Advocate Dharan V. Gandhi has
conducted a thorough analysis of the recent judgement of the Supreme Court
in PCIT vs. NRA Iron & Steel 412 ITR 161 on the
taxability of bogus share capital and premium u/s 68 of the Income-tax Act. He
has explained the nuances of
the judgement and also offered valuable advice on
what taxpayers should do to be able to successfully distinguish the said
judgement from applying to the facts of their case
Introduction
The most effective
and lethal weapon used by the Income-tax Department (‘Department’) against
evasive tactics used by the assessees, to convert their unaccounted money in
accounted one, is section 68 of the Income-tax Act, 1961 (‘Act’).
Even prior to the
insertion of the said section or its predecessor, there were ample authorities
to the same effect as section 68. In this regard, one may profitably refer to
the judgment of the Apex Court in case of Kale Khan Mohammad Hanif vs.
CIT -[1963] 50 ITR 1 (SC), wherein the Court has held as under:
“It is well established that the onus of proving the source of a
sum of money found to have been received by the assessee is on him. If he
disputes liability for tax, it is for him to show either that the receipt was
not income or that if it was, it was exempt from taxation under the provisions
of the Act. In the absence of such proof, the Income-tax Officer is entitled to
treat it as taxable income”.
Similar finding was
given by the Apex Court in case of A. Govindarajulu Mudaliar vs.
CIT – [1958] 34 ITR 807 (SC).
It was only later
that the above dictum of the Apex Court found embodiment in section 68 of the
Act.
Background of section 68
Section 68 does not
need any introduction. To summarise, it taxes any credit appearing in the books
of an assessee, where the assessee is not able to or not satisfactorily able to
explain the nature and source of such credit. It is a deeming fiction, which
taxes a credit as income on unsatisfactory explanation about nature and source
thereof and such fiction is applicable whether or not the credit is otherwise
income chargeable to tax.
Initial onus is on
the assessee to demonstrate the “nature and source” of the credit and when the
same is discharged, the burden shifts onto the Department to prove that the
credit is income chargeable to tax. It is now settled by various judgments that
the term “nature and source of a sum found credited” would require an assessee
to explain three things (ingredients) viz.
a. Identity of the
creditor
b. capacity of the
creditor to advance money and
c. genuineness of
the transaction.
The term ‘any sum
found credited’ also takes under its sweep any sum credited as share capital,
share premium or share application money or any such amount by whatever name
called [Refer Sophia Finance Ltd – 205 ITR
98 (Del); CIT vs. Ruby Traders and Exporters Ltd.
-263 ITR 300 (Cal); – CIT vs. Divine Leasing and
Finance Pvt. Ltd. – 299 ITR 268 (Del)]
Judgment in case of Lovely
export
The Hon’ble Supreme
Court in case of CIT vs. Lovely Exports P. Ltd. –
216 CTR 195(SC), while dealing with the issue of applicability of section 68 on
receipt of share capital and burden of proof on the assessee, held that ‘if the share application money is received by the assessee company
from alleged bogus shareholders, whose names are given to the AO, then the
Department is free to proceed to reopen their individual assessments in
accordance with law.’
Thus, the said
judgment reduced the rigours of section 68 in so far as, share capital etc. is
concerned, in as much as, the Court held that the onus is discharged on giving
names and PAN of the investor. It further held that, if at all, the Department
would like to assess any income, the same can be done in the hands of the
investor. Thus, unlike other credits, wherein one has to explain three
ingredients as stated above, the onus on the assessee company is limited while
explaining credit in the nature of share capital etc.
Following the said
judgment, many courts had earlier taken a view that, where the identity has
been established and PAN has been furnished, no addition can be made u/s 68 of
the Act and that the Department can take necessary actions against the
investors [Refer CIT vs. Siri Ram Syal Hydro Power (P) Ltd.-196
Taxman 441(Del); CIT vs. vs. GP International Ltd.-325
ITR 25(P&H); CIT vs. Dwarkadhish Investment (P) Ltd.
