v.CIT [1995] 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 Hattiv. CIT (1992) 2 SCC 378; Nemi Chand Kothari v. CIT

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A[2003] 264 ITR 254 (Gau.); CIT v. Divine Leasing &Financing Ltd. (2007) 158 Taxman 440; CIT v. ValueCapital Service (P) Ltd. (2008) 307 ITR 334 – reliedon.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2463of 2019.F

From the Judgment and Order dated 26.02.2018 of the HighCourt of Delhi at New Delhi in ITA No. 244 of 2018.

A. N. S. Nadkarni, ASG, Ms. Praveenha Gautam, RupeshKumar, Mrs. Anil Katiyar, Advs. for the Appellant.

GThe Judgment of the Court was delivered by INDU MALHOTRA, J. Leave granted.

1. The present appeal arises out of the Judgment and Order dated26.02.2018 passed by a division bench of the Delhi High Court in IncomeTax Appeal No. 244 of 2018. The Revenue has challenged the judgmentH

of the High Court by way of the present Appeal.

2. The issue which arises for consideration is that in a case whereShare Capital/Premium is credited in the books of account of the Assesseecompany, the onus of proof is on the assessee to establish by cogent andreliable evidence of the identity of the investor companies, the credit-worthiness of the investors, and genuineness of the transaction, to thesatisfaction of the Assessing Officer.

3. The facts of the case, briefly stated are as under :

3.1. The instant case pertains to the Assessment Year of 2009–10, for which the Respondent Company – Assessee had filed the originalReturn of Income on 29.9.2009 declaring a total income of Rs.7,01,870.

A Notice was issued u/S. 148 of the Act to re-open the assessmenton 13.04.2012 for the reasons recorded therein.

3.2. The Assessee filed submissions on 23.04.2012 to the Noticeu/S. 148, and objections on 30.04.2012. The objections were rejected on13.08.2012. A Show Cause Notice was issued on 13.01.2014. TheAssessee filed detailed Written Submissions on 22.01.2014.

3.3. The Assessee Company in its Return showed that moneyaggregating to Rs. 17,60,00,000/- had been received through ShareCapital/Premium during the Financial Year 2009-10 from the followingcompanies situated at Mumbai, Kolkatta, and Guwahati:

S. No. Name of the shareholder Amount (A)Mumbai Based Companies1.Clifton Securities Pvt. Ltd.95,00,0002. Lexus Infotech Ltd. 95,00,000 3. Nicco Securities Pvt. Ltd. 95,00,000 4. Real Gold Trading Company Pvt. Ltd. 90,00,000 5. Hema Trading Company Pvt. Ltd. 95,00,000 6.Eternity Multi-trade Pvt. Ltd.90,00,000(B)Kolkata Based Companies1.Neha Cassettes Pvt. Ltd.90,00,0002. Warner Multimedia Ltd. 95,00,000 3. Gopikar Supply Pvt. Ltd. 90,00,000 4. Ganga Builders Ltd. 90,00,000 5. Gromore Fund Management Co. Ltd. 95,00,000 6.Bayanwala Brothers Pvt. Ltd.95,00,0007.Super Finance Ltd.90,00,0008. Shivalaxmi Export Ltd. 95,00,000

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9. Natraj Vinimay Pvt. Ltd.95,00,00010.Neelkanth Commodities Pvt. Ltd.95,00,00011. Prominent Vyapaar Pvt. Ltd. 95,00,000 (C) Guwahati based companies 1. Ispat Sheets Ltd. 90,00,000 2. Novelty Traders Ltd. 90,00,000 BTotal Amount17,60,00,000

It is pertinent to mention that the shares had a face value of Rs.10 per share, were subscribed by the investor companies at Rs. 190 pershare.

3.4. The issue before the Assessing Officer (hereinafter referredCto as “AO”) was whether the amount of Rs. 17,60,00,000/-allegedlyraised by the Respondent through share capital/premium were genuinetransactions or not.

