GLIMPSES OF SUPREME COURT RULINGS

5. Pr. CIT vs. NRA Iron and Steel Pvt. Ltd.
(2019) 412 ITR 161 (SC)

Cash credits – Where sums of money are credited as share
capital / premium: (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 whether these
are bogus entries of name-lenders, and (3) If the inquiries and investigations
reveal that the identity of the creditors is dubious or doubtful, or they 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.

The A.O. found that:

(i) None of the investor-companies which had invested amounts
ranging between Rs. 90,00,000 and Rs. 95,00,000 as share capital in the
respondent company-assessee during the A.Y. 2009-10 could justify making
investment at such a high premium of Rs. 190 per share when the face value of
the shares was only Rs. 10;

(ii) Some of the investor companies were found to be
non-existent;

(iii) Hardly any one of the companies produced bank
statements to establish the source of funds for making such a huge investment
in shares, even though they were declaring a very meagre income in their
returns;

(iv) None of the investor-companies appeared before the A.O.,
but merely sent a written response through postal mail.

The A.O. held that the
assessee had failed to discharge the onus by cogent evidence either of the credit-worthiness
of the so-called investor-companies, or the genuineness of the transaction.

As a consequence, the amount of Rs. 17,60,00,000 was added
back to the total income of the assessee for the assessment year in question.
The assessee filed an appeal before the Commissioner of Income Tax (Appeals),
New Delhi. Reliance was placed on the decision of the Delhi High Court in CIT
vs. Lovely Exports Pvt. Ltd. (2008) 299 ITR 268 (Delhi). An S.L.P,
against the said judgement was dismissed.

The Commissioner of Income
Tax (Appeals), New Delhi, vide order dated 11.04.2014 deleted the addition made
by the A.O. on the ground that the respondent had filed confirmations from the
investor companies, their income tax returns, acknowledgments with PAN numbers
and copies of their bank accounts to show that the entire amount had been paid
through normal banking channels, and hence discharged the initial onus u/s. 68
of the Act, for establishing the credibility and identity of the shareholders.

The Revenue filed an appeal before the Income Tax Appellate
Tribunal (ITAT). The ITAT dismissed the appeal and confirmed the order of the
CIT(A) vide order dated 16.10.2017 on the ground that the assessee had
discharged his primary onus to establish the identity and credit-worthiness of
the investors, especially when the investor companies had filed their returns
and were being assessed.

The Revenue filed an appeal u/s. 260A of the Act before the
Delhi High Court to challenge the order of the Tribunal. The respondent
company-assessee did not appear before the High Court. Hence, the matter
proceeded ex parte. The High Court dismissed the appeal filed by the
Revenue vide the impugned order dated 26.02.2018 and affirmed the decision of
the Tribunal on the ground that the issues raised before it were urged on facts
and the lower appellate authorities had taken sufficient care to consider the
relevant circumstances. Hence no substantial question of law arose for their
consideration.

Aggrieved by the order passed by the High Court, the Revenue
filed an S.L.P. before the Supreme Court. The assessee, however, remained
unrepresented despite notices. The matter was finally heard on 5.02.2019 when
judgement was reserved.

The Supreme Court heard the learned counsel for the Revenue
and examined the material on record. According to the Supreme Court, the issue
which arose for its determination was whether the respondent-assessee had
discharged the primary onus to establish the genuineness of the transaction
required u/s. 68 of the Act.

The Supreme Court, on reading the provisions of section 68 of
the Act, was of the view that the use of the words “any sum found credited
in the books” in section 68 of the Act indicated that the section was
widely worded and included investments made by the introduction of share
capital or share premium.

The Supreme Court observed
that it was settled law that the initial onus is on the assessee to establish
by cogent evidence the genuineness of the transaction and credit-worthiness of
the investors u/s. 68 of the Act. The court noted the decisions in CIT vs.
Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal), Kale Khan Mohammad Hanif
vs. CIT (1963) 50 ITR 1 (SC) and Roshan Di Hatti vs. CIT (1977) 107 ITR (SC),
CIT vs. Oasis Hospitalities Pvt. Ltd. (2011) 333 ITR 119 (Delhi), Shankar Ghosh
vs. ITO (1985) 23 TTJ (Cal), CIT vs. Kamdhenu Steel & Alloys Limited and
Ors. (2012) 206 Taxmann 254 (Delhi). The court observed that the
judgements cited held that the A.O. ought to conduct an independent inquiry to
verify the genuineness of the credit entries.