– 330 ITR 298(Del); CIT vs. Creative World
Telefilms Ltd.-333 ITR 100 (Bom)]
Judgment in case of Lovely
Export distinguished
However, many
courts have, off late, distinguished the said judgment [refer CIT vs. Nipun Builders and Developers P. Ltd.-350 ITR
407(Del); CIT vs. Nova Promoters and Finlease (P) Ltd.
-342 ITR 169 (Del.); CIT vs. Oasis Hospitalities
Pvt. Ltd. -333 ITR 119 (Del.); Rajmandir Estates Private Limited vs.
PCIT -386 ITR 162 (Cal)].
From the above
referred judgments, it can be seen that the Delhi High Court and the Calcutta
High Court have distinguished the judgment in case of Lovely Exports on the
ground that private placement of shares would invite higher burden on the
assessees to explain the nature and source of the share capital etc. rather
than mere provision of name and PAN.
Though, some
courts, are still following the judgment of the Apex Court in case of Lovely Exports (supra) [Refer PCIT vs. Veedhata Tower Pvt. Ltd. -403 ITR
415(Bom); PCIT vs. Apeak Infotech -397
ITR 148(Bom); CIT vs. Gagandeep
Infrastructure (P.) Ltd.-394 ITR 680(Bom)].
In light of the
various judgments which have come off late, one may say that the ratio of the
judgment of the Apex Court in case of Lovely Exports (supra)
has been diluted to a lot extent. In fact, even the assessees are making a
point to demonstrate the three ingredients even in case of credit in the nature
of share capital etc. instead of merely submitting the name and PAN.
Nonetheless, there still do not exist any requirement to explain the source of
source or origin of origin in case of credit in the nature of share capital
etc.
Judgment in case of NRA Iron
and Steel Ltd.
Recently the
Hon’ble Supreme Court was seized with the issue of applicability of section 68
on receipt of share capital and share premium in case of Principal Commissioner of
Income-tax (Central)-1 vs. NRA Iron & Steel (P.) Ltd. reported in [2019] 103
taxmann.com 48 / 262 Taxman 74 / 412 ITR 161 (SC). The Court
gave out its verdict on 05th March, 2019, laying down certain important ratios.
Before going into the findings of the Court, it will be pertinent to analyse
the facts of the case.
Facts:
Appeal pertained to
the AY 2009-10. The assessee company had received share capital and share
premium totalling to Rs. 17.60 crores from 19 companies, of which, 6 were based
in Mumbai, 11 in Kolkata and 2 in Guwahati. Each company had invested an amount
of Rs. 90 lakh or Rs. 95 lakh. The shares issued were having face value of Rs.
10 and the premium charged was Rs. 190. The assessment of the assessee company
was reopened based on some information received from the investigation wing of
the Department.
During the course
of assessment proceedings, the assessee submitted that the share capital money
was received through banking channel and it submitted confirmations, income tax
return acknowledgments and bank accounts in respect of the investor companies.
The AO carried out
certain independent investigation into receipt of such share capital. The AO
issued summons to the investor companies, however, none appeared before the AO.
Some companies had replied to the summons by filing their submission through
dak. Some companies did not file any reply.
Summary of such
investigation by the AO is stated hereunder:
a. Companies to
whom notice served but no response received – 3 companies
b. Company in
respect of which the address was found to be incorrect and at new address,
office was found to be closed – 1 company
c. Companies in
respect of which notice could not be served as investor-company was not
available at the address and some other person owned the premises – 2 companies
d. Reply received
through dak. Details as to cheque number and share capital and number of shares
given. Further, detail as to return of income for the concerned year given
which showed very meagre income in the range of Nil to Rs. 28000 – 9 companies
e. Reply received
through dak stating that it had applied for shares but did not specify how many
shares and at what premium etc. Further, the company did not furnish bank
statement and had returned meagre income – 2 companies.
Also, field
inquiries were conducted, wherein it was found that out of 4 companies in
Mumbai, 2 companies were found to be non-existent and similarly, both the
companies based in Guwahati were found to be non-existent at the address furnished.
As a result, the AO
added such amount of share capital and share premium to the total income of the
assessee u/s 68 of the Act, on the ground that none of the investor companies
could justify such high premium, while some were found to be non-existent and
that none of the companies produced bank statement to justify the source of
their investment especially when the returned income of such investor companies
was meagre and none appeared before the AO.
