Recently, the Supreme Court, in an ex-parte decision in the case of NRA Iron [TS-5030-SC-2019-O], ruled upon the applicability of Sec. 68 in the scenario of issue of shares at a high premium while reversing all the lower Courts decisions. The Apex Court held that if upon investigation, the AO comes to a conclusion that the identity, genuineness and creditworthiness of the investors is doubtful, then the onus of the assessee does not stand discharged by merely supplying the details pertaining to the identity, genuineness and creditworthiness of the investors. The author Mr. Prakash Sinha, Chartered Accountant, discusses this landmark ruling wherein SC has elucidated that the term “any sum found credited in the books” is widely worded and includes investments made by share capital or share premium. Regarding SC’s observation that creditworthiness of certain companies were not established, the author opines that “taxable income is not a correct parameter to check the credit worthiness of the creditor as the investor may have funds which is available in Balance sheet and not in Profit-loss accounts”. The author further opines that “Supreme Court should have tested the section 68 requirements on case to case basis (each investor wise) rather than painting all with the same color”. Speaking of the impact of the SC decision on subsequent assessments and decisions, the author discusses a recent and subsequent ruling of Kolkata ITAT in the case of Baba Bhoothnath [TS-198-ITAT-2019(Kol)] wherein it has been held that "where the entire detail of the source of source were furnished by the respective share subscribers and the directors themselves appeared before AO and explained all the transactions with evidence and AO has nothing adverse, then the NRA Iron ruling is factually distinguishable and cannot be applied".

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The Honorable Supreme Court in its recent ex- parte ruling in the case of Principal Commissioner of Income Tax vs. NRA Iron & Steel  (P) Ltd [TS-5030-SC-2019-O] while discussing the issue of Section 68 has held that where the assessee has supplied the detail of the identity, genuineness and credit worthiness of all the investors, the onus of the assessee does not get over , if the AO has investigated the matter and during the investigation it comes to a conclusion that the identity, genuineness and credit worthiness is doubtful . The apex court has upheld the view of Assessing Officer that the Assessee has failed to deliver its onus and confirm the order of AO, whereas the CIT(A) has reversed the AO order citing the Lovely exports and ITAT concurred the view of the CIT(A) . On the Revenue appeal to the High Court, it has not interfered and dismissed the appeal even though assessee was not represented there.

The Court in this case has distinguished the order of CIT vs. Lovely Exports (P) Ltd./ Divine Leasing & Financing Ltd [TS-39-HC-2006(Delhi)-O]. The court has also relied on Sumati Dayal vs. CIT [TS-5013-SC-1995-O].

The facts of the case are as under:-During the AY-2009-10, corporate assessee who is a closely held company has received share capital along with premium amounting to Rs 17.60 crores from various parties of Mumbai , Kolkata and Guwahati .

Share of Rs. 10 was issued at a premium of Rs. 190. The AO served the notice under Section 148 and proceeding started under section 147 and during the course assessee provided certain documents about the receipt of the above share capital from all the above mentioned investorwith regard to identity, genuineness and credit worthiness of the investor. Being not satisfied by the reply, AO sent the notice under section 133(6) and further started the investigation on its own.

The outcome of the investigation are as under:-

In few companies there was no reply of the notice send by the AO , in some cases the address was incorrect hence the notice remain unserved , in some cases the company was not exists on the address given , in some cases the reply was received but the investor didn’t answer the reason of investing into such investee company at the higher price ,  in some cases the investor had not submitted their banks statement therefore the AO was not able to establish the source of source and so on .

Further, the Assessing Officer also summoned the representatives of various investors and despite being the notices served nobody turned up for the investor company. Based on such investigation report, the AO, who was not satisfied with the reply of the assessee, made the addition of Rs. 17.60 crores under section 68. 

Being aggrieved by the impugned order of AO, the company filed an appeal before CIT (Appeals) and it allowed the appeal of assessee. The learned CIT(Appeals) relied on Lovely Exports [TS-39-HC-2006(Delhi)-O] and the observation was as under:-

“In the case of a company the following are the propositions of law under section 6. The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely whether it has been transmitted through banking or other indisputable channels; (3) the credit worthiness or financial strength of the creditor; (4) if relevant details of the address of PAN identity of the creditor along with copies of the shareholders register, share application forms, share transfer register, etc, it would constitute acceptable proof or acceptable explanation by the assessee; (5) the Department would not be justified in drawing an adverse inference only because the creditor fails or neglects to respond to its notice; the Assessing Officer is duty bound to investigate the creditworthiness of the creditor, the genuineness of the transaction and the veracity of the repudiation.” The SLP filed against the judgment was dismissed.

On the subsequent appeal by the Revenue to ITAT, ITAT did not interfere with the order of CIT (Appeals) and thereby dismissed Revenue’s appeal. On appeal filed by the Revenue before the High Court, where the assessee remained unpresented, the High Court again dismissed the appeal of Revenue.

On appeal by Revenue at Supreme Court, the assessee again remained un- represented by any counsel and order was an ex-parte.

