Subject: Mr. Singh submitted firstly that the reduction of the commission rate substantially,
Referred Sections:
Section 260A of the Income Tax Act,
Section 68 of the Income Tax Act.
Section 69 of the Income-tax Act.
Section 66
Referred Cases / Judgments
Mohammad Hanif v. Commissioner Of Income-Tax (1963) 50 ITR 1 (SC)
Commissioner of Income Tax v. D.K. Garg 2018 (404) ITR 757 (Del).
Bhaiyalal Shyam Bihari v. CIT (supra),
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 07.09.2018
Pronounced on : 12.09.2018
+ ITA 544/2005
COMMISSIONER OF INCOME TAX ......Appellant
Through: Mr. Raghavendra Singh, Advocate.
Versus
M/S. JRD STOCK BROKERS PVT. LTD. .....Respondents
Through: Sh. M.P. Rastogi, Sh. K.N. Ahuja and Sh.
Manu Giri, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K. CHAWLA
MR. JUSTICE S. RAVINDRA BHAT
%
1. The question of law, framed in this appeal by the revenue under
Section 260A of the Income Tax Act, 1961 ("the Act" hereafter) is:
"Whether the order passed by the ITAT to the extent the same
deletes the additions made by the assessing officer suffers from
perversity?"
2. The facts necessary to decide the case are that the assessee, a
Chartered Accountant was also a member of Delhi Stock Exchange; he
commenced business in 1990. He later converted the proprietorship concern
into a Joint Stock Company by the name of M/ s J.R.D Stock Brokers (Pvt.)
Ltd. A search was conducted on 24.11.2000. During course of search, the
ITA 544/2005 Page 1 of 15
assessee accepted that he had been providing accommodation entries to
various parties and has opened fictitious bank accounts for which amounts
were deposited in cash which were later on transferred into his concern -
M/s. Ashok Gupta and Co. The Assessing Officer (hereafter "AO") brought
to tax ` 3,99,35,142/ - on account of unexplained cash/ credit in the bank
accounts by invoking the provisions of Section 68 of the Income Tax Act.
The AO also made an addition of ` 76,82,551/- being the 1.5% commission
of `51,21,70,060/-, the amount, which represented the total turnover of the
period in question. On appeal, both additions were upheld by the
CIT(Appeals). The ITAT, whom the assessee had approached held that the
addition of `3,99,35,142/ - was not justified; it was of the opinion that
Section 68 was inapplicable. On the other issue, the ITAT reduced the rate
of commission from 1.5% to 0.60%. For doing so, ITAT relied on its order
passed in M/s. JRD Stock Brokers (Pvt.) Ltd., against which revenue filed an
appeal before this court (ITA No. 544/05).
3. During the hearing of the appeal, two issues were broadly argued:
one, the reduction of the commission (from 1.5 % to 0.6%) and the other, the
deletion of the sum brought to tax, by the revenue, under Section 68 of the
Act. Mr. Singh submitted firstly that the reduction of the commission rate
substantially, was without reason and, therefore, deserved to be set aside. He
submitted that when both the tax authorities had concurred on the issue, the
ITAT should not have interfered with the exercise of its discretion. On this
aspect, the court is of opinion that no fault can be found with the ITAT. The
total turnover brought to tax (on which the commission rate was to be
applied) was over ` 100 crores. Although both lower authorities did impose
a higher commission rate, their orders too show that this was based on some
ITA 544/2005 Page 2 of 15
rough and ready estimate; in these circumstances, the ITAT's decision to
reduce the commission cannot be regarded as an error of law, calling for
correction.
4. On the second issue, it was contended that the ITAT fell into error in
holding that the addition under Section 68 was unwarranted. Counsel urged
that there is no anomaly in bringing to tax amounts on one or other head of
income and also, additionally holding that Section 68 applied. Mr.