CIT(A) and ITAT
decided the issue in favour of the assessee on the ground that the onus laid
down on the assessee was discharged as it had furnished confirmations, IT
return acknowledgment with PAN of the investors and bank statement to show
payment by banking channels. The Hon’ble Delhi High Court did not entertain the
appeal in view of factual issues being involved.
The Department
carried the matter to the Hon’ble Apex Court. None appeared on behalf of the
assessee before the Court inspite of serving the notice.
Findings of the Court
The Court after
considering the submissions of the Department, reversed the order of the
CIT(A), ITAT and the High Court and restored the order of the AO. While doing
so, it gave certain important findings after considering various judgments of
the different court. The findings are bifurcated in two parts viz. general
finding and findings specific to the facts of the case.
General findings
given by the Court are brought out hereunder:
1. Section 68 of
the Act would cover within its ambit credit in the nature of share capital and
share premium.
2. Initial onus is
on the assessee to establish the identity of the person, creditworthiness of
the person in the sense of financial capacity and the genuineness of the
transaction, as the facts are within the exclusive knowledge of the assessee.
If onus is not discharged to the satisfaction of the AO, then the amount of
credit would be treated as income without anything further to be done.
3. AO is duty bound
to investigate into the identity, creditworthiness of the party and genuineness
of the transaction. If the inquiries and investigation reveal that the identity
is doubtful or that the creditor lacks creditworthiness, then the genuineness
of the transaction would not be said to have been established.
4. Practice of conversion
of cloak of unaccounted money into share premium must be subjected to careful
scrutiny particularly in case of private placement of shares where higher onus
is required since the information is within the personal knowledge of the
assessee.
The above were the
general findings of the Court. The Court also gave findings which were specific
to the facts of the case before them as under:
1. AO’s detailed
inquiry revealed that there was no material on record to prove that share
application money was received from independent legal entities as some of the
companies were found to be non-existent and had no office at the address
mentioned. Since, the companies were non-existent, the onus to establish the
identity was held to be not discharged.
2. Some companies
did not appear nor did they produce the bank statement to substantiate the
source of the funds.
3. Investor
companies had filed return with negligible income, therefore, there was no
financial capacity with the investor to invest huge amount of about Rs. 90
lakh. Thus, in the facts of the case, the Court held that the investor had to
explain how they had invested such huge sums of money. As a result, the Court
held that the onus to establish the creditworthiness was not discharged.
4. No explanation was
offered by the investor as to charging of high premium.
5. As a result of
the above discrepancies, the genuineness was found to be doubtful
In the light of the
above averred general and specific findings, the Court restored the addition
made by the AO.
Analysis and going forward
It is quite settled
that any judgment of a Court has to be read in the context of the case before
the Court. The Hon’ble Apex Court in case of CIT vs. Sun Engineering Works
(P) Ltd. –(1992) 198 ITR 0297 (SC) has
held that “The judgment must be read as a whole and the observations from the
judgment have to be considered in the light of the questions which were before
this Court. A decision of this Court takes its colour from the questions
involved in the case in which it is rendered and, while applying the decision
to a later case, the Courts must carefully try to ascertain the true principle
laid down by the decision of this Court and not to pick out words or sentences
from the judgment, divorced from the context of the questions under
consideration by this Court, to support their reasoning.”
Similarly, the
judgment of the Court as rendered in the impugned case, has to be considered in
the light of the facts existing in the case. The Court itself, in para 15,
states that in the facts of the present case, the assessee company failed to
discharge the onus laid down u/s 68 of the Act.
Also, it is well
known that the additions made u/s 68 of the Act are fact specific. It depends
upon the details and evidences produced by the assessee to discharge the
initial onus and the inquiry and investigation of the AO in the course of
assessment proceedings. Thus, carte blanche application of the present judgment
to all the cases involving addition of share capital etc. u/s 68 of the Act
would not be justified.
Nevertheless, the
Court has laid down some important ratios which would be applicable to similar
cases.
