2025 (3) TMI 77 - AT - Income Tax

ITAT deletes protective assessment under Section 68 when assessee acts as mere conduit for unexplained cash credits

The A.C.I.T. Central Circle-26, New Delhi Versus M/s Nine Corporate Inception Pvt Ltd [Formerly known as SKM Creation Pvt Ltd. And (Vice-Versa)

ITAT Delhi held that protective assessment u/s 68 for unexplained entries cannot be sustained when assessee acts merely as a conduit. Both AO and CIT(A) ... Addition u/s 68 - unexplained entries - protective assessment made by the AO in hands of assessee - HELD THAT:- CIT (A) has found that the assessee is not the real owner of funds and the funds in the bank of the assessee is for the use of ultimate beneficiaries and it acted only as a conduit. In such circumstances, we find that the protective additions have no leg to stand. It is the finding of the AO as well as the CIT (A) that the assessee is not the owner of the credits/deposits in its bank account and that the assessee acts only as a conduit for transferring the said funds to the ultimate real/actual beneficiaries. Respectfully following the decision in the cases of Zed Enterprises (P) Ltd [2024 (1) TMI 1442 - ITAT DELHI], Shivij Garments (P) Ltd [2024 (2) TMI 454 - ITAT DELHI], Zen Tradex (P) Ltd [2024 (9) TMI 1701 - ITAT DELHI], M/s Round Square Exim Pvt Ltd [2025 (1) TMI 1521 - ITAT DELHI] we hold that the protective addition made in the instant case deserves to be deleted. Addition on account of commission income is also deleted as the same has been considered in the hands of the main entry operators Sh Anand Jain and Naresh Jain. Accordingly, the ground no 1 and 2 are dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include: Whether the additions made by the Assessing Officer (AO) on account of unexplained entries under Section 68 of the Income-tax Act, 1961, in the hands of the assessee company, were justified. Whether the addition of commission income, allegedly earned from providing accommodation entries, should be upheld in the hands of the assessee company. Whether the protective assessment made by the AO was appropriate given the identification of the ultimate beneficiaries of the funds.ISSUE-WISE DETAILED ANALYSIS1. Addition of Unexplained Entries under Section 68Relevant Legal Framework and Precedents: Section 68 of the Income-tax Act, 1961, deals with unexplained cash credits. The burden is on the assessee to explain the nature and source of such credits. Judicial precedents have established that if the assessee is merely a conduit or entry operator, the unexplained credits should not be added to its income.Court's Interpretation and Reasoning: The Tribunal found that the assessee was a conduit company managed by entry operators, Anand Jain and Naresh Jain. The funds in the assessee's bank account were used to transfer money to other entities, and the real beneficiaries were identified by the department.Key Evidence and Findings: The AO had made protective assessments, and information about the real beneficiaries was disseminated to their respective assessing officers. The CIT(A) found that the assessee was not the actual owner of the funds.Application of Law to Facts: The Tribunal applied the legal principle that when the real beneficiaries are identified, protective additions in the hands of the conduit company are not warranted.Treatment of Competing Arguments: The Revenue argued for the continuation of protective additions, but the Tribunal, following judicial precedents, found no basis for such additions when the real owners were identified.Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the protective additions, as the assessee was not the actual owner of the credits.2. Addition of Commission IncomeRelevant Legal Framework and Precedents: Commission income from accommodation entries should be taxed in the hands of the actual entry operators, not the conduit companies.Court's Interpretation and Reasoning: The Tribunal noted that the commission income was already taxed in the hands of the main entry operators, Anand Jain and Naresh Jain, and therefore, should not be taxed again in the hands of the assessee.Key Evidence and Findings: The AO had determined that the entry operators were responsible for managing the shell companies and earning commission. The Tribunal found that the assessee did not earn any commission.Application of Law to Facts: The Tribunal applied the principle that income should not be taxed twice and upheld the deletion of the commission income addition.Treatment of Competing Arguments: The Revenue's argument for taxing the commission in the hands of the assessee was rejected based on the fact that the income was already taxed in the hands of the entry operators.Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition of commission income in the hands of the assessee.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The CIT(A) held, 'when the beneficiaries were identified, there cannot be any protective addition of credits in the hands of the appellant since there being no doubt in the mind of the AO with respect to the belongingness/actual ownership of funds being credited in the bank account of the appellant being shell/conduit concern.'Core Principles Established: The Tribunal reinforced the principle that protective additions are unwarranted when the real beneficiaries are identified. Furthermore, commission income should be taxed in the hands of the actual entry operators, not the conduit companies.Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeals, confirming the CIT(A)'s decisions to delete both the protective additions under Section 68 and the commission income additions. The Tribunal found that the assessee acted merely as a conduit, and the real beneficiaries and entry operators should bear the tax burden.