Raghavendra Singh, learned counsel for the revenue, relied on Kale Khan
Mohammad Hanif v. Commissioner Of Income-Tax (1963) 50 ITR 1 (SC) in
this regard. It was submitted that the assessment record shows that the feeder
accounts were opened either in the name of employees or in the name of
persons who give their names for consideration and operate at the instruction
of Mr. Ashok Gupta. Moreover, these persons have completely denied of
having any knowledge of transactions in such bank accounts.
5. Counsel pointed out the findings of the lower revenue authorities; it
was submitted that under section 68, when a cash credit entry appeared in
the assessee's books of accounts, the assessee was under an obligation to
explain it to the satisfaction of the AO. In absence of such satisfactory
explanation or failure to tender evidence, the AO could hold that income was
income from undisclosed sources. The assessee had to establish prima facie
the transactions, which resulted in cash credit in its books of account. This
was proof of identity, capacity of creditors to advance and genuineness of
the transaction. In the present case, neither the capacity of the creditors was
proved nor the genuineness of the transaction was established as the assessee
admitted that the transactions were bogus. Thus, the onus upon the assessee
to prove the cash deposit in the bank accounts was not discharged.
ITA 544/2005 Page 3 of 15
6. Counsel for the assessee, Mr. Rastogi urged that Kale Khan (supra)
had no application to the facts of this case. It was argued that having once
assessed and brought to tax the larger amount of ` 104 crore, the AO could
not have carved out a "peak credit" amount from amongst that turnover,
based on aggregate of the amounts in the assessee's account in a particular
year, to give treatment under Section 68 of the Act. He relied on the ITAT's
observations, relying on its previous order, in this regard.
7. On appeal, the CIT (A) held that the assessee's argument with respect
to treatment of peak credit during the period, i.e. the block assessment years,
for the purpose of Section 68 was justified, observing as follows:
"7.1 These grounds of appeal relate to estimation of appellant's
undisclosed income on the basis of peak cash credit at
Rs.7,13,96,210/ -.
7.2 The A.R. submitted that the determination of peak and
valuation thereof is neither correctly determined nor required
to be made under Chapter XIV B. The addition, if any, required
was to be made in the hands of the beneficiaries and not in the
hands of the appellant. As per Section 68, addition under this
section was required to be made on the basis of entries in the
books of accounts and not on the basis of bank statement.
Moreover, the addition made is without any evidence or proof
to establish the fact that the deposits represents appellant's
undisclosed income.
7.3 The A.R. further argued that the deposits represent
deposits of money received from beneficiaries for exchange of
Cheque as the entire business of the appellant is exchange of
money for money, which does not call for any addition. It was
submitted that since all the transactions have been treated as
business and cash assumed to be deposited by the beneficiaries,
there is nothing, which can be added in the appellant's hand
ITA 544/2005 Page 4 of 15
and any addition, if required, is to be made only in those
accounts where the appellant has no business connection.
Reliance was also placed on the block assessment of Mr. Manoj
Aggarwal where no such addition was made.
7.4 I have gone through the submissions made by the
appellant. The assessment record shows that the feeder
accounts were opened either in the name of employees or in the
name of persons who land their names for consideration and
operated at the instruction of Mr. Ashok Gupta. Moreover,
these persons have completely denied of having any knowledge
of transactions in such bank accounts.
7.5 Regarding bank statement cannot be treated as books of
accounts; the appellant's contention is not maintainable on the
ground that the alleged accounts books and annual accounts
showing such entries are also made on the basis of these bank
accounts.