In the present case, the court noted that the A.O. made an
independent and detailed inquiry, including survey of the so-called investor
companies located in Mumbai, Kolkata and Guwahati to verify the
credit-worthiness of the parties, the source of funds invested and the
genuineness of the transactions. The field reports revealed that the
shareholders were either non-existent, or lacked credit-worthiness.

On the issue of unexplained credit entries / share capital,
the Supreme Court examined the judgements in Sumati Dayal vs. CIT (1995)
214 ITR 801 (SC), CIT vs. P. Mohankala (2007) 291 ITR 278, Pr. CIT vs. NDR
Promoters Pvt. Ltd. (2019) 410 ITR 379, Roshan Di Hatti vs. CIT (1992) 2 SCC
378, Nemi Chand Kothari vs. CIT (2003) 264 ITR 254 (Gau), CIT vs. N.R.
Portfolio (P) Ltd. (2014) 222 Taxman 157 (Del), CIT vs. Divine Leasing &
Financing Ltd. (2007) 158 Taxman 440, and CIT vs. Value Capital
Service (P) Ltd. (2008)307 ITR 334.

The Supreme Court held that the principles which emerge where
sums of money are credited as share capital / premium are:

1) The assessee is under a legal obligation to prove the
genuineness of the transaction, the identity of the creditors and the
credit-worthiness of the investors who should have the financial capacity to
make the investment in question, to the satisfaction of the A.O., so as to
discharge the primary onus.

2) The A.O. 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 inquiries
and investigations reveal the identities of the creditors to be dubious or
doubtful, or that they 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 present case, the
court observed that the A.O. had conducted detailed inquiry which revealed
that:

(i)  There was no
material on record to prove, or even remotely suggest, that the share
application money was received from independent legal entities. The survey
revealed that some of the investor companies were non-existent and had no
office at the address mentioned by the assessee. For example:

a. The companies Hema Trading Co. Pvt. Ltd. and Eternity
Multi Trade Pvt. Ltd. in Mumbai were found to be non-existent at the address
given and the premises was owned by some other person.

b. The companies in Kolkata did not appear before the A.O.,
nor did they produce their bank statements to substantiate the source of the
funds from which the alleged investments were made.

c. The two companies in Guwahati, viz., Ispat Sheet Ltd. and
Novelty Traders Ltd., were found to be non-existent at the address provided.

The genuineness of the transaction was found to be completely
doubtful.

(ii) The inquiries revealed that the investor companies had
filed returns for a negligible taxable income, which showed that the investors
did not have the financial capacity to invest funds ranging between Rs.
90,00,000 and Rs. 95,00,000 in the assessment year 2009-10 for purchase of
shares at such a high premium. For example:

(a) Neha Cassettes Pvt. Ltd. Kolkata had disclosed a taxable
income of Rs. 9,744 for the A.Y. 2009-10, but had purchased shares worth Rs.
90,00,000 in the assessee company;

(b) Warner Multimedia Ltd. Kolkata filed a NIL return, but
had purchased shares worth Rs. 95,00,000 in the assessee company;

(c) Ganga Builders Ltd. Kolkata had filed a return for Rs.
5,850 but invested in shares to the tune of Rs. 90,00,000 in the assessee
company.

(iii) There was no
explanation whatsoever offered as to why the investor companies had applied for
shares of the assessee company at a high premium of Rs. 190 per share, even
though the face value of the share was Rs. 10.

(iv) Furthermore, none of
the so-called investor companies established the source of funds from which the
high share premium was invested.

(v) The mere mention of the income tax file number of an investor
was not sufficient to discharge the onus u/s. 68 of the Act.

According to the Supreme Court, the lower appellate
authorities appeared to have ignored the detailed findings of the A.O. from the
field inquiry and investigations carried out by his office. The authorities
below had erroneously held that merely because the assessee had filed all the
primary evidence the onus on the assessee stood discharged. The lower appellate
authorities failed to appreciate that the investor companies which had filed
income tax returns with a meagre or nil income, had to explain how they had
invested such huge sums of money in the assessee company. Clearly, the onus to
establish the credit-worthiness of the investor companies was not discharged.
The entire transaction seemed bogus and lacked credibility. The court /
authorities below did not even advert to the field inquiry conducted by the
A.O. which revealed that in several cases the investor companies were found to
be non-existent and the onus to establish the identity of the investor
companies was not discharged by the assessee.