3.5. The Respondent Company – Assessee was called upon tofurnish details of the amounts received, and provide evidence to establishDthe identity of the investor companies, credit-worthiness of the creditors,and genuineness of the transaction.

The AO issued a detailed questionnaire to the Assessee to provideinformation with respect to the amount of Rs. 17,60,00,000 shown tohave been received as Share Capital/Premium from various legal entities.E

The AO gave various opportunities to the A.R. of the Assessee toattend the proceedings, and file necessary clarification on the queriesraised.

3.6. The Assessee inter alia submitted that the entire Share CapitalFhad been received by the Assessee through normal banking channels byaccount payee cheques/demand drafts, and produced documents suchas income tax return acknowledgments to establish the identity andgenuineness of the transaction. It was submitted that, there was no causeto take recourse to Section 68 of the Act, and that the onus on theAssessee Company stood fully discharged.G

3.7. The AO had issued summons to the representatives of theinvestor companies. Despite the summons having been served, nobodyappeared on behalf of any of the investor companies. The Departmentonly received submissions through dak, which created a doubt about theidentity of the investor companies.H

3.8. The AO independently got field enquiries conducted withrespect to the identity and credit-worthiness of the investor companies,and to examine the genuineness of the transaction. Enquiries were madeat Mumbai, Kolkatta, and Guwahati where these Companies were statedto be situated.

A

The result of the enquiry is summarised by the A.O. in his Orderas under :

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S. No. Name of AO’s Enquiries Amounts Investor invested & Tax Company returns filed1. Clifton Notice Served on 29.11.2011 at the given 95,00,000 Securities Pvt. address but no reply received till date. CLtd.- Mumbai 2.Lexus Infotech Notice Served on 19.11.2011 at the given 95,00,000Ltd.- Mumbai address but no reply received till date. 3. Nicco Securities Notice Served on 29.11.2011 at the given 95,00,000 Pvt. Ltd. – address but no reply received till date. Mumbai D4 Real Gold Address incorrect. The correct address is 90,00,000 Trading Co. Pvt. 2[nd]florr, Big Three Building where office Ltd.- Mumbai found closed bearing the name Hema Trading Co.5. Hema Trading Notice could not be served as 95,00,000 Co. Pvt. Ltd.- Respondent-Assessee not available at the Mumbai address given. The premises is owned by Esome other person. 6. Eternity Multi Notice could not be served as 90,00,000 Trade Pvt. Ltd.- Respondent-Assessee not available at the Mumbai address given. The premises is owned by some other person. 7. NehaCassetes A submission on 15.12.2011 through dak FPvt. Ltd.- was received wherein it was submitted, Kolkatta that the company had applied for 45,000 Rs. 90,00,000 equity shares of Rs. 10/- of NRA Iron and invested on Steel Pvt. Ltd. each at a premium of Rs. 21.10.2008 190/- each. The Company had not given Returned income any reason for paying such a high Rs. 9744 premium. (45,00,000/- Ch. No. 039302 dt. G21.10.2008 & Rs. 45,00,000/- Ch. No. 039315 dt. 21.10.2008 drawn on Axis Bank. The Company had shown a total income of Rs. 9,744/- in return for A.Y. 2009-10 H

[2019] 4 S.C.R.

