(2019) 412 ITR 161 (SC)
Unexplained cash credits
Identity alone is not enough. The company must establish the identity of the investors, their creditworthiness, and the genuineness of the transaction. Where investors are non-existent or lack means, the credits may be assessed as the company's income.
What must a company establish to discharge its burden in respect of share capital received at a premium from investor entities?
The assessee company received substantial share capital at a high premium from a number of investor companies. It produced their names, addresses, permanent account numbers, incorporation particulars, bank statements showing the payments, and confirmations. On enquiry the Assessing Officer found that several investors could not be located at the addresses given, that others had negligible income and no creditworthiness to support investments of the size claimed, and that in some cases funds had been deposited in the investors' accounts immediately before being transferred to the assessee. No justification was offered for the high premium at which shares in a company of the assessee's standing had been subscribed.
The Commissioner (Appeals), the Tribunal and the High Court all decided in the assessee's favour, holding the initial burden discharged by the documents produced. The Revenue appealed to the Supreme Court, which reversed.
For the assessee
The identity of each investor was established by incorporation and tax records, and the payments were made through banking channels and confirmed. Once that material is produced the initial burden is discharged, and if the Revenue doubts the investors it must proceed against them rather than against the recipient company.
For the Revenue
Producing names and bank entries establishes only that money moved. Where investors cannot be found, have no means to invest, and their accounts are funded immediately before the transfer, the material does not establish creditworthiness or genuineness, which the provision separately requires.
The Court restated the three requirements the assessee must satisfy: the identity of the creditor or investor, the creditworthiness of that person, and the genuineness of the transaction. It held that these are cumulative, and that establishing identity through incorporation and tax records does not by itself discharge the burden. On creditworthiness, the Court held that the assessee must show that the investors had the financial capacity to make investments of the size in question, and that entities with negligible income or assets do not acquire capacity merely because money passed through their accounts. On genuineness, it held that routing funds through banking channels is not conclusive, particularly where accounts are credited immediately before the transfer in a manner suggesting that the source lies elsewhere. The Court laid weight on the failure to explain the high premium, observing that an unexplained premium in a company without a commensurate record is itself a circumstance calling for scrutiny. It held that the appellate authorities had erred in treating the documentary material as sufficient without examining these elements, and restored the addition.
Unexplained credits are dealt with in Section 102 of the IT Act 2025 and taxed at the special rate in Section 195, without the benefit of any deduction or set off. Note that the statutory burden in relation to share capital received by a closely held company has been tightened, requiring the source of the investor's own funds to be explained as well. NRA Iron & Steel is the leading authority on the standard of proof and is applied extensively to share capital, premium and unsecured loan additions.