The Supreme Court observed that the practice of conversion of
unaccounted 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 A.O., failure of which would
justify addition of the said amount to the income of the assessee.

The court held that on the facts of the case, the assessee
company had clearly failed to discharge the onus required u/s. 68 of the Act
and the A.O. was justified in adding back the amounts to the assessee’s income.

The Supreme Court allowed the appeal filed by the appellant –
Revenue –and set aside the judgement of the High Court, the ITAT and the
CIT(A). The order passed by the A.O. was restored.

6. CIT vs. Gujarat
Cypromet Ltd. (2019) 412 ITR 397 (SC)

Business expenditure – Conversion of unpaid interest into
funded interest loan – Explanation 3C in clear terms provides that conversion
of interest amount into loan shall not be deemed to be regarded as “actually
paid” amount within the meaning of section 43B – Interest not allowable

The respondent-assessee
filed a return of income showing total loss of Rs. 3,76,70,656 on 31.10.2001.
The assessment order was passed on 17.03.2004 for the assessment year 2001-02.

The A.O. disallowed the
deduction claimed by the assessee with regard to payment of interest amounting
to Rs. 2,51,31,154 to the Industrial Development Bank of India. The A.O.
referred to the circular dated 16.12.1988 as well as the judgement of the
Madhya Pradesh High Court in Eicher Motors Ltd. vs. CIT (2009) 315 ITR
312 (MP). The assessee, aggrieved by the A.O.’s order, filed an appeal
before the Commissioner of Income-tax (Appeals), which was partly allowed.

An appeal was filed before
the Income-tax Appellate Tribunal against the order of the Commissioner of
Income-tax (Appeals), which was dismissed by the Income-tax Appellate Tribunal
on 24.06.1985.

Against the order of the
Income-tax Appellate Tribunal, an appeal was filed in the High Court, which was
dismissed following the decision in CIT vs. Bhagwati Autocast Ltd. (2003)
261 ITR 481 (Guj).

On an appeal by the
Revenue, the Supreme Court noted that the interest liability which accrued
during the relevant assessment year was not actually paid back by the assessee,
rather, it was sought to be adjusted in the further loan of Rs. 8 crore which
was obtained from the Industrial Development Bank of India.

The Supreme Court observed
that the judgement of the Delhi High Court relied upon by the learned counsel
for the appellant in CIT vs. M.M. Aqua Technologies Ltd. (2015) 376 ITR
498 (Del) referred to section 43B as well as Explanation 3C and held
that Explanation 3C having retrospective effect with effect from 1.04.1989
would be applicable to the year in question. The Delhi High Court in its
judgement has referred to the judgement of the Madhya Pradesh High Court in Eicher
Motors Limited (supra). In Eicher Motors, the court had noted that
Explanation 3C in clear terms provided that such conversion of interest amount
into loan shall not be deemed to be regarded as “actually paid” amount within
the meaning of section 43B. In view of a clear legislative mandate removing
this doubt and making the intention of the legislature clear in relation to
such a transaction, it was not necessary to interpret the unamended section 43B
in detail.

The court held that in the
impugned judgement, the Gujarat High Court had relied upon Bhagwati
Autocast Ltd. (supra) which was not a case covered by section 43B(d),
rather, it was a case of section 43B(a). The provisions of section 43B covered
a host of different situations. The statutory Explanation 3C inserted by the
Finance Act, 2006 was squarely applicable in the facts of the present case.
According to the Supreme Court, the attention of the High Court was not invited
to Explanation 3C. The Supreme Court was of the view that the A.O. had rightly
disallowed the deduction as claimed by the assessee. The appellate authority,
the Income-tax Appellate Tribunal and the High Court had erred in reversing the
said disallowance.

The Supreme Court, therefore, allowed the appeal. The
question of law was answered in favour of the Revenue.

7. CIT vs. Tasgaon Taluka S.S.K. Ltd. (2019) 412
ITR 420 (SC)

Business expenditure – Sugarcane purchase price paid to
the cane growers by the assessee-society more than the statutory minimum price
and determined under Clause 5A of the Control Order, 1966 – The entire / whole
amount of difference between the statutory minimum price and the state advisory
price per se could not be said to be an appropriation of profit – Only
that part / component of profit, while determining the final price worked out /
state advisory price / additional purchase price would be and / or can be said
to be an appropriation of profit

The assessee, a
co-operative society engaged in the business of production of sugarcane and
sale thereof, filed its return of income for the assessment year 1998-99
declaring NIL income. In the return, the assessee computed carry-forward loss
of Rs. 40,00,339 and unabsorbed depreciation of Rs. 1,67,26,665. The return was
processed u/s. 143(1)(a) of the Act, making adjustment of Rs. 2,02,242
relatable to section 40A(3) of the Act. Thereafter, the assessee filed a
revised return wherein business loss was shown to the tune of Rs. 3,32,42,426.