A8.Warner A submission on 15.12.2011 through Multimedia Ltd. dak was received wherein it was Rs. 95,00,000Kolkatta submitted, that the company had invested on applied for 47,500 equity shares of Rs. 21.10.200810/- of NRA Iron and Steel Pvt. Ltd. Returned income each at a premium of Rs. 190/- each. Rs. Nil BThe Company had not given any reason for paying such a high premium. (50,00,000/- Ch. No. 000084 dt. 21.10.2008 & Rs. 45,00,000/- Ch. No. 000083 dt. 21.10.2008 drawn on Kotak Mahindra Bank. CThe Company had shown Nil income for A.Y. 2009-10. 9. Gopikar Supply A submission on 15.12.2011 through Pvt. Ltd. dak was received wherein it was Rs. 90,00,000Kolkatta submitted, that the company had invested on applied for 45,000 equity shares of Rs. 21.10.2008D10/- of NRA Iron and Steel Pvt. Ltd. Return income each at a premium of Rs. 190/- each. Rs.28,387The Company had not given any reason for paying such a high premium. (50,00,000/- Ch. No. 000040 dt. 21.10.2008 & Rs. 40,00,000/- Ch. ENo. 000039 dt. 21.10.2008 drawn on Kotak Mahindra Bank. The Company had shown income of Rs. 28,387/- for A.Y. 2009-10. 10. Ganga Builders It was submitted, that the company had Ltd. Kolkatta applied for shares of NRA Iron and Rs. 90,00,000FSteel Pvt.Ltd. However, they had not invested on specified how many shares, and at 21.10.2008what premium they had purchased. The Return income Company had not enclosed their Bank Rs.5850Statement showing the source of fund for share application money. G(50,00,000/- Ch. No. 000001 dt. 24.10.2008 & Rs. 40,00,000/- Ch. No. 000002 dt. 24.10.2008 drawn on Kotak Mahindra Bank. The Company had shown income of Rs. 5,850/-for A.Y. 2009-10H

PRINCIPAL COMM OF IT (CENT) - I v. NRA IRON & STEEL171PVT. LTD. [INDU MALHOTRA, J.]A11.Gromore Fund It was submitted, that the company had Management applied for 47,500 equity shares of Rs. 10/- Rs. 95,00,000 Ltd. Kolkatta of NRA Iron and Steel Pvt. Ltd. each at a invested on premium of Rs. 190/- each. The Company 24.10.2008 had not given any reason for paying such a Return income high premium. Rs.14130 BThe Company had shown income of Rs. 14,130/- for A.Y. 2009-10 12. Bayanwala It was submitted, that the company had Brothers Pvt. applied for 47,500 equity shares of Rs. 10/- Rs. 95,00,000 Ltd. Kolkatta of NRA Iron and Steel Pvt. Ltd. each at a invested on premium of Rs. 190/- each. The Company 6.11.2008 Chad not given any reason for paying such a Return income Rs. high premium. (50,00,000/- Ch. No. 10626 000020 dt. 06.11.2008 & Rs. 45,00,000/- Ch. No. 000021 dt. 06.11.2008 drawn on Kotak Mahindra Bank The Company had shown income of Rs. 10,626/- for A.Y. 2009-10 D13. Super Finance It was submitted, that the company had Ltd. Kolkatta applied for shares of NRA Iron and Steel Pvt. Ltd. However, they had not specified Rs. 90,00,000 how many shares, and at what premium invested on they had purchased. The Company had not 17.11.2008 enclosed their Bank Statement showing the Return income Rs. Esource of fund for share application money. 10730 (50,00,000/- Ch. No. 069123 dt. 17.11.2008 & Rs. 40,00,000/- Ch. No. 069124 dt. 17.11.2008 drawn on Deutsche bank. The Company had shown income of Rs. F10,730/- for A.Y. 2009-10 14. Shivlaxmi It was submitted, that the company had Export Ltd. applied for 47,500 equity shares of Rs. 10/- Kolkatta of NRA Iron and Steel Pvt. Ltd. each at a Rs. 95,00,000 premium of Rs. 190/- each. The Company invested on had not given any reason for paying such a 18.11.2008 Ghigh premium. (50,00,000/- Ch. No. Return income 121824 dt. 18.11.2008 & Rs. 45,00,000/- Rs.10480 Ch. No. 121825 dt. 18.11.2008 drawn on Deutsche Bank. The Company had shown income of Rs. 10,480/-for A.Y. 2009-10H

[2019] 4 S.C.R.