XXXXXX XXXXXX XXXXXX
7.7 The issue is to be decided is whether the addition under
Section 68 had rightly been made or not. As per section 68,
when a cash credit entry appears in the appellant's books of
accounts, the appellant is under legal obligation to explain the
same that too to the satisfaction of the A.O. In case the
appellant did not offer any explanation or fails to tender
evidence or burkes an enquiry then the A.O. can hold that
income as income from undisclosed sources. It is thus,
imperative for the appellant to prove prima facie the
transactions, which resulted in cash credit in its books of
account. Such proof includes proof of identity, capacity of
creditors to advance and genuineness of the transaction. In
case these three basic ingredients have been proved then only
the onus would have been treated as discharged. Whereas in
the present case neither the capacity of the creditors was
proved not the genuineness of the transaction was established
as the appellant himself admitted the transactions were made
ITA 544/2005 Page 5 of 15
with mala fide intentions. Thus, the onus lied upon the
appellant to prove the cash found deposited in the bank
accounts was not discharged either before the A.O. or before
me.
7.8 Keeping in view the facts narrated above, in my opinion,
in absence of any supporting/ corroborative evidences, the A.O.
was justified in making addition of peak cash credit of
Rs.7,30,71,530/ -. Accordingly, the order of the A.O. is
confirmed on this ground."
8. The ITAT's decision in this case, directing the deletion of `
3,99,35,142/-, was based on the fact that its previous order in the same block
assessment period (Delhi Bench "G" in IT(SS) 54/Del/2004 dated
30.11.2004) had held as follows:
"22. We have given careful thought to the rival submissions of
the parties. At the very outset we hold that provision of sec. 68
of the Income-tax Act has no application. The addition has been
made not for any cash credits in the books of accounts of the
assessee but for peak of credits in the bank accounts of the
assessee. The provision in question (section 68) could not be
applied on credits in books of account of bank. If at all,
addition could be made, the same could be made under section
69 of the Income-tax Act. On facts of the case, we are of the
view that no addition of peak cash credits is justified in this
case. The reason being that the revenue has practically
accepted the case of the assessee that it was mainly carrying on
the business of providing accommodation entries of share loss/
share profit through fictitious entries and this way had carried
total transactions worth more than Rs 104 crores. The assessee
further claimed that it received cash from its clients and gave
them cheques of profit or loss in share dealings to give genuine
colour from fictitious transactions. Thus when case of the
assessee has been accepted and total turnover taken at more
that Rs 104 crores for computing income from transactions, we
ITA 544/2005 Page 6 of 15
see no justification for not accepting case relating to credit of
less than Rs 8 Crores in the accounts of the assessee. On facts
of the case above credits cannot be treated as unexplained.
These are part and parcel of total credits of Rs 104 crores duly
accepted by the revenue for computing assessee's commission
income. Besides cash received from the clients was credited in
various bank accounts described as main/ feeder / fictitious
accounts maintained by the assessee in the names of his
employees like Surinder Rawat etc. Admittedly from the above
account cash was brought to the bank account of the assessee.
Therefore, as far as credit entries in the bank account of the
assessee are concerned, these are explained with reference to
the cash available in the main or feeder accounts. The addition
for unaccounted cash is made, if any, in the feeder/main
accounts which have been treated by the revenue as benami
accounts of the assessee if the case of the assessee that its
clients gave cash to the assessee for getting cheques supported
by fictitious entries of profit/loss in share dealing was not
accepted. But as stated earlier, the case pleaded by the assessee
as per statement of Shri Ashok Gupta recorded under sec.
132(4) has been accepted. In this connection, reference is
invited to observation In the assessment orders and that of the
order of Ld. CIT(A). A portion of the said order has been
reproduced in para 5 above. Thus, when cash credits have been
accepted in feeder/fictitious accounts there is no question of
making addition for cash credits in bank accounts. These cash
credits have proximity can be treated as unexplained with
reference to deposit/withdrawals from feeder accounts. The
assessee is also entitled off set of the commission income added
in the hands of the assessee. Thus considered from any angle we
see no justification for sustaining addition for peak credits
under section 68 of the Income-tax Act. The same is directed to
be deleted."