Further, the Court has deliberated on the following issues-

The court in Para 8.1 has discussed the provision of Section 68 and the meaning of the term “any sum found credited in the books” and has concluded that this term is widely worded and includes investments made by share capital or share premium. The Supreme Court in Para 8.2 in order has discussed the initial onus on the assessee in terms of identity, genuineness and credit worthiness of the investor as coming out from the order of Precision Finance [TS-5381-HC-1993(Calcutta)-O]. The court has also discussed Kale khan Mohammed Hanif & Roshan Di Hatti [TS-5013-SC-1977-O] about the onus of assessee & its disposal. The court has further discussed issue in Oasis Hospitalities [TS-5077-HC-2011(Delhi)-O].

The Supreme Court has also discussed the Kamdhenu Steel & Alloys Limited ruling [TS-808-HC-2011(DEL)-O] and comes to an understanding that Assessing Officer ought to conduct an enquiry to find the genuineness of the creditor. Further, Supreme Court has discussed the issue in Sumati Dayal [TS-5013-SC-1995-O], P. Mohankala [TS-5013-SC-2007-O] & N.R. Portfolio [TS-5820-HC-2013(Delhi)-O] set the principles which has come out from the above said order as enumerated in Para 11.

The assessee is under a legal obligation to prove the genuineness of ten 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.

The Assessing Officer is duty bound to investigate the credit worthiness of the creditor, 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 investigation 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.

Further in Para 12 of the order, the Supreme Court has discussed about following investors -

1. Hema Trading & Eternity Multi Trade

Supreme Court observes that these companies were non-existent at the address given and some other person owned the premises.

The author views that:

This investigation was not complete and remain inconclusive andAO should have checked the actual address from the latest MCA records. The ownership of the premises by someone else should not influence the genuineness of the transaction. The company may be on rented premises or could have left the premises and shifted somewhere else. The updated MCA records as well as the ITR could have been a better guidance here.

2. The company in Kolkata did not appear before AO and did not produce any bank statements to substantiate the sources of fund from which the alleged investments were made.

The author view is that there were11 companies from Kolkata and all the above said companies as per the status of the investigation report given in Para 8.3 of the order have replied the notice of AO.  It means that all the companies were served the notices and had replied the notice to AO. This proves the identity of the company. Further the submissions of the bank statements were not a requirement to prove the source of source in view of the amendment in section 68, where the proviso clause was inserted from Finance Act 2012 with effect from 01/04/2013. Since the matter in this case was for the AY 2009-10, the assessee was not obliged to submit the source of source.

3. The two companies at Guwahati were found non-existent at the address provided.

The author opinion is that this should have been properly investigated in terms of MCA website or the utility bills or the ITR filed by Companies.

Further, Supreme Court opines that that

a) Taxable income of the Neha Cassettes Pvt. Ltd. And Kolkata Builders, Warner Multimedia Ltd and Ganga Builders the investor has nil taxable income and doubted the credit worthiness of the investor.

The author is in the opinion that taxable income which is not a correct parameter to check the credit worthiness of the creditor as the investor may have funds which is available in Balance sheet and not in Profit-loss accounts. Thus, nil income should not be taken as conclusive proof of the credit worthiness.

b) Further, there was no explanation offered by the company as to why the companies had applied for shares of the Assessee Company.

The author is in the opinion that the investor company is not supposed to reply why it has invested in a particular company.

c) The Assessee was not obliged to provide the source of source of the relevant AY.

The Honourable Supreme Court, based on the above observation has concluded that assessee had not discharged its primary onus under section 68 and therefore upheld the order of Assessing Officer and allowed the appeal of Revenue. The author is of the opinion that Supreme Court should have tested the section 68 requirements on the case to case basis (each investor wise) rather than painting all with the same color. Further, the author is of the opinion that due to ex-parte order the matter was not represented well in the apex court. The assessee may request for the recalling of order.

The next issue arises whether this order passed by Supreme Court in order of Article 141 of Constitution or Article 142 of the Constitution.

The order under Article 141 is on the question of law and has a precedent value whereas order under Article 142 being a very fact specific does not enjoy the same precedents as per Article 141.

The author is of the opinion that the decision is very much fact specific and the outcome of the Assessing Officer investigation report and therefore cannot be called as precedent under Article 141 of the Constitution.

However, it has been seen that recently the department has used the order in every ruling Section 68 before the lower authorities and the lower authorities has followed it as binding precedent. The author's opinion is that it should not have been used as a binding precedent in every case against the assessee. Recently, the ITAT Kolkata in the case of M/S Baba Bhootnath Trade & Commerce Ltd vs. ITO [TS-198-ITAT-2019(Kol)] distinguished the NRA Iron Steel from the case and held that in case where the entire detail of the source of source were furnished by the respective share subscribers before the learned AO in response of summons by AO by complying the notice u/s. 131 and the directors themselves appeared before AO and explained all the  transactions with evidence and AO has nothing adverse on it than the NRA as contended by the Revenue cannot be applied and therefore, it is factually distinguishable and ITAT held that it has not helped the Revenue.