Section 69C wrongly applied to sales transactions - only 5% profit element taxable, not entire accommodation entry amount

ITAT Kolkata held that AO incorrectly applied Section 69C provisions to sales transactions with SINPL, which were accommodation entries rather than unexplained expenditure. Since Section 69C applies to unrecorded expenditure, not sales, the addition was legally erroneous. The tribunal directed that only profit element at 5% commission rate (Rs. 1,73,000) should be added to assessee's income instead of treating entire transaction amount as unexplained expenditure, as assessee was merely providing accommodation entries while actual purchases were made by SINPL.

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Issues Involved:

1. Legality of the assumption of jurisdiction under Section 148 of the Income Tax Act.
2. Validity of additions under Section 69C of the Income Tax Act for alleged bogus purchases.
3. Treatment of accommodation entries and the appropriate commission rate.

Detailed Analysis:

1. Legality of the Assumption of Jurisdiction under Section 148:

The appellant challenged the assumption of jurisdiction under Section 148, arguing it was in violation of mandatory jurisdictional conditions. However, this ground was not pressed during the proceedings, and thus, the tribunal dismissed it as not pressed. The tribunal did not provide a detailed analysis of this issue, indicating that no substantial argument or evidence was presented to challenge the jurisdiction effectively.

2. Validity of Additions under Section 69C for Alleged Bogus Purchases:

The core issue was the addition of Rs. 34,59,840/- for AY 2017-18 and Rs. 48,41,226/- for AY 2018-19 under Section 69C, which pertains to unexplained expenditure. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld these additions based on information that the appellant engaged in bogus transactions with M/s Saakar Infra Nirman Pvt. Ltd. (SINPL). The AO relied on incriminating documents indicating that SINPL made payments for machinery and parts from entities providing bogus accommodation entries. The appellant admitted to providing accommodation entries for a commission but argued that no actual sales or purchases occurred. The tribunal found that the transactions were indeed accommodation entries and not unexplained expenditures as defined under Section 69C. Therefore, the tribunal concluded that the AO incorrectly applied Section 69C, as the transactions were recorded in the books as sales, not unexplained expenditures.

3. Treatment of Accommodation Entries and the Appropriate Commission Rate:

The appellant admitted to earning a 1% commission on the accommodation entries but suggested a higher commission rate of 5% during the hearing. The tribunal accepted this suggestion, directing that a 5% commission be applied to the total sales amount, resulting in a revised addition of Rs. 1,73,000/- for AY 2017-18 and Rs. 2,42,100/- for AY 2018-19. This adjustment reflects the tribunal's acknowledgment of the appellant's role in providing accommodation entries and the profit element involved.

Conclusion:

The tribunal allowed the appeals partly, modifying the additions made by the AO under Section 69C to reflect only the commission income from accommodation entries, thereby reducing the tax liability significantly. The tribunal's decision underscores the importance of distinguishing between unexplained expenditures and recorded transactions, particularly in cases involving accommodation entries.

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