Bogus accommodation entries: estimation of income sustained after retraction of statement, 2% addition upheld and appeals dismissed

Bogus accommodation entries were subjected to estimation of taxable income by the appellate authority at 2% on such transactions; the estimating authority applied a reasoned analysis including consideration of retraction of a prior statement, and its factual findings were treated as supported by material. The appellate conclusion sustaining the 2% estimation was affirmed on review, with no interference warranted, resulting in dismissal of both the taxpayers and Revenues appeals and confirmation of the assessed estimation of income.

---

---

Issues: (i) Whether the addition of Rs. 2,15,77,500/- made under section 68 is sustainable where transactions in unlisted shares were held non-genuine; (ii) Whether it was reasonable to estimate taxable income at 2% of the gross value of non-genuine share transactions and restrict addition to Rs. 9,65,900/-.

Issue (i): Whether the addition of Rs. 2,15,77,500/- under section 68 is sustainable.

Analysis: The facts include purchase and sale of unlisted private company shares with large price variations over short spans, investigation findings classifying the assessee as a layer-4 conduit, statement of a key intermediary admitting arrangement of accommodation entries and later retraction, confirmations from counterparties, and rejection of the assessee's books u/s 145(3). The appellate authority examined the contemporaneous investigative material and the retraction, and treated the transactions as non-genuine but assessed the income on the basis of the assessee being a conduit rather than by taxing the entire differential amount claimed by the AO.

Conclusion: The addition of Rs. 2,15,77,500/- under section 68 is not sustained in full; the major part is deleted while the assessee is treated as a conduit for accommodation entries.

Issue (ii): Whether estimating taxable income at 2% of the gross transaction value and restricting addition to Rs. 9,65,900/- is reasonable.

Analysis: Precedent and authorities recognise that where an assessee functions as a conduit for accommodation entries, taxable income may be limited to the commission or profit margin on the gross turnover of such transactions. The appellate authority considered relevant tribunal decisions and the factual matrix (scale of transactions, absence of substantive turnover historically, investigative findings, bank confirmations) and applied a 2% estimate on the combined gross sale consideration of Rs. 4,82,95,000/-, arriving at Rs. 9,65,900/-. The appellate authority's assessment of a reasonable percentage for estimation was reasoned and founded on comparable judicial approaches to estimating commission on accommodation-entry turnovers.

Conclusion: Estimation of taxable income at 2% of the gross transaction value is upheld and the addition is restricted to Rs. 9,65,900/-.

Final Conclusion: The assessing authority's addition of Rs. 2,15,77,500/- under section 68 is not sustained in full; the matter is concluded by taxing the assessee on an estimated income of 2% of the gross value of the non-genuine share transactions, resulting in a reduced addition of Rs. 9,65,900/-, and the appeals against the appellate order are dismissed.

Ratio Decidendi: Where an assessee is found to be a conduit for accommodation entries, the taxable income can be determined by estimating a reasonable commission or profit margin on the gross turnover of such non-genuine transactions rather than treating the entire differential amount as unexplained income under section 68.

---