A15Natraj Vinimay It was submitted, that the company had Pvt. Ltd. applied for 41,500 equity shares of Rs. 10/- Rs. 95,00,000 Kolkatta of NRA Iron and Steel Pvt. Ltd. each at a invested on premium of Rs. 190/- each. The Company 19.11.2008 had not given any reason for paying such a Return income high premium. (50,00,000/- Ch. No. Rs.42083 B000098 dt. 19.11.2008 & Rs. 45,00,000/- Ch. No. 000009 dt. 19.11.2008 drawn on Kotak Mahindra Bank. The Company had shown income of Rs. 42,083/- for A.Y. 2009-10 16 Neelkanth It was submitted, that the company had 95,00,000 CCommodities applied for 47,500 equity shares of Rs. 10/- Return income Pvt. Ltd. of NRA Iron and Steel Pvt. Ltd. each at a Rs.9420 Kolkatta premium of Rs. 190/- each. The Company had not given any reason for paying such a high premium. (50,00,000/- Ch. No. 209681 dt. 5.12.2008 & Rs. 45,00,000/- Ch. No. 209677 dt. 5.12.2008 drawn on DCenturion Bank of Punjab Rs. 95 lakhs invested on 5.12.2008 By 2 cheques The Company had shown income of Rs. 9,470/- for A.Y. 2009-10 17 Prominent It was submitted, that the company had EVyappar Pvt. applied for 47,500 equity shares of Rs. 10/- Rs. 95,00,000 Ltd. Kolkatta of NRA Iron and Steel Pvt. Ltd. each at a invested on premium of Rs. 190/- each. The Company 5.12.2008 had not given any reason for paying such a By 2 cheques high premium. (50,00,000/- Ch. No. Return income 205185 dt. 5.12.2008 & Rs. 45,00,000/- Rs.10307 FCh. No. 205189 dt. 5.12.2008 drawn on HDFC (Centurion Bank of Punjab) The Company had shown income of Rs. 10,307/- for A.Y. 2009-10

The AO recorded that the enquiries at Mumbai revealed that outof the four companies at Mumbai, two companies were found to be non-Gexistent at the address furnished.

With respect to the Kolkata companies, the response came throughdak only. However, nobody appeared, nor did they produce their bankstatements to substantiate the source of the funds from which the allegedinvestments were made.H

With respect to the Guwahati companies – Ispat Sheet Ltd. andNovelty Traders Ltd., enquiries revealed that they were non-existent atthe given address.

3.9. On the basis of the detailed enquiries conducted, the A.O.held that the Assessee had failed to prove the existence of the identity ofthe investor companies and genuineness of the transaction.

The A.O. found that :

i. None of the investor-companies which had invested amountsranging between Rs. 90,00,000 and Rs. 95,00,000 as sharecapital in the Respondent Company – Assessee during the A.Y.2009-10, could justify making investment at such a high premiumof Rs. 190 for each share, when the face value of the shareswas only Rs. 10;

ii. Some of the investor companies were found to be non-existent;

iii. Almost none of the companies produced the bank statementsto establish the source of funds for making such a hugeinvestment in the shares, even though they were declaring avery meagre income in their returns;

iv. 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 onusby cogent evidence either of the credit worthiness of the so-calledinvestor-companies, or genuineness of the transaction.

As a consequence, the amount of Rs. 17,60,00,000/- was addedback to the total income of the Assessee for the assessment year inquestion.

4. The Respondent Company – Assessee filed an Appeal beforethe Commissioner of Income Tax (Appeals)-I, New Delhi. Reliancewas placed on the decision of the Delhi High Court in CIT v. LovelyExports Pvt. Ltd[1]. wherein it was held that :

“In the case of a company the following are the propositionsof law under section 68. The assessee has to prima facie prove(1) the identity of the creditor/subscriber; (2) the genuinenessof the transaction, namely, whether it has been transmitted 1 (2008) 299 ITR 268 (Delhi)

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Athrough banking or other indisputable cannels; (3) thecreditworthiness or financial strength of the creditor/subscriber; (4) if relevant details of the address of PAN indetityof the creditor/subscriber alongwith copies of the shareholdersregister, share application forms, share transfer register, etc,it would constitute acceptable proof or acceptable explanationBby the assessee; (5) the Department would not be justified indrawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notice; TheAssessing Officer is duty bound to investigate thecreditworthiness of the creditor/subscriber the genuinenessCof the transaction and the veracity of the repudiation.” TheSLP filed against the judgment was dismissed.”

