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SC’s NRA Judgement on Sec.68 : Threadbare Analysis of Subsequent Decisions -

Part 1

Date: May 18,2020

Nehal Shah (G.K. Choksi & Arpita Prajapati

Co.)

INTRODUCTION:

With the introduction of Section 68 which provides that any sum is found credited in the books of accounts of
the assessee maintained for any previous year, and the assessee offers no explanation about the nature and
source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory,
the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The
practice of conversion of un-accounted money through cloak of Share Capital/Premium must be subjected to
careful scrutiny especially in private placement of shares. Filing primary evidence is not sufficient. The onus
to establish credit worthiness of the investor companies is on the assessee. The Assessee is under legal
obligation to prove the receipt of share capital/premium to the satisfaction of the AO and failure of which,
would justify addition of the said amount to the income of the Assessee. Majority of the decisions of the
Tribunal or of the High Courts are also to this very effect that there cannot be any addition under section 68
of the I.T. Act if assessee establish Identity of investors, their creditability and genuineness of the transaction
and AO has not conducted any inquiries with regards to details submitted by assessee. However, it is
pertinent to note that this section and the judgement under consideration has increased litigation in
immoderations. Recently the Apex Court in the case of PCIT v/s. NRA Iron & Steel Pvt. Ltd. [2019] [TS-
106-SC-2019] (SC) adjudicated this issue. The court has also emphasised on human probability and deep
investigation carried out by Assessing Officer on details submitted by assessee regarding amount received
as share capital. The facts of above case, reasoning advanced by the Apex court for the view it has taken as
well as other judicial decisions rendered subsequent to this decision, are briefly described along with
comments thereon.

Click here to read the facts, arguments and decision of Supreme Court in NRA Iron & Steels case.

RELEVANT DECISION RENDERED SUBSEQUENT TO ABOVE DECISION AND IMPACT OF IT

In order to appreciate the controversy arising from the decisions on this issue rendered by the different
Benches of the Tribunal/High courts, it would be appropriate that facts and decisions in different cases are
analysed meticulously as under-

(I) Cases wherein decision of Supreme court is followed:

(A) The Delhi ITAT in the case M/s. Par Excellence Leasing and Financial Services Pvt. Ltd. V/s.
ACIT [2020] while adjudicating the similar issue, at para 19 of its order observed that it is legitimate for the
learned Assessing Officer to make enquiries relating to find answers to the questions like which is
summarised as under:

(a) “Whether the two parties are related or known to each other, or mode by which parties approached each
other?

(b) Whether the transaction is entered into through written documentation to protect investment?

(c) Whether the investor was an angel investor?

(d) What is the quantum of money invested?

(e) How the party believed the credit-worthiness of the recipient?

(f) What is the object and purpose of payment/investment?

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(g) Whether the share applicant is in existence and an independent entity?

(h) How the financial capacity of the share applicant to invest funds is proved?

(i) How the source of funds from which the high share premium was invested is dealt with by the assessee?

(j) Why the investor companies had applied for shares of the Assessee Company at a high premium?

(k) In case the field enquiry conducted by the AO revealed that 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?

(l) Whether the assessee discharged their legal obligation to prove the receipt of share capital/premium to
the satisfaction of the AO? whether the assessee discharged the onus to establish the credit worthiness of
the investor companies?

(m) Did the assessee do anything more than mere mention of the income tax file number of an investor to
discharge the onus under Section 68 of the Act?

(n) Did the assessee do anything more than mere filing all the primary evidence in discharge of their onus to
prove the identity of the investee?

ITAT in above referred case decided issue against assessee and at para 20 observed that mere paperwork
by the assessee does not take the authorities anyway, when the authorities suspected the
existence of the entities that applied and paid for share application and share premium and
insisted that a higher degree of proof is required in that respect. ITAT has squarely applied the
decision of NRA Iron and Steel Pvt Limited along with decision of Delhi High court in the case of NDR
Promotors Pvt. Ltd ([2019] (Delhi)

(B) Delhi ITAT in yet another case M.A. Projects Pvt Limited Vs DCIT [TS-7125-ITAT-2019(DELHI)-O] decided
similar issue against assessee on the ground that analysis of Balance Sheet of Investor company, it was
found that turnover and profit was minuscule, entire funds in form of capital and reserves are locked up in
advances. Similarly, financial of investee company does not justify share premium of Rs 100 per share and
company is not engaged in substantial activity.

(II) Cases where ratio of decision of Supreme Court is distinguished

(A) Bombay High court in the case of PCIT Vs Ami Industries (India) (P.) Ltd [2020] [TS-67-HC-
2020(BOM)]

Ø In above referred case, Assessing Officer noted that assessee had disclosed funds from three Kolkata
based companies as share application money. As per AO, the three companies had no funds of their own and
that the companies had not responded to the letters written to them which could have established their
creditworthiness. The AO made addition of Rs 34 crore in the hands of assessee.