In the earlier
paras, I have bifurcated the findings of the Court into two part viz. general
findings and specific findings qua the facts of the case. Such general findings
of the Court would have to be taken note of while analysing similar issue. Most
of the general findings of the Court are quite settled principles and
therefore, would not require much deliberation, except one which is “Practice of conversion of cloak of unaccounted money into share
premium must be subjected to careful scrutiny particularly in case of private
placement of shares where higher onus is required since the information is
within the personal knowledge of the assessee.“
Importantly, he
above finding of the Court, in my opinion, points out to one fact that the
ratio laid down by the same Court in case of Lovely Export (supra)
would no longer apply to private placement of shares. Though, there is no
discussion in the impugned order in respect of the judgment in case of Lovely Export, however, the Court was very well aware
of the said judgment as the CIT(A) and ITAT had swayed in favour of the
assessee by relying on this very judgment. Nonetheless, the ratio in case of Lovely Export, in my opinion, would be still be alive
and kicking in case of issue of shares other than by way of private placement.
In so far as the
specific findings of the Court are concerned, the same should be read in the
context of the judgment. As already stated above, one cannot pick and choose a
finding of the Court divorced from the facts of that case and universally apply
the same. In the impugned case, what can be discerned is that all the specific
findings cumulatively lead to adverse opinion of the Court. Thus, in my humble
opinion, each specific finding independently cannot justify an addition in
other cases and one should analyse other factors also before coming to any
conclusion.
The specific
findings of the Court are discussed hereunder:
The Court in the
facts of the case held that explanation should be given in respect of high
premium. This fact of high premium per se cannot be a factor to make an
addition u/s 68 of the Act, if the other three ingredients are well
established. The section merely requires nature and source to be explained. For
this very reason, section 56(2)(viib) was inserted in the statute book, wherein
excess share premium received over the fair market value can be taxed. In this
regard, one can refer to the judgment of the Hon’ble Madhya Pradesh High Court
in case of PCIT vs. Chain House
International (P.) Ltd. – [2018] 98 taxmann.com 47 (MP),
wherein it has been held that once genuineness, creditworthiness and identity
of investors are established, no addition can be made only on ground that
shares were issued at excess premium. In fact, SLP filed against the said
judgment has been dismissed by the very same bench of the Apex Court
[SLP(Civil) Diary No(s). 1992/2019].
The Court also held
that the investor companies did not produce their bank statement to explain
their source of funds. This requirement of explaining the source of funds was
justified in the facts of the case before the Court because of meagre income
shown by investors for the relevant years.
However, once the
creditworthiness is satisfied, there is no requirement for a person to prove
the source of source. Secondly, such requirement now finds a specific mention
in the statute book in the form of Proviso to section 68 which has come into
effect from 1.4.2013. The Hon’ble Bombay High Court in case of CIT vs. Gagandeep Infrastructure
Pvt. Ltd.-394 ITR 680(Bom), has held that such proviso is
prospective in nature. Thus, prior to the said date, there cannot be any
requirement on the assessee to prove the source of source.
Of course, this
would not prohibit the AO to enquire into the source of source. But then the
question would be, if the investor is not able to explain his source, should
the additions be made in the hands of the investors or in the hands of the
company. One can argue that if the investor company fails to offer any
explanation about the source of their funds for investment, the addition should
be made in the hands of the investor company and not the assessee company.
This is because,
the wording used in section 68 are “the sum so credited may be
charged to tax as the income of the assessee”. The section is worded
in such a manner so as to give discretionary power to the AO to make addition
unlike section 56(2)(x) wherein the difference is automatically considered the
income of the assessee. Thus, the option is with the AO to tax it in the hands
of the assessee and that he can exercise his discretion to tax it in the hand
of the investor.
However, post
insertion of the proviso to section 68 i.e. w.e.f. 1.4.2013, if the investor
fails to offer the explanation of source of their investment then addition has
to be made in the hands of the assessee-company.
