High Court ruling on unexplained cash credit under Income Tax Law
Bombay High Court held that for providing accommodation entries, entire deposits cannot be assessed as unexplained cash credits
Executive Summary
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- In the recent ruling, Hon’ble Bombay High Court (HC) in case of Principal Commissioner of Income Tax – 14 (PCIT) vs. Alag Securities Private Limited (Taxpayer) held that section 68 of the Income Tax Act, 1961 (ITA) would come into play when any sum is found credited in the books of the Taxpayer and the Taxpayer offers no explanation about nature and source thereof or the explanation offered by the Taxpayer is not in the opinion of the Assessing Officer (AO) satisfactory.
- In the abovementioned situation, the sum so credited may be charged to income tax as the income of the Taxpayer of the relevant previous year. However, in the given case the business of the Taxpayer is centered around customers/beneficiaries making deposits in cash amounts, and in lieu thereof taking cheques from the Taxpayer for amounts slightly lesser than the quantum of deposits, the difference representing the commission realized by the Taxpayer. The cash amounts deposited by the customers i.e., the beneficiaries had been accounted for in the assessment orders of these beneficiaries.
- Therefore, the question of adding such cash credits to the income of the Taxpayer, more so when the Taxpayer was only concerned with the commission earned on providing accommodation entries does not arise.
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- The taxpayer was engaged in the business of providing accommodation entries to entry seekers.
- As per the AO, the identity of the parties involved in the transactions was not furnished as well as genuineness of the transactions relating to total cash deposits were not satisfactorily explained by the Taxpayer.
- AO added back to the total income, the amount which was found in deposits in various bank accounts as unexplained income from undisclosed sources under section 68 of the ITA stating that the source, nature, genuineness, and creditworthiness of the creditors relating to the transactions were not proved by the Taxpayer.
- The Commissioner of Income Tax – Appeals (CIT-A) directed the AO to adopt only 0.15% of the total deposits as commission in the hands of the Taxpayer and to delete the balance addition.
- The Income Tax Appellate Tribunal (ITAT) upheld the order of the CIT-A and dismissed the appeal of the Revenue.
- Revenue challenged the order of ITAT before the HC.
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- Revenue contended that the Taxpayer had failed to discharge the primary onus on it by satisfactorily explaining the cash deposits.
- AO had recorded a clear finding that Taxpayer could not satisfactorily explain the source, nature, genuineness, and creditworthiness of the creditors of those transactions.
- The CIT-A was not at all justified in restricting the addition to only a percentage of commission, that too, at the low rate of 0.15%.
- The ITAT committed a manifest error in affirming such a decision of the CIT-A.
- Revenue has referred to and relied upon a decision of the Hon’ble Supreme Court in Principal Commissioner of Income Tax Vs. NRA Iron and Steel (P) Ltd., (2019) 103 Taxmann.com 48.
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- The taxpayer contended that it was involved in the business of facilitating and providing accommodation entries to the beneficiaries, details of which were explained during the search action.
- The taxpayer used to charge a commission for such services rendered and the rate of the commission was taken at 0.15%.
- Taxpayer also contended that it had deposited the cash received from the customers/ beneficiaries and issued corresponding cheques to them for which it earned commission.
- Section 68 of the ITA would not be attracted in such a case because the cash credits did not belong to or formed part of the income of the Taxpayer.
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- Whether cash amount received by Taxpayer for providing accommodation entries to entry seekers are unexplained income from undisclosed sources under section 68 of the ITA?
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- In a case of this nature, Section 68 of the ITA would not be attracted. Section 68 of the ITA comes when any sum is found credited in the books of the Taxpayer and the Taxpayer offers no explanation about nature and source thereof or the explanation offered by the Taxpayer is not in the opinion of the AO satisfactory, the sum credited may be charged as income of the Taxpayer of that previous year.
- The CIT-A and ITAT affirmed that the business of the Taxpayer centered around customers/ beneficiaries making deposits in cash amounts and in lieu thereof taking cheques from the Taxpayer for amounts slightly lesser than the quantum of deposits, the difference representing the commission realized by the Taxpayer. The cash amounts deposited by the customers i.e., the beneficiaries had been accounted for in the assessment orders of these beneficiaries. Therefore, the question of adding such cash credits to the income of the Taxpayer, more so when the Taxpayer was only concerned with the commission earned on providing accommodation entries does not arise.
- On the issue of the percentage of commission, ITAT had already held a 0.1% commission in a similar type of transaction to be a reasonable percentage of commission. Therefore ITAT accepted the percentage of commission at 0.15% disclosed by the Taxpayer itself. This finding is a plausible one and it cannot be said that the rate of the commission was arrived at in an arbitrary manner.
Tag: Income Tax Law