AWOL – Consequences
A two-judge bench of Supreme Court comprising Justice Indu Malhotra and Justice U.U. Lalit in the case of PCIT vs. NRA Iron and Steel has held that providing only identity of the investors and using appropriate banking channels was not sufficient to prove the genuineness and credit worthiness of investors under section 68.
Assessing officer’s investigation
The AO conducted a detailed investigation on the investors and found:
- The address provided for some companies, didn’t house the company.
- The source of funds for the investment could not be established.
As a result, the AO added the amount invested to the income of the assessee.
Journey of the case
The case was appealed by the assessee, and the CIT(A), ITAT and the HC all ruled in favor of the assessee, NRA Iron and Steel.
The CIT and ITAT seem to have relied on the case of CIT vs. Divine Leasing, Delhi HC 2008, 299 ITR 268 (Del) (The SC in CIT vs. Lovely Exports  216 CTR 195 (S.C.) dismissed an SLP against this order). In this case, the court had observed that the assessee had discharged the primary burden u/s 68 by providing the details of the investors, and since the AO had failed to present any reasonable evidence indicating the non-genuineness of the creditors, the court ruled in favor of the assessee.
In the HC, the matter was dismissed on the basis that there was no substantial question of law to decide on and the lower courts had already adjudicated on the facts of the case.
Now the Supreme Court
The SC differed from the lower courts on the point of whether the responsibility to prove the genuineness of the investors u/s 68 was discharged by the assessee and since there were no arguments provided, it ruled in favour of the Revenue and used the following to support its judgment:
- 264 ITR 254 (Gau) Nemi Chand Kothari (2003 Gauhati HC): This case mentions that only using proper banking channels to channel investments is not sufficient to prove that the creditor is genuine.
- It also accepted the proof submitted by the AO on the investors being merely paper companies since neither the investors nor the assessee showed otherwise.
Differences between Divine Leasing and PCIT vs. NRA Iron and Steel case
Here are few key differences between the cases:
- No detailed investigation was done on the creditors or at least wasn’t in the record of the case.
- Only summons u/s 131 had been issued and no follow up investigation was done.
- Since AO had no cogent evidence to show that their veracity could be doubted, the burden of proof would stand discharged on the part of the assessee.
- AO carried out a detailed investigation and found compelling evidence to doubt the genuineness of the transaction and the creditors.
- No counter argument was provided and the assessee did not appear in court.
- Since the burden of proof was not discharged, the SC held in favour of revenue
Moreover, from the AY 2013-14, Section 68 was amended to the effect that in case of share application money, investors must also offer a satisfactory explanation to prove the genuineness of the investment.
Missing in action
At both the High Court and Supreme Court, the assessee was not present, and the decisions were given ex-parte.
On 26 July 2017, immediately prior to the order of ITAT, Bhushan Steel Ltd. was admitted into a resolution program. NRA Steel used to be a group company of Bhushan steel, change in personnel and subsequent corporate difficulties may have contributed to NRA’s inability to defend the proceedings before the High Court and Supreme Court.
The absence could have been a contributing factor in the outcome of the decision.
Know your judges
Looking at the profiles of both the presiding judges in PCIT vs. NRA Iron and Steel gives a very important insight:
None of them had ever judged a case on Section 68 or the bogus share application money issue in the past.
This was advantageous to both the parties, inasmuch as they had the opportunity to shape the narrative of the precedents in their favour. In an ex-parte case the Revenue did just that.
A quick look at all the precedents discussed in the case using the Riverus Income Tax Research tool shows that they are overwhelmingly pro revenue.
Our Analysis of ex-parte cases
The SC has had to decide 7 tax cases ex-parte over the years. The side with representation has won the case thrice, while the other 4 times the unrepresented party has come out on top.
However, 1971 was the last time an unrepresented party won an ex-parte tax case at the SC. It seems safe to say that not entering an appearance put NRA at a substantial disadvantage in this particular case.
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Written by Siddharth P. Sharma, Product Manager @ Riverus