Ø The Assessee has submitted evidences like PAN, return of income, confirmation and bank statements of
depositors. In Para 20, the court referred to observation of ITAT wherein it was held that Assessing Officer
had referred the matter to the investigation wing of the department at Kolkata for making inquiries into the
three creditors from whom share application money was received. Though report from the investigation wing
was received, Tribunal noted that the same was not considered by the Assessing Officer despite mentioning
of the same in the assessment order, besides not providing a copy of the same to the assessee. In the
report by the investigation wing, it was mentioned that the companies were in existence and
had filed income tax returns for the previous year under consideration but the Assessing Officer
recorded that these creditors had very meager income as disclosed in their returns of income
and therefore, doubted creditworthiness of the three creditors.

Ø In this back ground, Bombay High court concluded in favour of assessee that appellant has discharged
onus u/s 68 of the Act and observed that bank accounts of the creditors showed that the creditors had funds
to make payments for share application money and in this regard, resolutions were also passed by the Board
of Directors of the three creditors and inquiries through investigation wing clearly prove source of source
though assessee is not required to prove source of source. (After 01/04/2013, assessee is required to prove
such if funds are received in form of share capital and decision was pertaining to prior period)

TAKE AWAY:

(i) The Bombay High court distinguished NRA Iron & Steel (P.) Ltd. (supra), on the ground that field report
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revealed that the shareholders were either non-existent or lacked credit-worthiness. In case before Supreme
court, bank statements of depositors were not submitted which are essential evidences to prove source of
transactions.

(ii) The High court at para 18 of the order also observed that nonresponding to notice would not ipso facto
mean that the creditors had no creditworthiness. This mean that if other evidences and if inquiry report
material evidences are found in favour of justifying share capital/share premium, addition u/s 68 cannot be
made.

(iii) Non-appearance of the directors before the AO should not go against the assessee as held in CIT v.
Orchid Industries (P.) Ltd. [2017] [TS-304-HC-2017(BOM)].

(iii) Sometimes it may have happened that AO might have issued summons to old director of Investor
Company and they may not have responded to notice of AO. In this scenario, assessee can provide correct
address of existing directors so as to comply with notices issued by AO.

(B) The Bombay High court in the case of PCIT VS Aditya Birla Telecom Limited [2019] [TS-166-HC-
2019(BOM)] has held that “where investment in assessee-company was made by US based global private
investment group with permission of Government authorities, same could not be branded as sham
transaction merely because it involved huge investment and investor would not earn any dividend income
immediately and investment was divested to group companies by assessee-company”. In this case,
Departmental Representative referred to decision of Supreme court in the case of NRA IRON & Steel and
contended that the assessee had through complex web of corporate structures, merely routed its own
money. However, the court held that the Assessing Officer himself was also prima facie of the belief that the
materials on record proved genuineness and financial capacity of the persons making investment and no
suspicious movement of the funds.

(C) The Delhi ITAT in the case of ITO V/s. Commitment Financial Services Pvt. Ltd. [2020] [TS-5133-
ITAT-2020(DELHI)-O] wherein it was held as under:

“5.3 Thus, from the evidence/s placed on record by the assessee as well as share applicants, it is seen that
the identity and existence of share applicants cannot be doubted as the replies have been received in
response to notice issued u/s 133(6) of the Act. By placing on record the bank account particulars, PAN, ITRs
and financials etc. the assessee has also submitted the prima-facie material to prove the creditworthiness
and genuineness of transactions. In such circumstances, non-production of directors, without bringing any
contrary material on record, cannot be adversely viewed against the assessee and such position of law has
been upheld by the Hon'ble Jurisdictional High Court in the case of Principal Commissioner of Income-tax-8 v.
Softline Creations (P.) Ltd (supra) and also by the decision of Hon'ble Delhi High Court in the case of Principal
Commissioner of Income Tax v. Himachal Fibers Ltd (supra) which has been confirmed by dismissal of the
SLP in the case of Principal Commissioner of Income Tax v. Himachal Fibers Ltd (supra).

5.4 Keeping in view the above position, we are of the opinion that there is no infirmity in the order of the Ld.
CIT (A) vide which, after considering all these evidences, the impugned addition of ₹ 1,00,00,000/- made on
account of share application money and premium has been deleted….

TAKE AWAY

In the above case, once again it was held that non production of director without brining any other evidences
on record, addition u/s 68 is not justified. The ITAT at para 5.8 distinguished decision of NRA IRON(supra) on
the ground that (i) in said decision none of the share applicant produced the bank statement to establish the
source of funds for making the huge investment in shares even though they were declaring a very meagre
income in their returns and (ii) many of the share applicants were found non-existent at the addresses
provided by the assessee. In case before Delhi ITAT the replies have been received in response to all the
notices sent u/s 133(6) of the Act.

