Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Onus under section 68 is on the taxpayer to prove the identity,
credit worthiness of investors and genuineness of receipt of share
capital
March 12, 2019
In brief
Recently, the Supreme Court1 (SC), in context of section 68 of the Income-tax Act, 1961 (Act) (on receipt of share capital/ share premium), reversed the order of the appellate authorities holding the following: (1) The taxpayer failed to establish the credit worthiness of investor companies as investor’s income-tax return had meagre/ nil income, while the investments made in the taxpayer was huge. (2) The taxpayer failed to establish the investor’s identity, as a few investors were found to be non-existent.
Therefore, since the taxpayer failed to discharge the onus required under section 68 of the Act, the tax officer’s (TO) action of adding back the receipt of share capital/ share premium as income in the hands of the taxpayer was upheld. Further, the SC found an error in the order passed by the appellate authorities, wherein based on primary evidence (e.g. income-tax return acknowledgments, cheques, etc.), the onus on the taxpayer was discharged.
In detail
Facts
The taxpayer, disclosed money received through share capital/ share premium in its return of income for the assessment year (AY) 2009-10.
The TO re-opened the assessment for AY 2009-10, and called for details of the share capital/ share premium received to establish the identity of investors, credit worthiness of the creditors and
genuineness of the transaction.
1SLP (Civil) No. 29855 of 2018
The taxpayer had submitted that the entire share capital had been received through normal banking channels by account payee cheques/
demand drafts. Further, the taxpayer produced
documents such as income- tax return
acknowledgments to establish the identity and genuineness of the transaction. In light of the aforesaid documents, the taxpayer submitted that there was no cause to take recourse to section 68 of the Act, and its onus stood discharged.
The TO issued summons to representatives of the investor companies.
However, nobody appeared on behalf of any of the investor companies, although certain
submissions were received through post which created doubt regarding the identity of the investors.
Subsequently, the TO independently conducted field enquiries and observed the following –
- Few companies were found to be non- existent at the furnished address.
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- Almost none of the companies produced their bank statements to substantiate the source of the funds for alleged investments, although they declared very meagre income in their return of income.
- None of the companies could justify making an investment at a high premium per share.
- None of the companies appeared before the TO, but merely sent a written response through post.
Based on the above
observations, the TO held that the taxpayer failed to
discharge its onus of providing cogent evidence, either of the credit worthiness of investor companies or genuineness of the transaction and made an addition to the taxpayer’s total income.
The Commissioner of Income- tax (Appeals) [CIT(A)] relied on the Delhi High Court’s (HC) judgment2 and deleted the TO’s addition. The CIT(A) held that the taxpayer
discharged its onus under section 68 of Act by
establishing the credibility and identity of investor companies by submitting the following information –
- Confirmations.
- Acknowledgment of return of income along with PAN.
- Copy of bank account statement to prove
2CIT v. Lovely Exports Private Limited [2007] 299 ITR 268 (Delhi HC)
3 CIT v. Precision Finance Private Limited [1994] 208 ITR 465 (Calcutta HC)], Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC), Roshan Di Hatti v. CIT [1977]
107 ITR (SC), CIT v. Oasis Hospitalities Private Limited [2011] 333 ITR 119 (Delhi HC), Shankar Ghosh v. ITO [1985] 23 TTJ
payment through normal banking channels.
The Income-tax Appellate Tribunal (Tribunal) dismissed the appeal and confirmed the CIT(A)’s order. Further, the Delhi HC dismissed the revenue’s appeal on the ground that no substantial question of law arose for their consideration.
Aggrieved, the revenue filed the present special leave petition before the SC.
Issue before the Supreme Court
Whether the taxpayer discharged its primary onus to establish the genuineness of the transaction required under section 68 of the Act?
Supreme Court’s decision
Since no appearance was made by the taxpayer despite
repeated dates on which the matter was listed for hearing, the SC disposed the matter ex- parte.
