SC: Primary evidence alone can’t discharge onus u/s 68 of Income Tax Act

On 5thMarch, 2019 the Honorable Supreme Court in the matter of Principal Commissioner of Income Tax (Central) v.NRA Iron & Steel Pvt. Ltd. pronounced that in case of cash credit by way of share capital/premium the genuineness of  transaction, the identity of the creditors, and credit-worthiness of the investors, to the satisfaction of the AO, has to be proved by  assessee by cogent and credible evidence since these facts are exclusively within the assessee’s knowledge. Merely filing primary evidence doesn’t discharge onus on assessee.

The Hon’ble Supreme Court observed that:

The use of the words “any sum found credited in the books” in Section 68 of the Act indicates that the section is widely worded, and includes investments made by the introduction of share capital or share premium (Para 8.1)

As per settled law, the initial onus is on the Assessee to establish by cogent evidence the genuineness of the transaction, and credit-worthiness of the investors under Section 68 of the Income Tax Act.(Para 8.2)

If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the Revenue to hold that it is the income of the assesse, and there would be no further burden on the revenue to show that the income is from any particular source.(Para 8.2)

The genuineness of  transaction relating to fund inflows by way of share capital/premium, has to be proved by  assessee by cogent and credible evidence since such facts are exclusively within the assessee’s knowledge. Merely filing Primary Evidence (like confirmations from the investor companies, their Income Tax Return, acknowledgments with PAN numbers, copies of their bank account to show that the entire amount had been paid through normal banking channels) doesn’t discharge onus on assessee u/s 68 of the Income Tax Act. To satisfactorily discharge the onus the assessee has to establish not just the transaction  but more importantly the identity and the financial capacity of the investor company to make the investment. Merely proving the identity of the investors does not discharge the onus of the assessee, if the capacity or credit-worthiness has not been established . (This inference has been drawn on basis of Para 4,8.3,,13,14)

The Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries.(Para 9)

Merely because a transaction takes place by cheque, it is not sufficient to discharge the burden on the Assessee. [Nemi Chand Kothari v. CIT12 held [2003] 264 ITR 254 (Gau.)]

Negligible taxable income being filed by investor companies, and failure to establish source of would go against assesse in establishing  financial capacity to invest funds for purchase of shares at high premium.If the enquiries and investigations reveal lack credit-worthiness, then the genuineness of the transaction would not be established. (This inference has been drawn on basis of Para 11,12)

Copy of judgement: Judgement_05th-Mar-2019

-Manikya Malik

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