9. In Kale Khan (supra) the facts were that the assessee, a trader was
carrying on two businesses, (general merchandise and bidis). He had income
from property too. Four of the years concerned, he had submitted a return;
ITA 544/2005 Page 7 of 15
however, his accounts were not found complete and reliable. The AO
assessed the gross profits of the businesses on the basis of certain percentages
of the total sales which had also to be fixed by estimates. This was not
questioned. Later, while dealing with another year, the AO noted that various
credit entries in the assessees' books of account that appeared to have
escaped his attention at the time of the assessment for the concerned years
mentioned. The entries were (i) Gold Khata- `41,300 (ii) Ghar Khata-
`33,000 /- (iii) Mohammad Islam Khata ` 10,000/- (iv) Muslim Bi Khata
`11,000. The total for the year was ` 95,300. Likewise, for the other year
(1947-48) these were an aggregate of `39,575.The AO duly re-opened the
assessments in respect of these years and after giving the assessee
opportunity to explain the nature of these entries made fresh assessments. In
the fresh assessments, he added to the previously estimated incomes the said
sum of ` 95,300 in respect of the year 1945-46 and the said sum of ` 39,575
in respect of the year 1947-48, as he was unable to accept the explanation
offered by the assessee in support of his contention that the credit entries did
not represent income. The Supreme Court dealt with the assessee's
submission that the amount brought to tax as undisclosed could have been,
since income was previously assessed on percentage basis. The Court held as
follows:
"We have now to deal with the last question, question No.6,
which, as framed in the case for the assessment year 1945-46,
is set out below :
"Whether having regard to the fact that the
Income-tax Officer has assessed the income on a
percentage basis, he was justified in treating the
ITA 544/2005 Page 8 of 15
said sums of Rs. 41,300 and Rs. 11,000 as profits
from an undisclosed source ?"
In the case for the assessment year 1947-48 the corresponding
question was in identical terms except that the figures
mentioned in it were Rs. 19,575 and Rs. 20,000. The High
Court answered the question in the affirmative, and in our view
rightly, for we do not think that any other answer is possible.
We are in some difficulty in appreciating the point of this
question also. The question would seem to suggest that because
the income from a disclosed source has been computed on the
basis of an estimate and not on the basis of the return filed in
respect of it, an income represented by a credit entry in the
books of account of that source cannot be held to be income
from another and undisclosed source. We do not see why it
cannot be so held. It appears from the judgment of the High
Court that the reason given in support of the suggestion was
that if that income was held to be income of an undisclosed
source, the result would be double taxation of the same income
which the Income Tax Act does not contemplate. Apparently, it
was said that there would be double taxation because it was
assumed that the same income had once been earlier taxed on
the basis of an estimate. This reason is obviously fallacious, for
if the income is treated as one from an undisclosed source
which the question postulates, it is not treated as income of the
disclosed source which had previously been assessed to tax
and, therefore, there is in such a case no double taxation. It is
not a case where the income sought to be taxed was held to be
undisclosed income of a disclosed source, the income of which
source had previously been taxed on the basis of an estimate. If
it were so, the question of double taxation might have been
legitimately raised. That, however, is clearly not the case here
as the question as framed itself shows.
We concede that the question as to the source from which a
particular income is derived is one which has to be decided on
all the facts of the case. Hence the question whether income
represented by an entry in the books of a business is income of
ITA 544/2005 Page 9 of 15
that business or of another business would have to be decided
on the facts which showed the business to which it belonged.
But quite clearly the answer to that question would not depend
on whether the income from the first mentioned business had
been computed on the basis of a return filed or of an estimate of
the income made by the taxing authorities. This, however, is
what the question as framed suggests, and that suggestion is in
our view wholly without foundation. Therefore, it cannot be
said that the taxing authorities were precluded from treating
the amounts of the credit entries as income from undisclosed
sources simply because the entries appear in the books of a
business whose income they had previously computed on a
percentage basis. That is why we think that the answer to the
question as framed must be in the affirmative.