The Commissioner of Income Tax (Appeals)-I, New Delhi videOrder dated 11.04.2014 deleted the addition made by the A.O. on theground that the Respondent had filed confirmations from the investorDcompanies, their Income Tax Return, acknowledgments with PANnumbers, copies of their bank account to show that the entire amounthad been paid through normal banking channels, and hence dischargedthe initial onus under Section 68 of the Act, for establishing the credibilityand identity of the shareholders.

E5. The Revenue filed an Appeal before the Income Tax AppellateTribunal (hereinafter referred to as “ITAT”). The ITAT dismissed theappeal, and confirmed the order of the CIT(A) vide Order dated16.10.2017 on the ground that the Assessee had discharged their primaryonus to establish the identity and credit-worthiness of the investors,especially when the investor companies had filed their returns and wereFbeing assessed.

E

6. The Revenue filed an Appeal bearing I.T.A. No. 244/2018 u/S.260A of the Act before the Delhi High Court to challenge the order ofthe Tribunal. The Respondent Company – Assessee did not appear beforethe High Court. Hence, the matter proceeded ex-parte. The High CourtGdismissed the Appeal filed by the Revenue vide the Impugned Orderdated 26.02.2018, and affirmed the decision of the Tribunal on the groundthat the issues raised before it, were urged on facts, and the lower appellateauthorities had taken sufficient care to consider the relevantcircumstances. Hence no substantial question of law arose for theirconsideration.H

7. Aggrieved by the Order passed by the High Court, the Revenuefiled the present S.L.P. (C) No. 29855/2018 before this Court. This Courtissued Notice on 12.11.2018 returnable in six weeks. After service waseffected on the Respondent Company – Assessee, the matter was listedon 02.01.2019. However, none appeared on behalf of the RespondentCompany – Assessee. Consequently, the matter was adjourned for twoweeks, and posted on 18.01.2019, when it was ordered that in case theRespondent Company – Assessee chooses not to enter appearance, thematter would be disposed of ex-parte.

The matter was thereafter listed again on 23.01.2019, when thefollowing Order was passed:

“Notice was issued in the matter on 12.11.2018, Office reportdated 22.12.2018 indicated that notice was served upon thesole Respondent but none had entered appearance.

By order dated 02.01.2019, last opportunity was given to theRespondent and it was indicated that if the Respondent chose-not to enter appearance, the matter would be disposed of exparte.Even then none has entered appearance.

Having gone through the matter, we give one more opportunityto the Respondent to enter appearance and make submissionswith respect to the merits of the matter. If the Respondent stillchooses not to appear, the matter shall definitely be decidedex-parte.”

The Respondent Company – Assessee however remainedunrepresented even on the subsequent dates i.e. on 31.01.2019 and05.02.2019. The matter was finally heard on 05.02.2019, when judgmentwas reserved.

8. We have heard the Ld. Counsel for the Revenue, and examinedthe material on record.

8.1. The issue which arises for determination is whether theRespondent / Assessee had discharged the primary onus to establish thegenuineness of the transaction required under Section 68 of the saidAct.Section 68 of the I.T. Act (prior to the Finance Act, 2012) read asfollows:

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A“68. Cash credits- Where any sum is found credited in thebook of an Assessee maintained for any previous year, andthe Assessee offers no explanation about the nature and sourcethereof or the explanation offered by him is not, in the opinionof the Assessing Officer, satisfactory, the sum so credited may-be charged to incometax as the income of the Assessee ofBthat previous year”

The use of the words “any sum found credited in the books” inSection 68 of the Act indicates that the section is widely worded, andCincludes investments made by the introduction of share capital or sharepremium.

