2019 (3) TMI 323 - SC - Income Tax

Addition u/s 68 - expansion of scope of primary onus - unexplained credit entries /share capital - non discharge of initial onus of proof by 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 - HELD THAT - The principles which emerge where sums of money are credited as Share Capital/Premium are - 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. - In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act. 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. 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 Assesse Company - Respondent. Clearly the onus to establish the credit worthiness of the investor companies was not discharged. The entire transaction seemed bogus, and lacked credibility. The Court/Authorities below did not even advert to the field enquiry conducted by the AO which 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. 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.

Summary

Issues Involved:
1. Onus of proof in cases of Share Capital/Premium credited in the books of the Assessee company.
2. Identity, credit-worthiness, and genuineness of the investor companies.
3. Compliance with Section 68 of the Income Tax Act.
4. Validity of the assessment and addition made by the Assessing Officer (AO).
5. Evaluation of the findings by lower appellate authorities.

Detailed Analysis:

1. Onus of Proof in Cases of Share Capital/Premium Credited in Books:
The core issue was whether the Assessee company discharged its onus to prove the identity, credit-worthiness of the investors, and genuineness of the transactions under Section 68 of the Income Tax Act. The Supreme Court emphasized that the initial onus is on the Assessee to establish these elements by cogent evidence. The Assessee must provide satisfactory explanations about the nature and source of the credited sums to the satisfaction of the AO.

2. Identity, Credit-worthiness, and Genuineness of the Investor Companies:
The AO conducted detailed enquiries, which revealed that several investor companies were non-existent or failed to justify their investments. For instance, companies like Hema Trading Co. Pvt. Ltd. and Eternity Multi Trade Pvt. Ltd. were found to be non-existent at the provided addresses. The companies that responded did so through dak and did not produce bank statements to substantiate the source of funds. The AO concluded that the Assessee failed to prove the identity and credit-worthiness of the investors or the genuineness of the transactions.

3. Compliance with Section 68 of the Income Tax Act:
Section 68 stipulates that any sum credited in the books of an Assessee, for which no satisfactory explanation is provided, may be charged as income. The AO found that the Assessee did not discharge the onus under Section 68 as the investor companies either did not exist or lacked the financial capacity to make substantial investments. The Supreme Court reiterated that the mere submission of primary evidence such as income tax returns and PAN numbers does not suffice if the credit-worthiness and genuineness of the transactions are not established.

4. Validity of the Assessment and Addition Made by the AO:
The AO's detailed field enquiry and independent investigations revealed that the transactions were dubious. The AO added back the amount of ?17,60,00,000 to the Assessee's income, concluding that the Assessee failed to discharge its onus under Section 68. The Supreme Court found this addition justified, given the lack of credible evidence from the Assessee.

5. Evaluation of the Findings by Lower Appellate Authorities:
The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) had deleted the addition made by the AO, holding that the Assessee had filed necessary confirmations and primary evidence. The Delhi High Court dismissed the Revenue's appeal, stating no substantial question of law arose. However, the Supreme Court found that the lower authorities ignored the AO's detailed findings and field enquiry. The Supreme Court emphasized that the lower authorities erred in concluding that the Assessee discharged its onus merely by filing primary evidence without establishing the credit-worthiness of the investors and the genuineness of the transactions.

Conclusion:
The Supreme Court allowed the Revenue's appeal, setting aside the judgments of the High Court, ITAT, and CIT. The Court restored the AO's order, holding that the Assessee failed to discharge the onus required under Section 68 of the Act. The practice of converting unaccounted money through share capital/premium must be scrutinized, especially in private placements where the Assessee has exclusive knowledge of the transactions.