As we have earlier said, the question as to the source from
which a particular income is derived has to be decided on all
the facts of the case. In the present case, the Income-tax Officer
held the income represented by the credit entries to be income
from undisclosed sources, that is, neither from the manihari
(general merchandise) nor from the bidi business of the
assessee which he had disclosed. This view was upheld by the
Appellate Commissioner and by the Tribunal excepting as to
two of the amounts earlier mentioned. It was open to the
assessee to raise the question that the finding that those
amounts were income received from undisclosed sources was
not based on any evidence or was, for other reasons, perverse.
It appears that he did raise some questions of this type before
the Tribunal for reference to the High Court but the Tribunal
did not think that those questions legitimately arose and did not
refer them to the High Court. The assessee accepted the
decision of the Tribunal and did not move the High Court to
direct a reference in regard to those questions under section 66
(2). Those questions, therefore, cannot be raised in this court.
We have dealt with the reference made on the basis that the
finding that the amounts of the credit entries were income
received from undisclosed sources was disputed only on the
ground that the income from the business had been computed
ITA 544/2005 Page 10 of 15
on the basis of an estimate. In the circumstances of the case we
could not have done anything else."
10. In the present case, the basis for addition under Section 68 is that the
assessee could not explain or establish the identity, genuineness (of the
credit transaction), or creditworthiness of the party. That these amounts were
included in the larger turnover, in terms of Kale Khan (supra), does not ipso
facto shut out an inquiry into the credits, which have to be explained. These
amounts were in fact "peak credit" amounts that were brought to tax, since
the assessee's explanations were inadequate. This kind of acceptance of
"peak credit" theory to bring to tax amounts under Section 68 was approved
by this court in Commissioner of Income Tax v. D.K. Garg 2018 (404) ITR
757 (Del).
"19. 13. There have been numerous cases before the AO, CIT
(A), the ITAT and for that matter even before this Court, where
the question involved concerns the treatment of
'accommodation entries'. Basically, what an accommodation
entry provider does is to accept cash from an Assessee and
arranges to have a cheque issued from his own account or some
other account, usually of 'paper' or fake entities, to make it
appear to be a loan or an investment in share capital. The
accommodation entry provider usually charges a commission
which is deducted upfront. Where the Assessee is unable to
explain the source of such credit in his account - i.e. by
demonstrating the identity of the provider of the credit, the
creditworthiness of such entity, and the genuineness of the
transaction - the credit entry is treated as unexplained and the
income is treated under Section 68 of the Act as the income of
the Assessee.
14. In cases where the Assessee discharges the initial onus of
establishing the identity and creditworthiness of the credit
provider and the genuineness of the transaction, be it one of
ITA 544/2005 Page 11 of 15
loan or subscribing to share capital, the onus shifts to the
revenue to show the contrary. Where, for instance, an Assessee
furnishes the complete details of the entity like its certificate of
incorporation, PAN number, income tax returns, bank
accounts, names and addresses of the directors and so on, the
Courts have insisted on the AO to make a proper enquiry to
examine the identity and creditworthiness of such companies
and the genuineness of the transactions in question. Where the
AO fails to make such an enquiry, a Court might delete the
additions made by the AO.
15. The present case, however, is of a different nature. Here, we
are dealing with an Assessee who does not deny that he is an
accommodation entry provider. He, in fact, makes no bones of
the fact that he either owned or floated 'paper companies' only
for that purpose. He also does not dispute the fact that he has
not been able to explain the source of all the deposits in his
accounts or the ultimate destination of all the outgo from his
accounts.
16. The Assessee's plea that he should be taxed only on a
composite 'peak credit' is based entirely on principles of
accountancy. He questions the logic behind allowing peak
credits for some of the credit entries by way of cheques and
denying it for the other entries in cash. He also questions the
practice of working out separate peak credits for cheque and
cash transactions.
17. The premise underlying the concept of peak credit is the
squaring up of the deposits in the account with the
corresponding payments out of the account to the same person.