It was noticed that the price paid by the assessee to the
sugarcane growers, most of whom were its members, was in excess of what was
payable as per the Sugarcane (Control) Order, 1966.

The A.O. held that the difference between the price paid as
per Clause 3 of the Control Order, 1966 determined by the Central Government,
and the price determined by the State Government under Clause 5A of the Control
Order, 1966 (and consequently paid by the assessee to the cane growers) could
be said to be a distribution of profit, as in the price determination under
Clause 5A of the Control Order, 1966, there was an element of profit and
therefore the price paid to the cane growers determined by the State Government
was excessive and therefore it was not deductible as expenditure and was
required to be included in the income of the assessee.

Alternatively, the A.O. also held that the excess cane price
paid to the cane growers over the statutory minimum price (SMP) was
disallowable as per section 40A(2)(a) of the Act by observing that the purchase
price paid was excessive and unreasonable.

On an appeal, the
Commissioner of Income Tax (Appeals), relying upon and considering the decision
of a Special Bench, Mumbai ITAT in the case of Manjara Shetkari Sakhar
Karkhana Limited dated 19.08.2004 allowed the appeal preferred by the
assessee and held that the price actually paid for the procurement of the
sugarcane is to be allowed as business expenditure. The learned CIT(A) also
observed and held that the excess payment of cane price as fixed by the State
Government (SAP) over and above the SMP for sugarcane to members and
non-members cannot be disallowed u/s. 40A(2)(b) of the Act, despite the fact that
profit is one of the components in asserting the price. The CIT(A) observed
that just because profit is one of the components in asserting the price, it
cannot be said that profit is separately distributed in the guise of additional
price. The learned CIT(A) observed that the amount paid by the
assessee–co-operative society to the sugarcane growers is considered for the
procurement of the sugarcane and it cannot be construed to be appropriation of
profits. Consequently, the learned CIT(A) deleted the addition made by the A.O.

The learned ITAT confirmed the order passed by the learned
CIT(A), which was further confirmed by the High Court. The High Court had
dismissed the appeal preferred by the department by observing that the question
was covered by the judgement of the High Court in the case of Commissioner
of Income Tax vs. Manjara Shetkari Sahakari Sakhar Karkhana Limited,
reported in (2008) 301 I.T.R. 191 (Bom).

On further appeal by the department, the Supreme Court
observed that the short question posed before it for consideration was whether
the sugarcane purchase price paid to the cane growers by the assessee-society
more than the SMP and determined under Clause 5A of the Control Order, 1966,
could be said to be the sharing of profit / appropriation of profit or was
allowable as expenditure?

The Supreme Court noted that the entire scheme / mechanism
while determining the additional purchase price under Clause 5A had been dealt
with and considered by it in detail in the case of Maharashtra Rajya Sahakari
Sakhar Karkhana Sangh Limited (1995) Supp. (3) SCC 475. In the said
decision it was observed that the additional purchase price / SAP is paid at
the end of the season; the Bhargava Commission had recommended payment of
additional price at the end of the season on 50:50 profit sharing basis between
the growers and factories to be worked out in accordance with the 2^nd
Schedule to the Control Order, 1966; that the additional purchase price
comprises of not only the cost of cultivation, but profit as well; the price
thus being paid on recovery of cane and profits made from sale of sugar is not
minimum but optimum price which is paid to a cane grower. The additional cane
price or additional state-fixed price is paid as a matter of incentive. The
entire price structure of cane is founded on two basic factors, one, the
recovery percentage and two, the incentive for sharing profit arrived at by
working out receipt minus expenditure.

