2023 (7) TMI 1620 - AT - Income Tax

Accommodation entry facilitator taxed only on evidenced commission; presumptive rates rejected, Section 69A additions and jewellery remanded

ITAT Mumbai allowed assessee's appeal substantially and dismissed Revenue's appeal. It held that the assessee was only a facilitator in accommodation ... Estimation of commission income on providing of alleged accommodation entries - CIT(A) estimated the income at the rate of 1.15 percent in lieu of 4.75 percent estimated by the AO - HELD THAT:- Transactions transacted in the stock exchange of the above said scrips cannot be considered as the whole transactions facilitated solely by the assessee. The scrips transacted through the stock exchange are the total transaction made by the respective companies. What is relevant is the transactions carried or facilitated through RK Mall (employee of the assessee). Only aspect which links the assessee in the above transactions are statement recorded under oath from RKK and ledger account found in the books of RKK entered in the name of the employee of the assessee. Other than that there is absolutely nothing on record to show that the assessee has any direct involvement in any of the suspected transactions. The distribution of commission between the various operators by the Ld CIT(A) is only based on the assumptions without their being any evidence collected from any person involved. Even the stated commission adopted by the Assessing Officer is also pure presumption on hearsay basis that the commission involved in this kind of transactions are at 5 to 6%. In our view there is no basis to impinge assessee directly carrying out the entry business in such scrips for providing LTCG in such scrips, albeit assessee can be reckoned as a facilitator who alone cannot earn such commission. AR brought to our notice that in the similar transactions, the ITAT has confirmed the rate of 0.40% in the case of Brij Bhushan Singal [2018 (10) TMI 1635 - ITAT DELHI] Whether the assessee along with the employee Mr. R K Mall are considered to be playing key role in the above said transactions? - The statement of Mr. Randel, who has mentioned that certain transactions were made through the assessee, cannot implicate assessee to rope in the entire transaction and to tax commission for entire trade carried out in stock exchange. Therefore, the information contained in the ledger found in the books of the RKK, which relates to certain transactions carried through the employee Mr. RK Mall, in which various transactions are carried in scrips like Randel, Mishka, Dhenu and others have been mentioned. We have perused the ledger copies found from the possession of RKK that he has charged and paid certain percentage of commission, which is not uniform. This itself shows that the apportionment made by the CIT (A) on equal basis is not justified. As discussed above, the commission is already mentioned in the ledger found in the case of RKK, which is already available on the actual basis. Here it is case under section 153A where scope of addition has to be seen qua the documents found. Thus, the commission which relates to the suspected scrips alone can be treated as an income of the assessee. Rander scrip and investigation conducted by SEBI on this scrip - Rander scrip was not subject matter of SEBI and the SEBI has not declared the transactions entered in this scrip as bad or void nor any such material has been brought on record that its trading was ever banned by the SEBI. Therefore, the decisions held in the case of Rander scrip were in favour of the assessee considering the fact that Assessing Officer has not made proper verification independently but merely relied on the findings of the investigation wing of the Calcutta. Here also no such information or inquiry has been done in the case of the assessee or there is any such direct or indirect information against the assessee. Here also, assessee has made purchase through stock exchange as an independent investor, similar to the shares purchased by the other regular investors to whom assessee was merely facilitating the transactions and referring the cases to the other investors. There is nothing on record to show that assessee involved anywhere in the rigging prices or anywhere found in the dubious transactions involving penny stock transactions except as a facilitator that to it we have inferred because of one of the employees of the assessee was involved with the RKK group. Accordingly, the ground raised by the assessee is allowed and the ground raised by the revenue is dismissed. Addition u/s 69A - in dealing with the issue of level of involvement of the assessee in the whole episode dealing with the RKK group. The investigating team has stumbled upon certain messages, which they could found any connection, these are SMS alert of banking transactions. These is nothing on record to link the above transactions with the assessee and the way the questions are framed shows that it is only rowing enquiry. From the answers, at the most, he can be considered as an facilitator of arranging investors to buy or sell the scrips. The issue of funds transfers are directly handled by the RKK Group. When we consider the assesse as an facilitator, the above transactions are part of the arranging investments for the investors. Furthermore, the search /investigation made in the case of the assessee has not unearthed any material to support the views of the department except presumptions. These can be linked to the investment activities and hence, this mere message cannot be the source for making any addition unless there is corroborative evidence linking