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Principal Commissioner of Income Tax (Central)-1 v. NRA Iron and Steel Pvt. Ltd.

Civil Appeal · 2019 INSC 314Decided 5 Mar 2019
Civil Appeal arising out of SLP (Civil) No. 29855 of 2018
Justice Uday Umesh Lalit · Justice Indu Malhotra

Background

NRA Iron & Steel Pvt. Ltd., a company with modest declared income, reported receiving Rs. 17.6 crore in share capital/premium from 17 investor companies based in Mumbai, Kolkata and Guwahati during Assessment Year 2009-10, at a steep premium of Rs. 190 per share on a face value of just Rs. 10. When the tax department investigated, several investor companies were found non-existent at their given addresses, none appeared before the Assessing Officer, and most had filed returns showing negligible income, raising serious doubts about whether the money was genuine investment or laundered unaccounted income. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal both ruled in the company's favour, and the Delhi High Court dismissed the Revenue's further appeal.

Decision Breakdown

The Supreme Court held that merely producing paperwork like PAN numbers, bank statements and income tax returns does not automatically discharge a company's burden under Section 68 of the Income Tax Act; the assessee must also prove the genuine identity, creditworthiness and real financial capacity of its investors, especially in private placements where only the assessee has true knowledge of the facts. Since the field enquiries showed investor companies to be non-existent, unresponsive, or financially incapable of making such large investments at such an unusual premium, the Court found the transactions were not genuine. It allowed the Revenue's appeal, set aside the rulings of the High Court, Tribunal and first appellate authority, and restored the Assessing Officer's order adding the amount back to the company's taxable income.

Lesson Learnt

Paper compliance alone (cheques, PAN cards, returns) is not enough to prove that money received as share investment is genuine: if the source companies turn out to be shell entities with no real financial capacity, the tax department is entitled to treat the amount as the recipient company's own undisclosed income.

Official source (sci.gov.in)View Judgment (PDF)

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