Therefore, the Supreme Court held that to the extent of the
component of profit which would be a part of the final determination of SAP and
/ or the final price / additional purchase price fixed under Clause 5A would
certainly be and / or said to be an appropriation of profit. However, at the
same time, the entire / whole amount of difference between the SMP and the SAP per
se could not be said to be an appropriation of profit. Only that part / component
of profit, while determining the final price worked out / SAP / additional
purchase price would be and / or can be said to be an appropriation of profit
and for that an exercise has to be done by the A.O. by calling upon the
assessee to produce the statement of accounts, balance sheet and the material
supplied to the State Government for the purpose of deciding / fixing the final
price / additional purchase price / SAP under Clause 5A of the Control Order,
1966. Merely because the higher price is paid to both, members and non-members,
qua the members, still the question would remain with respect to the
distribution of profit / sharing of the profit.

So far as the non-members
were concerned, the same could be dealt with and / or considered applying section
40A (2) of the Act, i.e., the A.O. on the material on record has to determine
whether the amount paid is excessive or unreasonable or not. However, this
being not the subject matter in the present appeals, the Supreme Court
restricted itself to the present appeals qua the sugarcane purchase
price paid by the society to the cane growers above the SMP determined under
Clause 3 and the difference of sugarcane purchase price between the price
determined under Clause 3 and Clause 5A of the Control Order, 1966.

The Supreme Court observed that the A.O. would have to take
into account the manner in which the business works, the modalities and manner
in which SAP / additional purchase price / final price are decided and to
determine what amount would form part of the profit and after undertaking such
an exercise whatever is the profit component is to be considered as sharing of
profit / distribution of profit and the rest of the amount is to be considered
as deductible as expenditure.

In view of the above and for the reasons stated above, the question of
law was answered accordingly, partly in favour of the department and partly in
favour of the assessee.

8. Pr. CIT vs. Yes Bank Ltd. (2019)
412 ITR 459 (SC)

Appeal to the High Court – The High Court could not have
dismissed the appeal without framing any substantial question of law as was
required to be framed u/s. 260-A of the Act though heard the appeal bipartite
and that too without deciding any issue arising in the case

The appellant is the Union of India (Income Tax Department)
and the respondent-bank is the assessee.

In the course of assessment proceedings of the
respondent-assessee (bank) for the assessment year 2007-08, a question arose as
to whether the respondent-assessee (bank) was entitled to claim deduction u/s.
35-D of the Act for the assessment year in question. In other words, the
question arose as to whether the respondent-bank was an industrial undertaking
so as to entitle them to claim deduction u/s. 35-D of the Act.

The case of the respondent was that they, being an industrial
undertaking, were entitled to claim the deduction u/s. 35-D of the Act. The
A.O. passed an order dated 31.10.2009 which gave rise to the proceedings before
the Commissioner u/s. 263 of the Act which resulted in passing of an adverse
order dated 14.11.2011 by the Commissioner.

This, in turn, gave rise to the filing of the appeal by the
respondent before the ITAT against the order of the Commissioner. By an order
dated 5.12.2014, the ITAT allowed the appeal which gave rise to filing of the
appeal by the Revenue (Income-tax Department) in the High Court u/s. 260-A of
the Act.

The High Court dismissed the appeal after hearing both the
parties, giving rise to the filing of an appeal by way of a special leave
petition before the Supreme Court. The short question that arose for
consideration before the Supreme Court was whether the High Court was justified
in dismissing the appellant’s appeal.

According to the Supreme
Court, firstly, the High Court did not frame any substantive question of law as
was required to be framed u/s. 260-A of the Act though it heard the appeal
bipartite. In other words, the High Court did not dismiss the appeal in
limine on the ground that the appeal does not involve any substantial
question of law. Secondly, the High Court dismissed the appeal without deciding
any issue arising in the case saying that it was not necessary. Thirdly, the
main issue involved in the appeal, as rightly taken note of by the High Court,
was with regard to the applicability of section 35-D of the Act to the
respondent-assessee (bank). It was, however, not decided.

The Supreme Court was of the view that the High Court should
have framed the substantive question of law on the applicability of section
35-D of the Act in addition to other questions and then should have answered
them in accordance with the law rather than to leave the question(s) undecided.

The Supreme Court noted that the issue with regard to
applicability of section 35-D of the Act to the respondent-bank was already
pending consideration before the High Court at the instance of the respondent
in one appeal.
In such a case, both the appeals should have been decided together.

According to the Supreme Court, the order of the High Court
was not legally sustainable. It therefore set aside the order of the High
Court. The appeal was accordingly remanded to the High Court for its decision
on merits in accordance with law along with another appeal, if pending, after
framing proper substantive question(s) of law arising in the case.