8.2. As per settled law, the initial onus is on the Assessee to establishby cogent evidence the genuineness of the transaction, and credit-worthiness of the investors under Section 68 of the Act.DThe assessee is expected to establish to the satisfaction of theAssessing Officer[2] :

• Proof of Identity of the creditors;

• Capacity of creditors to advance money; and E• Genuineness of transaction This Court in the land mark case of Kale Khan MohammadHanif v. CIT[3] and, Roshan Di Hatti v. CIT[4] laid down that the onus ofproving the source of a sum of money found to have been received byan assessee, is on the assessee. Once the assessee has submitted theFdocuments relating to identity, genuineness of the transaction, and credit-worthiness, then the AO must conduct an inquiry, and call for moredetails before invoking Section 68. If the Assessee is not able to providea satisfactory explanation of the nature and source, of the investmentsmade, it is open to the Revenue to hold that it is the income of theGassesse, and there would be no further burden on the revenue to showthat the income is from any particular source.

8.3. With respect to the issue of genuineness of transaction, it isfor the assessee to prove by cogent and credible evidence, that the 2 CIT v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal)

3 [1963] 50 ITR 1 (SC)H 4 [1977] 107 ITR (SC)

investments made in share capital are genuine borrowings, since thefacts are exclusively within the assessee’s knowledge.

The Delhi High Court in CIT v. Oasis Hospitalities Pvt. Ltd.[5],held that :

“The initial onus is upon the assessee to establish three thingsnecessary to obviate the mischief of Section 68. Those are:(i) identity of the investors; (ii) their creditworthiness/investments; and (iii) genuineness of the transaction. Onlywhen these three ingredients are established prima facie, the department is required to undertake further exercise.”

It has been held that merely proving the identity of the investorsdoes not discharge the onus of the assessee, if the capacity or credit-worthiness has not been established.

In Shankar Ghosh v. ITO[6], the assessee failed to prove thefinancial capacity of the person from whom he had allegedly taken theloan. The loan amount was rightly held to be the assessee’s ownundisclosed income.

8.4. Reliance was also placed on the decision of CIT v. KamdhenuSteel & Alloys Limited and Other[7] wherein the Court that :

“38. Even in that instant case, it is projected by the Revenuethat the Directorate of Income Tax (Investigation) hadpurportedly found such a racket of floating bogus companieswith sole purpose of lending entries. But, it is unfortunatethat all this exercise if going in vain as few more steps whichshould have been taken by the Revenue in order to find outcausal connection between the case deposited in the bankaccounts of the applicant banks and the assessee were nottaken. It is necessary to link the assessee with the source whenthat link is missing, it is difficult to fasten the assessee withsuch a liability.”

9. The Judgments cited hold that the Assessing Officer ought toconduct an independent enquiry to verify the genuineness of the creditentries.

5 333 ITR 119 (Delhi)(2011)

6 [1985] 23 TTJ (Cal.)

7 (2012) 206 Taxaman 254 (Delhi)

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AIn the present case, the Assessing Officer made an independentand detailed enquiry, including survey of the so-called investor companiesfrom Mumbai, Kolkata and Guwahati to verify the credit-worthiness ofthe parties, the source of funds invested, and the genuineness of thetransactions. The field reports revealed that the share-holders wereeither non-existent, or lacked credit-worthiness.B

10. On the issue of unexplained credit entries /share capital, wehave examined the following judgments :

i. In Sumati Dayal v. CIT[8]this Court held that :

“if the explanation offered by the assessee about the natureCand source thereof is, in the opinion of the Assessing Officer,not satisfactory, there is prima facie evidence against theassessee, vis., the receipt of money, and if he fails to rebut thesame, the said evidence being unrebutted can be used againsthim by holding that it is a receipt of an income nature. Whileconsidering the explanation of the assessee, the departmentDcannot, however, act unreasonably”

ii.In CIT v. P. Mohankala[9] this Court held that:

