2025 (5) TMI 2051 - AT - Income Tax

Conduit Entities Face Tax Scrutiny: Unaccounted Funds Routing Challenged Under Section 68 of Income Tax Act

DCIT, Central Circle-28, New Delhi. Versus Geemed Promoters P. Ltd. And (Vice-Versa)

The SC/Tribunal addressed tax issues involving accommodation entries and unexplained cash credits. The court found the assessee was a pass-through entity ... Addition on account of (paid - up share capital, share premium and security premium) credited in its books of accounts - assessee had not discharged its primary onus to establish the identity and creditworthiness of the creditors and genuineness of the transaction during assessment proceedings - CIT(A) deleted addition - HELD THAT:- DR could not dispute the fact that in the hands of Ashok Kumar Tyagi the additions stand final by way of commission income only. Thus no question to examine the genuineness of transaction in the hands of assessee is needed. Assessee company was made a pass through entity and had was only a medium of transaction. The money did not belong to it nor it has gained from the transaction as the commission landed by Ashok Kumar Tyagi, in whose hand commission income stands added. Thus the finding of CIT(A) need no interference and grounds of appeal of revenue have no substance. Similarly in regard to CO of assessee, we find no merit as assessee admits to be mere pass through entity. It has no income of its own. The money credited in bank account, beyond Rs. Ten Crore, which were further invested, remains to be unexplained income and the is no error in sustaining this addition by ld. CIT(A). Ground has no substance. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal and cross-objection are:(a) Whether the addition of Rs. 10 crore credited as paid-up share capital, share premium, and security premium in the assessee's books of accounts was rightly deleted by the Commissioner of Income-tax (Appeals) (CIT(A)) on the ground that the assessee had not discharged the primary onus to establish the identity, creditworthiness of the creditors, and genuineness of the transaction during assessment proceedings;(b) Whether the assessee company was merely a pass-through entity or a paper company used for accommodation entries, thereby affecting the genuineness of the share capital transactions;(c) Whether the ad hoc addition of Rs. 1,70,000/- bank deposit made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, was justified, given the assessee's failure to explain the nature and source of the said amount;(d) The correctness of the CIT(A)'s order in confirming the addition of Rs. 1,70,000/- while deleting the Rs. 10 crore addition;(e) The interplay between the findings against the related party (Sh. Ashok Kumar Tyagi) and the assessee company, particularly whether the assessee's transactions could be considered genuine in light of the findings against the related group involved in accommodation entries.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Deletion of Rs. 10 crore addition on account of share capital and share premium credited in booksRelevant legal framework and precedents: Section 68 of the Income Tax Act, 1961, deals with unexplained cash credits. It places the onus on the assessee to prove the identity and creditworthiness of the creditor and the genuineness of the transaction where unexplained credits appear in the books of accounts. Precedents consistently hold that mere entry of share capital or share premium in books does not absolve the assessee from proving the genuineness of the source.Court's interpretation and reasoning: The Tribunal noted that the CIT(A) had thoroughly examined the facts and circumstances, including the search and seizure operation under section 132 of the Act involving the Ocus group and the role of Sh. Ashok Kumar Tyagi. The AO had found that the assessee company was a paper company engaged in giving accommodation entries and was used as an entry operator to route unaccounted income to M/s MGC Estate P. Ltd. through layering of funds.The CIT(A) held that since the appellant company was merely an operator facilitating accommodation entries, the addition of Rs. 10 crore in its hands was not justified and deserved to be deleted. The Tribunal agreed with this reasoning, emphasizing that the assessee was only a conduit and did not gain from the transaction. The ultimate beneficiary of the accommodation entries was M/s MGC Estate P. Ltd., in whose hands the addition was rightly made under section 68.Key evidence and findings: The search and seizure operation, assessment orders passed against Sh. Ashok Kumar Tyagi and related companies, and the AO's investigation revealing the modus operandi of accommodation entries were critical. The AO's finding that the assessee was a paper company and merely an entry operator was accepted by the CIT(A) and upheld by the Tribunal.Application of law to facts: Given the assessee's role as a pass-through entity and the finality of the additions in the hands of Ashok Kumar Tyagi, the Tribunal found no merit in sustaining the addition in the hands of the assessee company. The primary onus under section 68 was not discharged by the Revenue to link the Rs. 10 crore addition to the assessee's own income.Treatment of competing arguments: The Revenue argued that the assessee failed to establish the identity and creditworthiness of the creditors and the genuineness of the transaction. However, the Tribunal found that since the assessee was only a medium for routing funds and