Conversion Of Unaccounted Money Through The Cloak Of Share Capital/Premium Must Be Carefully Scrutinised: SC [Read Judgment]

The bench comprising Justice Uday Umesh Lalit and Justice Indu Malhotra observed that the practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny

The issue considered by the bench in Principal Commissioner of Income Tax (Central) - 1 vs. NRA Iron & Steel Pvt. was that, in a case where Share Capital/Premium is credited in the books of account of the Assessee company, whether the onus of proof is on the 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, to the satisfaction of the Assessing Officer.

Referring to various judgments in the matter, the bench summarized the principles as follows:

1. 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.
2. 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.
3. 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.

In the case in hand, the bench, referring to the records observed that the Assessee Company failed to discharge the onus required under Section 68 of the Act, the Assessing Officer was justified in adding back the amounts to the Assessee's income. In this case, the Assessing Officer had held that the Assessee had failed to prove the existence of the identity of the investor companies and genuineness of the transaction. It said:

"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."

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