Source of share capital needs to be proved: SC

Suresh P Iyengar Mumbai | Updated on March 07, 2019 Published on March 07, 2019

The Supreme Court has ruled that corporates should justify the source of fund received as share capital to the income tax officer and receiving them through bank channel is not enough to prove its genuineness.

Delivering the judgement in the Principle Commissioner of IT against NRA Iron & Steel, Justices Indu Malhotra and Uday Umesh Lalit said that the practice of conversion of unaccounted money through share capital route and premium must be subjected to careful scrutiny.

Setting aside the High Court, Income Tax Appellate Tribunal and Commissioner of Income Tax order favouring NRA Iron & Steel promoters, the Apex court said assesses are under a legal obligation to prove the receipt of share capital and premium to the assessing officer, failure of which would justify addition of the said amount to the income of the assessee.

In 2009-10, NRA Iron & Steel had filed an income tax return with an income of ₹7.01 lakh. A group of companies in Mumbai, Kolkatta and Guwahati had invested ₹17.60 crore subscribing to NRA Iron and Steel’s share with a face value of ₹10 at premium of ₹190 a share.

Justifying the transaction, the company said the entire share capital had been received through normal banking channels and produced documents such as IT return acknowledgements to establish the identity.

The IT department found that some of the companies that invested in NRA Iron & Steel were non-existence or could not establish their source of funds for their investment.

Following this, the IT department added ₹17.60 crore to the total income and directed the company to pay more tax. The company moved Commissioner of IT (Appeals) and received a favourable order. Subsequent, IT department plea in the IT Appellate Tribunal and the Delhi High Court was rejected.

On Tuesday, the Supreme Court ruled that the practice of conversion of unaccounted money through the cloak of share capital and premium must be subjected to careful scrutiny.

The mere mention of the IT file number of an investor was not sufficient. The lower appellate authorities failed to appreciate that the investor companies which had filed IT returns with a meagre income had invested such huge money in the assessee company. The entire transaction seemed bogus and lacked credibility, it said.

Published on March 07, 2019
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