the actual activities carried by the assessee. We observe that Ld CIT(A) has already gave his finding that the above transactions are linked to the commission income and accordingly, he deleted the same. Therefore, we do not see any reason to sustain the additions. Addition being unexplained jewellery that is gold bars and coins and diamond jewellery seized during the course of search action on the assessee - We observe from the record that the AO/CIT(A) has not verified the transactions under consideration and also observe that the search parties have found gold bars in the possession of the assessee and not evaluated the allowability of holding of certain amount of gold in the individuals in the given case, it was submitted before us that the family members have purchased the above said gold bars. Therefore, we are inclined to remit this issue back to the file of AO to verify the same and the gold bars are equal to investment in gold/jewellery, therefore, the AO has to give allowance of gold that can be held by the individuals in their individual capacity. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in search assessments under section 153A, additions as 'commission income' for providing alleged accommodation entries of Long-Term Capital Gain (LTCG) could be sustained on the basis of (i) ledgers seized from a third party (R.K. Kedia), (ii) statements of such third party and others, and (iii) total stock-exchange turnover in certain scrips, and at a presumptive rate of 4.75%-6%. 1.2 Whether the ledgers and other material seized from the premises of a third party (R.K. Kedia), including the ledger styled 'R.K. Mall A/c', SMS messages, and investigation reports, constituted sufficient, reliable and corroborated evidence to treat the assessee as an 'accommodation entry provider' and to sustain large estimated additions. 1.3 Whether LTCG declared by the assessee on sale of shares in various companies (including Rander Corporation Ltd, Mishka Finance & Trading Ltd, Dhenu Buildcon Ltd, Unisys Software Holding Industries Ltd, Pine Animation Ltd and LIC Housing Finance Ltd) was bogus and liable to be taxed as unexplained cash credits / unexplained income with consequential additions towards alleged commission under sections 68/69C. 1.4 Whether additions under section 69A could be made on the basis of certain SMS messages found on the assessee's mobile phone, allegedly evidencing unaccounted 'cash dealings' and fund movements with third parties (including R.K. Kedia and Amarchand Rander). 1.5 Whether and to what extent unexplained investment in gold bars, coins and jewellery found during search could be added under section 69 in the hands of the assessee, having regard to (i) claims of purchase by family members, (ii) CBDT instructions on jewellery in search cases, and (iii) the evidentiary value of purchase bills produced post-search. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Estimated commission income for alleged accommodation entries based on Kedia ledgers, statements and stock-exchange turnover Legal framework (as discussed) 2.1 The Tribunal considered: (i) section 153A (scope of assessment in search cases), (ii) presumptions under section 132(4A), (iii) evidentiary rules governing third-party documents and statements (including the need for corroboration and cross-examination), and (iv) case law on the limited evidentiary value of loose papers and third-party books without independent corroboration. Interpretation and reasoning 2.2 The only incriminating material directly found with the assessee was (i) a ledger in the name of the assessee's employee 'R.K. Mall' seized from the premises of R.K. Kedia, and (ii) certain SMS messages on the assessee's mobile. No independent ledgers, parallel books or incriminating documents evidencing operation of an 'entry racket' were found at the assessee's premises. 2.3 The ledgers seized from Kedia's premises (including 'Daga_Loan A/c', 'Daga_Advance A/c' and 'R.K. Mall A/c') were prepared and maintained by Kedia's group. The Tribunal accepted that: - Section 132(4A) presumptions apply only against the person from whose possession documents are found, not automatically against third parties; and - Entries in third-party books or loose sheets cannot, by themselves and without corroboration, fasten liability on another person. 2.4 The authorities had not: (i) correlated specific ledger entries with any seized material from the assessee's premises; (ii) linked RK Mall ledger entries with 'Thakur' (cash) account; (iii) examined or summoned the persons named in the RK Mall ledger; or (iv) confronted Kedia in assessment with these particular ledger pages to establish that they pertained to the assessee. 2.5 Statements of R.K. Kedia: the Tribunal noted that Kedia had given inconsistent statements (original statement, retraction, and subsequent withdrawal of retraction). Given this 'flip-flop' and absence of cross-examination in a meaningful manner (opportunity fixed in Delhi at fag-end of limitation and witness not produced), the Tribunal held that such statements, without corroborative material directly linking the assessee, could not be treated as reliable primary evidence against the assessee. 2.6 The allegation that the assessee 'managed' or 'controlled' the three scrips (Rander, Mishka, Dhenu) was found to be unsubstantiated: - No controlling shareholding or management documents were found against the assessee; - Material itself showed that control/management lay with other persons (e.g., findings that certain companies were controlled by another individual); and - No incriminating material evidencing manipulation by the assessee was seized at assessee's premises. 