did not benefit directly, the addition was rightly deleted by the CIT(A). The Revenue's grounds were dismissed as lacking substance.Conclusion: The deletion of the Rs. 10 crore addition in the hands of the assessee company was upheld, recognizing the company as a pass-through entity used for accommodation entries, with no direct income or gain from the transaction.Issue (c) and (d): Addition of Rs. 1,70,000/- bank deposit under section 68Relevant legal framework and precedents: Section 68 requires explanation of unexplained cash credits, including bank deposits. Failure to satisfactorily explain the nature and source of such deposits justifies addition to income.Court's interpretation and reasoning: The AO added Rs. 1,70,000/- to the income of the assessee as the nature and source of this bank deposit could not be explained. The CIT(A) confirmed this addition, noting that the assessee did not provide any explanation even during appellate proceedings.Key evidence and findings: The absence of any explanation or evidence from the assessee regarding the Rs. 1,70,000/- deposit was the key factor.Application of law to facts: Given the assessee's failure to explain the nature and source of the bank deposit, the addition was justified under section 68.Treatment of competing arguments: The assessee's cross-objection sought to quash this addition, but no substantive explanation was provided to counter the AO's finding. The Tribunal found no infirmity in the CIT(A)'s confirmation of the addition.Conclusion: The addition of Rs. 1,70,000/- was rightly sustained as unexplained income under section 68.Issue (e): Effect of findings against related party on the assessee's transactionsRelevant legal framework and precedents: The principle that findings against related parties in search and seizure operations and assessments can influence the treatment of transactions in the assessee's hands, especially where the assessee is a conduit or part of a group engaged in accommodation entries.Court's interpretation and reasoning: The Tribunal noted that the additions in the hands of Sh. Ashok Kumar Tyagi and related companies were final and undisputed. The assessee was found to be a paper company used by this group for accommodation entries. Therefore, the genuineness of the transactions in the hands of the assessee did not require further examination.Key evidence and findings: The AO's orders under section 153A against Sh. Ashok Kumar Tyagi and M/s MGC Estate P. Ltd., and the findings of commission income additions in their hands, were pivotal.Application of law to facts: Since the assessee was a mere entry operator with no beneficial interest or income from the transactions, the Revenue's attempt to treat the Rs. 10 crore addition as unexplained income in the hands of the assessee was not sustainable.Treatment of competing arguments: The Revenue's argument that the assessee failed to establish the genuineness of the transactions was rejected on the basis that the primary additions were made against the related party, and the assessee was only a conduit.Conclusion: The Tribunal upheld the CIT(A)'s finding that no addition was warranted against the assessee on account of the Rs. 10 crore transaction, given its role as a pass-through entity and the finality of findings against related parties.3. SIGNIFICANT HOLDINGSThe Tribunal preserved and affirmed the following crucial legal reasoning:'The appellant company was found to be only paper company which was engaged only in giving accommodation entries to the beneficiaries. Thereby, the unaccounted income of M/s MGC Estate P. Ltd. have been routed through the appellant company by layering the funds and the appellant company was used as an entry operator, therefore, addition in the case of M/s MGC Estate P. Ltd. was made under section 68 of the IT Act of Rs. 10 crore being the ultimate beneficiary of the modus operandi adopted by the relevant concerns with the help of the appellant (the company owned by Sh Ashok Kumar Tyagi). Since, the appellant company was held to be only entry operator during the course of investigation/assessment proceedings, therefore, addition made in its hand deserve to be deleted.'Core principles established include:(i) Where an assessee is found to be a mere conduit or paper company used for accommodation entries, unexplained credits routed through it cannot be treated as its income under section 68;(ii) The primary onus to prove the identity and creditworthiness of creditors and genuineness of transactions remains with the assessee, but where the assessee is merely an entry operator and does not derive benefit, additions in its hands are not justified;(iii) Additions made in the hands of the ultimate beneficiary of accommodation entries are sustainable and final, and the genuineness of transactions in the hands of pass-through entities need not be doubted;(iv) Failure to explain the nature and source of unexplained bank deposits justifies additions under section 68.The final determinations on each issue are:(a) The Rs. 10 crore addition credited as share capital and share premium was rightly deleted in the hands of the assessee company;(b) The addition of Rs. 1,70,000/- bank deposit was rightly sustained as unexplained income;(c) The assessee was a mere pass-through entity and paper company used for accommodation entries, and the additions in the hands of related parties stand final and conclusive;(d) Both the Revenue's appeal and the assessee's cross-objection were dismissed as meritless.