The SC held that it is a settled law that the initial onus is on a taxpayer to establish by cogent evidence the genuineness of the transaction and credit- worthiness of the investors. In this context, the SC discussed principles arising from several judgements3 and observed that the TO ought to have
conducted an independent enquiry to verify the credit worthiness of parties, source of funds invested and genuineness of transactions.
In the present case, TO’s field reports revealed that the shareholders were non-
(Calcutta HC) and CIT v. Kamdhenu Steel
& Alloys Limited and Other [2012] 206 Taxaman 254 (Delhi HC)
4 Sumati Dayal v. CIT [1995] 214 ITR 801 (SC), CIT v. P. Mohankala [2007] 291 ITR 278 (SC), PR.CIT v. NDR Promoters Private Limited [2019] 410 ITR 379 (Delhi HC), Roshan DiHatti v. CIT [1992] 2 SCC 378 (SC), Nemi Chand Kothari v. CIT
existent or lacked credit worthiness.
With respect to unexplained credit entries in the form of share capital/ share premium, the SC discussed the following principles arising from the judgements4 –
- The taxpayer is under legal obligation to prove before the TO, the genuineness of transaction, identity of creditors and credit worthiness/ financial capacity of investors for making investment.
- The TO to investigate credit worthiness/ identity of investors and ascertain genuineness (or bogus entries) of transactions.
- If enquiries reveal the identity to be dubious or doubtful or lacking credit worthiness, the
genuineness of the transaction is questionable.
The SC noted the following observations of the TO, which were resultant of detailed field enquiries/ investigations – - Investor companies were
not independent legal entities, and some were non-existent without any office address.
- Few investor companies did not produce bank statements to substantiate the source of funds. In fact, none of them could establish the source of funds to invest a high sum of share capital/ share
[2003] 264 ITR 254 (Gauhati HC)], CIT v.
N.R. Portfolio Private Limited [2014] 42 taxmann.com 339 (Delhi HC)], CIT v.
Divine Leasing & Financing Limited [2007]
158 Taxman 440 (Delhi HC) and CIT v.
Value Capital Service Private Limited [2008] 307 ITR 334 (Delhi HC)
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premium.
- Investor companies had filed return of income with negligible taxable income which showed that the investor companies did not have the financial capacity to invest.
- No explanation was offered with respect to the payment of the high premium.
- Merely mentioning the income-tax file number is not sufficient to discharge the onus under section 68 of the Act.
In light of the above observations and based on principles arising from judgements discussed above, the SC noted that appellate authorities had ignored the detailed findings of the TO.
Hence, the SC found error in the order passed by the appellate authorities which were based on primary evidence (e.g. income-tax return acknowledgments, cheques, etc.). Thus, the SC
held that the onus to establish the credit worthiness/ identity of investor companies was not discharged by the taxpayer and that the entire transaction was bogus and lacked
credibility.
Further, the SC held that in case of conversion of
unaccounted money through share capital/ share premium (especially private placement of shares), the taxpayer is under a legal obligation to prove the receipt of share capital/ share premium to the satisfaction of the TO. On failure, the said amount is taxable as income under section 68 of Act.
The takeaways
This SC judgment once again reiterates the principle that a taxpayer is under legal obligation/ primary onus to establish, by cogent evidence, the genuineness of the transaction and credit- worthiness of the investors under section 68 of the Act.
Mere submission of primary evidence does not discharge
this onus.
Further, it reiterates the point that the revenue authorities are duty bound to investigate the credit worthiness and identity of the investor, and examine whether the transaction involves bogus entries of money lenders.
The Finance Act, 2012 has amended section 68 of the Act to specifically include sums such as share application money, share premium, etc., within its ambit and clearly laid out the requirement for the taxpayer to provide an explanation regarding the nature and sources of funds of the creditor or investor.
However, it will be interesting to note how the judiciary deals with the double taxation of same income on account of introduction of section
56(2)(viib) by the Finance Act, 2012.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2019 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
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