In Bhaiyalal Shyam Bihari v. CIT (supra), the Allahabad High
Court explained that benefit of peak can be given only when the
assessee owns up all the cash credits in the books of accounts.
It was further held:
"For adjudicating upon the plea of peak credit the
factual foundation has to be laid by the assessee. He has
ITA 544/2005 Page 12 of 15
to own all cash credit entries in the books of account and
only thereafter can the question of peak credit be raised."
19. The legal position in respect of an accommodation entry
provider seeking the benefit of 'peak credit' appears to have
been totally overlooked by the ITAT in the present case. Indeed,
if the Assessee as a self-confessed accommodation entry
provider wanted to avail the benefit of the 'peak credit', he had
to make a clean breast of all the facts within his
knowledge concerning the credit entries in the accounts. He has
to explain with sufficient detail the source of all the deposits in
his accounts as well as the corresponding destination of all
payments from the accounts. The Assessee should be able to
show that money has been transferred through banking
channels from the bank account of creditors to the bank
account of the Assessee, the identity of the creditors and that
the money paid from the accounts of the Assessee has returned
to the bank accounts of the creditors. The Assessee has to
discharge the primary onus of disclosure in this regard.
20. While the AO in the present case did not question the
working out of the peak credit by the Assessee, he, at the same
time, insisted that the additions made by him to the returned
income of the Assessee should be sustained. The peak credit
worked out by the Assessee was on the basis that the principle
of peak credit would apply, notwithstanding the failure of the
Assessee to explain each of the sources of the deposits and the
corresponding destination of the payment without squaring
them off. That is not permissible in law as explained by the
Allahabad High Court in the aforementioned decisions which,
this Court concurs with.
Conclusion
21. As already noted, the ITAT went merely on the basis of
accountancy, overlooking the settled legal position that peak
credit is not applicable where deposits remain unexplained
under Section 68 of the Act. The question of law framed by this
Court, is accordingly, answered in the negative i.e. in favour of
ITA 544/2005 Page 13 of 15
the Revenue and against the Assessee. The impugned order of
ITAT is, accordingly, set aside and the order of the AO is
restored to file."
11. This court observes that the lower authorities found from the
assessment records that the "feeder accounts" were opened either in the
name of the assessee's employees or in the name of those who operated for
consideration and operated at the instruction of Mr. Ashok Gupta, proprietor
of the assessee. These individuals denied of having any knowledge of
transactions in those bank accounts. The AO, in these circumstances felt that
the bank statements were reliable because entries in the books (found during
the search) reflecting the amounts, supported in the bank account statements
seized. Having regard to Kale Khan (supra) and D.K. Garg (supra), it is held
that per se the ITAT could have not ruled out taxability under Section 68,
given the unsatisfactory nature of the explanation provided by the assessee.
This court notices, at the same time that inconsistent approaches were
adopted by the lower revenue authorities for two years: for the first block
period, ending with AY 2000-2001, the assessee was sought to be taxed for a
total amount of ` 71,396,211/-; for the later block period (in Appeal No.
178/2002-03) the CIT taxed (out of the same amount) only the sum of `
3,99,35,142/-. It appears that the assessee could satisfactorily explain the
genuineness and other necessary ingredients needed under Section 68 with
respect to the balance except inability to co-relate the cheque or instruments
with the creditor concerned. Given that on these aspects, the findings were in
favour of the assessee (which do not appear to have been interfered with),
the revenue's appeal can only succeed in part.
ITA 544/2005 Page 14 of 15
12. In view of the above finding, it is held that the revenue's appeal has to
succeed in part; the amount of ` 3,99,35,142/- in the account of the assessee
can be taxed under Section 68 of the Act. The appeal is allowed to this
extent. There shall be no order on costs.
S. RAVINDRA BHAT
(JUDGE)
A.K. CHAWLA
(JUDGE)
SEPTEMBER 12, 2018
ITA 544/2005 Page 15 of 15
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