(D) The Ahmedabad ITAT in the case of D.J. Stock Broking Pvt. Ltd., C/O. Mehta Lodha & Co. V/s.
ITO bearing ITA.No.313/Ahd/2017 vide order dated 03/03/2020 has decided the issue in favour of
assessee. In this case, assessee has filed confirmation, bank statements, copy of income tax returns qua two
share applicants, i.e. Maars Software International Ltd., Shri Anilkumar Champalal Jain, all three share
applicants have responded to the query raised by the AO under section 133(6) of the Income Tax Act.
According to assessee, it has discharged its onus whereas according to department, applicants have shown
meagre income, and therefore, their credit-worthiness is doubtful. The court while decided issue in favour of
assessee mainly held as under:

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Ø Hon'ble Delhi High Court in the case of Softline Creations P.Ltd. [2017] and CIT Vs. Fair Finvest Ltd., [TS-
5796-HC-2012(DELHI)-O] has held that once assessee submit evidences in support of share
capital/application, onus is on AO in enquire into matter by invoking powers u/s 131 of the Act. General
investigation report or statement cannot be elevated and inference which can be drawn on the basis of
reading of such material into judicial conclusions would be improper.

Ø ITAT has referred to decision of ITO Vs. Victor Electrodes Ltd., [TS-5389-HC-2010(DELHI)-O] (Delhi)
regarding non-production of share applicants before the AO.

Ø The ITAT has referred to decision of Bombay High court in the case of Ami Industries Limited (supra) and
held that “in one hand cases where the AO has conducted an inquiry and disproved whatever submitted
by the assessee, and in other case, the AO simply assumed existence of such facts . All Hon'ble High
Courts are unanimous in their approach that where AO remained silent, did not conduct any inquiry, and
merely on the basis of certain details submitted by the assessee draw an inference in such cases, he cannot
simply doubt the stand of the assessee.”

(D) Reference is drawn to decision of Mumbai ITAT in the case of DCIT V/s. M/s. Acro Exports
Trade Pvt. Ltd. [2019] [TS-7384-ITAT-2019(MUMBAI)-O] wherein AO has made addition u/s 68 mainly
on following facts:

Ø The assessee was subsidiary of AEPL. The assessee had issued certain equity shares at a premium of
certain amount. The holding company namely AEPL was later on taken over by EIDPL, a 'S' group company.
In assessment proceedings, appellant has submitted PAN number and ITR acknowledgement and financial
statements along with bank statement of subscribers. In assessment proceedings, none of the companies
(Investors) have responded to notices issued u/s 133(6) of the Act.

Ø A survey under section 133A was conducted in 'S' group of companies. During the course of survey,
statement under section 131 was recorded from KK, the main promoter of 'S' group of company. In the
statement, KK had offered an amount of Rs. 46.6 crores as unaccounted income, in the name of five
companies including assessee towards share capital and share premium received for the year under
consideration. In the above statement, he further stated that his group concern EIDPL had acquired a
controlling interest in AEPL by investing a sum of Rs. 1 crore.

Ø The AO observed that assessee and other five companies are shell companies promoted, for the purpose
of conversion of unaccounted income in the form of share capital and share premium, which is evident from
the fact that although, the above companies carries huge reserves and surplus of Rs. 46.06 crore, but said
companies have been taken over at face value of Rs. 1 crore. The VS from old management has also stated
that these companies are shell companies.

Ø During the course of assessment proceedings, another statement of KK was recorded under section 131. In
the said statement, he had denied any knowledge about all the transactions of investments and share capital
in the above mentioned five companies. He, further stated that transactions of investments and share capital
were handled by the old management and hence, he was not in a position to offer any comments on the
admission made by the old management, in respect of share capital and share premium.

Ø In the said statement, KK once again stated that he was unaware as to the basis on which, VS has stated
that these five companies are shell company. He had also asked for cross-examination of VS for the facts
mentioned in his statement.

The ITAT after considering various decisions held that additions made by the Assessing Officer cannot be
sustained even on basis of statement of VS because the Assessing Officer has relied upon statement of VS,
the erstwhile director of those five companies to make additions towards share capital, but when KK, the
present director of the assessee-company asked for copies of statement of VS and also opportunity for cross
examination of VS, the Assessing Officer has denied, the opportunity of cross examination and also not
furnished copies of statement recorded from VS. KK has already retracted from his statement in assessment
proceedings.

ITAT has further held that “ No doubt, none of the investors companies have responded to section 133(6)
notices issued by the Assessing Officer, but fact of the matter is when, the assessee has filed complete set of
documents, including name and address of the parties, it is for the Assessing Officer to carry out further
investigation by exercising all possible options available to him, but non-attendance of parties in response to
section 133(6) cannot be attributed to the assessee, because due to time lag certain persons might have left
the place and for this no responsibility can be fastened upon the assessee. In this case, the assessee done
what best it could do and filed, whatever information available with it, in order to satisfy the Assessing
Officer. In case, the Assessing Officer is not satisfied with documents furnished by the assessee,

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then he is free to carry out his own investigations by exercising powers conferred under section
131 or under section 133(6).”

The ITAT has also distinguished the decision of NRA Steel (Supra) on the ground that no inquiry u/s 131 was
made by AO and observed that the AO has not carried out further investigations to ascertain true nature of
transactions, he cannot come to the conclusion merely on the basis of documents submitted by the
assessee. On these facts, ITAT has decided issue in favour of assessee.

In Part 2, the authors shall draw broad conclusions arising from the threadbare analysis of various
judgements discussed in part-1.

Stay tuned for Part-2 of this comprehensive article.

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