The Court in the
discussed case referred to the meagre income of the investor companies to hold
that creditworthiness was not proved. This may be because, the other details
like the availability of funds in other form or past profits may not be
available with the Court. This inference can also be drawn because the Court
also held that the investor companies did not demonstrate the source of funds
for investment. Thus, merely because in the year in which shares are
subscribed, the investor company has earned meagre income or suffered a loss
would not mean that the investor company has no creditworthiness. If the
investor company is able to demonstrate from the balance sheet that it had
sufficient funds available with it to invest, then creditworthiness can be said
to have been established. The Hon’ble Delhi High Court in case of CIT vs. Ms. Mayawati – 338 ITR 0563(Del) has held
that the capacity of any person does not mean how much they earn monthly or
annually, but the term capacity has wide meaning and the same can be perceived
by how wealthy a person is.
In so far as the
identity aspect is concerned, the Court held that in case of some parties, they
were found to be non-existent at the address already furnished. This would lead
to the conclusion that the identity is not established. Thus, the traditional
concept of giving name, PAN and address has been enlarged to this effect.
However, if the person bring confirmation, gives new address and the investor
party replies to the summons of the AO, then one can say, in my opinion, that
the identity has been established.
It is important to
note that the said judgment of the Court was considered by the Kolkata Bench of
ITAT in case of M/s Baba Bhootnath Trade &
Commerce Ltd. vs. ITO (ITA No.
1494/Kol/2017). In the said judgment, the Tribunal has distinguished the
judgment in case of NRA Iron and Steel (supra)
on similar grounds that the facts of the case were different as compared to the
facts in the case before the Apex Court. The Tribunal distinguished the
judgment of the Apex Court on the following counts:
a. the AO in the
case before the Apex Court had made extensive enquiries and from that he had
found that some of the investor companies were non-existent which was not the
case before the Tribunal.
b. In the case
before the Apex Court, certain investor companies did not produce their bank
statements proving the source for making investments in Assessee Company, which
was not the case before the Tribunal. In the case before the Tribunal, the
entire details of source of source were duly furnished by all the respective
share subscribing companies before the AO in response to summons u/s 131 of the
Act by complying with the personal appearance of directors.
From the above
discussion, I may humbly opine that the specific findings of the Court cannot
be isolated from other specific findings of the Court to make addition in a
particular case. As already specified earlier, the findings of the Court have
to be read in the context of the case and not otherwise. In the context of the
impugned case, the specific findings are supported by other specific findings
which cumulatively lead the Court to give the said judgment.
It is interesting
to note that the Tribunal in the case of NRA Iron and Steel Pvt. Ltd.
(ITA.No.3611/Del./2014), while deciding in favour of the assessee had relied
upon judgment of the co-ordinate bench of the Tribunal – [ACIT vs. M/s. Adamine Construction Pvt. Ltd. -ITA No.
6175/Del/2013] wherein identical issues were involved, in fact, few of the
investor companies were also common. In the case of the said company i.e. M/s.
Adamine Construction Pvt. Ltd., the matter travelled upto the Hon’ble Supreme
Court and in that case, the Court had dismissed the SLP of the Department [PCIT
v. Adamine Construction (P.) Ltd. (2018) 259 Taxman 131 (SC)]. Ironically, one
of the judges in both the cases is common.
Conclusion
Notably, the
judgment would cause little impact after 1.4.2013, as the Legislature has
already taken required measures vide Finance Act, 2012. The proviso to section
68, is a very strong measure wherein a company is required to even explain the
source of the investor, which presupposes the fact that the company would be
able to get those evidences easily as the investor would be a known party.
However, prior to
AY 2013-14, i.e. in case of pending disputes pertaining to earlier years, the
judgment of the Apex Court so discussed, would have a considerable impact. One
has to carefully distinguish the said judgment, so as to reduce it rigours,
while applying to the facts of other cases. In any case, there should no longer
be any doubt that one has to now furnish a lot details to discharge the onus
and one cannot simply wash his hands by furnishing name, address and PAN.
|
Disclaimer: The contents of this document are
solely for informational purpose. It does not constitute professional advice
or a formal recommendation. While due care has been taken in preparing this
document, the existence of mistakes and omissions herein is not ruled out.
Neither the author nor itatonline.org and its affiliates accepts any
liabilities for any loss or damage of any kind arising out of any inaccurate
or incomplete information in this document nor for any actions taken in
reliance thereon. No part of this document should be distributed or copied
(except for personal, non-commercial use) without express written permission
of itatonline.org
|
No comments:
Post a Comment