2.7 The Assessing Officer and CIT(A) had computed commission by taking entire stock-exchange turnover in these scrips during relevant years and applying a presumptive rate (4.75% by AO; 1.15% by CIT(A)). The Tribunal held: - Entire exchange turnover could not be presumed to be routed through, or facilitated by, the assessee; and - There was no material to show that the assessee was the sole or principal operator in these scrips; at best, the assessee (through employee RK Mall) acted as a facilitator for certain specific transactions. 2.8 The rate of commission (5-6% as assumed by AO and reworked to 1.15% by CIT(A) by splitting between four 'layers') was held to be purely presumptive and unsupported by any concrete evidence gathered from any actual beneficiary or operator in the assessee's own case. 2.9 The Tribunal noted that the ledger seized from Kedia already contained explicit 'brokerage/commission' figures for transactions routed through 'RK Mall A/c', including in the alleged penny scrips, and that these figures were neither uniform nor consistent with the assumed rates. Since this was a section 153A assessment 'qua documents found', the actual commission amounts reflected in the relevant ledger alone could be relied upon, if at all. 2.10 The Tribunal accepted the assessee's limited admission that, without prejudice, he would 'own up' the transactions routed through his employee RK Mall, but rejected the Revenue's attempt to expand this to whole-market turnover or to rely entirely on presumptions and investigation reports without specific linkage. Conclusions 2.11 The Tribunal held that: - The assessee could not be treated, on the present record, as an accommodation entry operator for entire turnover in Rander, Mishka and Dhenu. - No addition could be made by applying 4.75% or 1.15% on full BSE turnover of these scrips. - Only the actual brokerage/commission recorded in the seized RK Mall ledger, relatable to the suspected scrips, could be attributed as income of the assessee. 2.12 On that basis, for A.Y. 2014-15, the Tribunal computed total commission attributable to the assessee at Rs. 18,36,737.20 (i.e. Rs. 18,36,737.2), and restricted the addition to this figure, deleting the balance commission additions upheld by CIT(A) and entirely rejecting the Revenue's appeals for higher additions. 2.13 For A.Ys. 2012-13, 2013-14 and 2015-16, the Tribunal applied the same reasoning mutatis mutandis, deleting the large estimated commission additions based on entire turnover and holding that only actual commission as per seized ledger relatable to RK Mall / specific scrips could, if at all, be taxed in assessee's hands. Issue 3 - Alleged bogus LTCG and commission u/ss. 68 / 69C on various scrips (Rander, Mishka, Dhenu, Unisys, Pine, LIC Housing) Legal framework (as discussed) 2.14 The Tribunal proceeded on the statutory requirements of section 68 (on-creditor identity, genuineness and source), section 69C (unexplained expenditure/commission), and exemption under section 10(38) in respect of LTCG, read with the evidentiary standards applicable in cases involving alleged 'penny stocks' and bogus LTCG. The Tribunal also considered decisions of the jurisdictional High Court and Coordinate Benches on similar issues, including earlier decisions specifically involving Rander scrip. Interpretation and reasoning 2.15 The assessee had earned and claimed LTCG (u/s 10(38)) on: - Rander Corporation Ltd - multiple years; - Mishka Finance & Trading Ltd and Dhenu Buildcon Ltd - alleged penny stock context; - Unisys Software Holding Industries Ltd - A.Ys. 2012-13 and 2013-14; - Pine Animation Ltd - A.Y. 2013-14 / 2015-16; and - LIC Housing Finance Ltd - A.Y. 2014-15. 2.16 The Assessing Officer treated the Rander and Unisys (and in some years Pine) LTCG as bogus on the footing that these scrips were part of a wider penny-stock / LTCG entry scam unearthed by Investigation Wings and that some other beneficiaries had admitted bogus LTCG and commission payments. In addition, separate additions were made for alleged commission (6% reduced by CIT(A) to 4.75%) u/s 69C. 2.17 The Tribunal noted: - The assessee produced full primary documentation: contract notes, demat statements, bank statements evidencing purchase/sale through stock exchange and payments through banking channels and STT. - Neither AO nor CIT(A) impeached the genuineness or authenticity of these transactional documents, nor established any direct flow-back of cash from assessee to any counterparty. - The Investigation Directorate / SEBI material relied upon was of a general nature and did not contain any specific adverse finding against the assessee; in particular, SEBI's orders in respect of Mishka/Pine did not name the assessee as a wrongdoer, and Rander was not even subjected to SEBI action or trading ban. 2.18 For Rander scrip, the Tribunal followed earlier decisions of the ITAT (including in a Delhi Bench decision specifically on Rander) where it was held that mere appearance of a scrip in an Investigation Wing report, without SEBI having declared trades void or brokers/assessee being implicated, and without independent enquiry by AO, is not sufficient to deny LTCG where regular exchange trades and banking are proved. 2.19 For Unisys Software scrip, the Tribunal recorded that facts and reasoning were materially identical: the assessee's documentation was not discredited, and the Revenue had not brought specific material to show assessee's involvement in manipulation; generic penny-stock allegations and other parties' conduct could not, without corroboration, be used to tax the assessee's genuine, documented transactions. 