“A bare reading of section 68 of the Income-tax Act, 1961,suggests that (i) there has to be credit of amounts in the booksmaintained by the assessee ; (ii) such credit has to be a sumof money during the previous year ; and (iii) either (a) theassessee offers no explanation about the nature and sourceof such credits found in the books or (b) the explanationoffered by the assessee, in the opinion of the Assessing Officer,is not satisfactory. It is only then that the sum so credited maybe charged to Income-tax as the income of the assessee ofthat previous year. The expression “the assessee offers noexplanation” means the assessee offers no proper, reasonableand acceptable explanation as regards the sums foundcredited in the books maintained by the assessee.

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F

The burden is on the assessee to take the plea that, even if theexplanation is not acceptable, the material and attendingcircumstances available on record do not justify the sum foundcredited in the books being treated as a receipt of incomenature.”

G

8 [1995] 214 ITR 801 (SC)H 9 291 ITR 278

iii. The Delhi High Court in a recent judgment delivered inPR.CIT -6, New Delhi v. NDR Promoters Pvt. Ltd.[10] upheld theadditions made by the Assessing Officer on account of introducing bogusshare capital into the assessee company on the facts of the case.

iv. The Courts have held that in the case of cash credit entries, itis necessary for the assessee to prove not only the identity of the creditors,but also the capacity of the creditors to advance money, and establishthe genuineness of the transactions. The initial onus of proof lies on theassessee. This Court in Roshan Di Hatti v. CIT[11], held that if the assesseefails to discharge the onus by producing cogent evidence and explanation,the AO would be justified in making the additions back into the incomeof the assessee.

v.The Guwahati High Court in Nemi Chand Kothari v. CIT[12]held that merely because a transaction takes place by cheque is notsufficient to discharge the burden. The assessee has to prove the identityof the creditors and genuineness of the transaction. :

“It cannot be said that a transaction, which takes place byway of cheque, is invariably sacrosanct. Once the assesseehas proved the identity of his creditors, the genuineness ofthe transactions which he had with his creditors, and thecreditworthiness of his creditors vis-a-vis the transactionswhich he had with the creditors, his burden stands dischargedand the burden then shifts to the revenue to show that thoughcovered by cheques, the amounts in question, actuallybelonged to, or was owned by the assessee himself”

vi. In a recent judgment the Delhi High Court[13] held that thecredit-worthiness or genuineness of a transaction regarding shareapplication money depends on whether the two parties are related orknown to each other, or mode by which parties approached each other,whether the transaction is entered into through written documentation toprotect investment, whether the investor was an angel investor, thequantum of money invested, credit-worthiness of the recipient, object 10 410 ITR 379 11 (1992) 2 SCC 378 12 [2003] 264 ITR 254 (Gau.)

13 CIT v. N.R. Portfolio (P.) Ltd.[2014] 42 taxmann.com 339/222 Taxman 157 (Mag.)(Delhi)

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Aand purpose for which payment/investment was made, etc. Theincorporation of a company, and payment by banking channel, etc. cannotin all cases tantamount to satisfactory discharge of onus.

vii. Other cases where the issue of share application moneyreceived by an assessee was examined in the context of Section 68 areBCIT v. Divine Leasing & Financing Ltd.[14], and CIT v. Value CapitalService (P.) Ltd.[15]11. The principles which emerge where sums of money arecredited as Share Capital/Premium are :

i. The assessee is under a legal obligation to prove the genuinenessCof the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financialcapacity to make the investment in question, to the satisfactionof 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 theDsubscribers, 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 thecreditors to be dubious or doubtful, or lack credit-worthiness,then the genuineness of the transaction would not beEestablished.

In such a case, the assessee would not have discharged the primaryonus contemplated by Section 68 of the Act.

12. In the present case, the A.O. had conducted detailed enquirywhich revealed that :Fi. There was no material on record to prove, or even remotely

i. There was no material on record to prove, or even remotelysuggest, that the share application money was received fromindependent legal entities. The survey revealed that some ofthe investor companies were non-existent, and had no officeat the address mentioned by the assessee.

GFor example:

a. The companies Hema Trading Co. Pvt. Ltd. and EternityMulti Trade Pvt. Ltd. at Mumbai, were found to be non-existent at the address given, and the premises was ownedby some other person.

14 (2007) 158 Taxman 440H 15 [2008]307 ITR 334

15 [2008]307 ITR 334

b. The companies at Kolkatta did not appear before the A.O.,nor did they produce their bank statements to substantiatethe source of the funds from which the alleged investmentswere made.

A

c. The two companies at Guwahati viz. Ispat Sheet Ltd. andNovelty Traders Ltd., were found to be non-existent at theBaddress provided.

The genuineness of the transaction was found to be completelydoubtful.

ii.The enquiries revealed that the investor companies had filedreturns for a negligible taxable income, which would show thatthe investors did not have the financial capacity to invest fundsranging between Rs. 90,00,000 to Rs. 95,00,000 in theAssessment Year 2009-10, for purchase of shares at such ahigh premium.

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For example:

Neha Cassetes Pvt. Ltd. - Kolkatta had disclosed a taxable incomeof Rs. 9,744/- for A.Y. 2009-10, but had purchased Shares worthRs, 90,00,000 in the Assessee Company.

Similarly Warner Multimedia Ltd. – Kolkatta filed a NIL return,but had purchased Shares worth Rs. 95,00,000 in the AssesseeCompany – Respondent.

E

Another example is of Ganga Builders Ltd. – Kolkatta which hadfiled a return for Rs. 5,850 but invested in shares to the tune ofRs. 90,00,000 in the Assessee Company – Respondent, etc.

F

iii. There was no explanation whatsoever offered as to why theinvestor companies had applied for shares of the AssesseeCompany at a high premium of Rs. 190 per share, even thoughthe face value of the share was Rs. 10/- per share.

iv. Furthermore, none of the so-called investor companiesestablished the source of funds from which the high sharepremium was invested.

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v.The mere mention of the income tax file number of an investorwas not sufficient to discharge the onus under Section 68 ofthe Act.

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A

13. The lower appellate authorities appear to have ignored thedetailed findings of the AO from the field enquiry and investigationscarried out by his office. The authorities below have erroneously heldthat merely because the Respondent Company – Assessee had filed allthe primary evidence, the onus on the Assessee stood discharged.

The lower appellate authorities failed to appreciate that the investorcompanies which had filed income tax returns with a meagre or nil incomehad to explain how they had invested such huge sums of money in theAssesse Company - Respondent. Clearly the onus to establish the creditworthiness of the investor companies was not discharged. The entiretransaction seemed bogus, and lacked credibility.

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C

The Court/Authorities below did not even advert to the field enquiryconducted by the AO which revealed that in several cases the investorcompanies were found to be non-existent, and the onus to establish theidentity of the investor companies, was not discharged by the assessee.

D14. The practice of conversion of un-accounted money throughthe 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 theinformation is within the personal knowledge of the Assessee. TheAssessee is under a legal obligation to prove the receipt of share capital/Epremium to the satisfaction of the AO, failure of which, would justifyaddition of the said amount to the income of the Assessee.

D

15. On the facts of the present case, clearly the Assessee Company- Respondent failed to discharge the onus required under Section 68 ofthe Act, the Assessing Officer was justified in adding back the amountsFto the Assessee’s income.

16. The Appeal filed by the Appellant – Revenue is allowed. Inthe aforesaid facts and circumstances, and the law laid down above, thejudgment of the High Court, the ITAT, and the CIT are hereby set-aside.The Order passed by the AO is restored.

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Pending applications, if any are disposed of.

Ordered accordingly.

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Devika Gujral