2.20 For LIC Housing Finance Ltd, the Tribunal found that: - The scrip was never alleged by Investigation Wing or Kedia to be a penny stock; and - The assessment order itself contained no specific allegation or adverse material concerning this script. Accordingly, its LTCG could not be clubbed with alleged bogus LTCG in penny scrips. 2.21 The Tribunal rejected the CIT(A)'s approach of sustaining additions on LTCG 'protectively' or merely on telescoping basis against alleged commission income, observing that once the LTCG transactions themselves are found to be genuine on merits, no protective addition or related commission addition can be sustained. Conclusions 2.22 The Tribunal held that: - The assessee had discharged the onus to prove genuineness of LTCG transactions in all the disputed scrips (Rander, Unisys, Pine, LIC Housing), having transacted through stock exchange, routed monies through bank and supported transactions with standard market documentation; - The Revenue failed to bring cogent, transaction-specific evidence showing that these were mere accommodation entries or that assessee's funds had circulated in cash; and - Generic investigation reports, uncorroborated statements of third parties and suspicion of price manipulation, without direct evidence against assessee, are insufficient to invoke sections 68 or 69C in respect of such LTCG. 2.23 Accordingly, for all years: - Additions treating LTCG on Rander, Unisys, Pine and LIC Housing as unexplained/bogus stood deleted; and - Consequential additions for alleged commission expenditure u/s 69C on such LTCG were also deleted. Issue 4 - Additions u/s 69A based on SMS messages (alleged unaccounted cash) Interpretation and reasoning 2.24 The Assessing Officer had treated certain SMSs on the assessee's mobile (relating to RTGS transfers, references to 'cash dealing', 'fund requirement', etc. between third parties) as reflecting unaccounted cash transactions of the assessee, and made aggregate additions u/s 69A. 2.25 The Tribunal observed: - Most messages clearly referred to RTGS / bank transfers between identified third-party entities; they did not themselves refer to receipt or payment of cash by the assessee; - The assessee had not responded to many such messages, and there was no material to show that these were actually acted upon by the assessee; and - The AO did not issue notices / summons to the counterparties named in the SMSs, nor correlate any such SMS to seized cash, bank entries, 'Thakur' account, or any other corroborative evidence. 2.26 The Tribunal considered that the assessment, insofar as it relied on these SMSs, was based entirely on presumptions and rowing enquiry without concrete linkage to any unexplained money traceable to the assessee. 2.27 The CIT(A) had deleted these additions on the footing that any such transactions (to the extent proved) would, in any case, be part of the same alleged accommodation entry activity whose commission income was already brought to tax, and that no separate unexplained cash could be inferred. Conclusions 2.28 The Tribunal upheld deletion of additions u/s 69A, holding that: - Mere SMS alerts or uncorroborated text messages, without independent evidence of actual cash movement or unexplained money in assessee's hands, cannot form the sole basis of additions; and - In the absence of corroboration and specific linkage, no unexplained money could be inferred from such messages. Issue 5 - Unexplained investment in gold bars / jewellery u/s 69 Interpretation and reasoning 2.29 During search, gold bars, coins and jewellery were found at assessee's premises. The AO made addition u/s 69 treating the entire seized jewellery as unexplained. The CIT(A) reduced the addition but largely sustained it, inter alia holding that: - CBDT instructions on non-seizure of a certain quantum of jewellery were for seizure purposes only and did not dispense with the assessee's burden to explain source; - Purchase bills were not produced during search / immediately thereafter and were considered to be 'managed' post-search; and - No corresponding bank debits were seen before date of search. 2.30 Before the Tribunal, the assessee contended that: - Gold bars were purchased by different family members from explained sources; - Detailed reconciliation and supporting documents had been filed during post-search proceedings and before the AO; and - The authorities had not conducted any verification of the claimed purchases from concerned jewellers / family members through section 133(6)/131. 2.31 The Tribunal observed that: - The AO and CIT(A) had not undertaken independent verification of the assessee's claim that family members had purchased the gold, nor examined the claimed bills or sources; and - In search cases, while the onus lies on the assessee, the authorities are also required to appropriately verify explanations and apply CBDT guidelines on reasonable holding of gold/jewellery by family members. Conclusions 2.32 The Tribunal set aside the issue of unexplained jewellery investment to the file of the Assessing Officer with directions to: - Verify, through proper enquiry, the purchases claimed by individual family members, including bills and sources of funds; - Apply the CBDT-prescribed permissible limits for holding jewellery by individual family members, treating those as explained to that extent; and - Thereafter re-adjudicate the addition u/s 69 after giving due opportunity of hearing to the assessee. 2.33 Thus, additions on account of jewellery/gold were neither finally confirmed nor deleted, but remanded for fresh adjudication in accordance with law.