2025 (9) TMI 425 - AT - Income Tax

Broker providing accommodation entries taxed on unexplained deposits at 0.2% brokerage; matter remitted to AO

ITAT KOLKATA - AT held that the assessee, a commodity broker providing accommodation entries, failed to disclose certain bank accounts and deposits. ... Unexplained cash credit u/s 68 - accommodation entry receipts - onus to prove - HELD THAT:- We find that undisputedly the assessee is engaged in the business of trading in commodities and was thereby providing accommodation entries to various beneficiaries. We have perused the evidences before us, wherein there is no doubt about the business of the assessee. How the income to be estimated and assessed qua deposits made in the undisclosed bank accounts by the assessee? - Since, it is undisputed that assessee is a broker in commodity stock exchange and has been providing services accordingly, in commodity transactions and charging commission at the rate of 2% as brokerage. It is also undisputed that the assessee has not disclosed these bank accounts in the return filed during the year. There is also no dispute as to the fact that money received / deposited in the bank accounts in cash and cheques were already transferred to the beneficiaries, immediately and all these entries are supported with the contract notes. Therefore, considering the factual matrix of the case and the rate of commission at which the assessee carries on business of broking in commodity exchange, we are of the view that it would be reasonable if the assessee deposits in undisclosed the bank accounts are brought to tax by applying the commission of 0.2% on the amount of total deposits which the commission charged by the assessee in the normal course of business on commodity stock exchange. Accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to make the addition at the rate of 0.2% of the total deposit. Assessee appeal partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether deposits in undisclosed bank accounts can be treated as unexplained cash credit under section 68 when the assessee's admitted business involved providing accommodation entries to beneficiaries who converted cash into bogus intra-day commodity trading profits. 2. Whether the Assessing Officer's method of estimating taxable income by taking the peak credit on a single day is a reasonable mechanism to quantify unexplained cash credits under section 68 in the factual matrix of accommodation-entry/broking transactions. 3. Whether, on the facts that the assessee is a commodities broker charging commission/brokerage, the proper measure of taxable income from the undisclosed bank deposits is the commission ordinarily earned (0.2% applied by the Tribunal) rather than the entire deposit amount. 4. Whether the Assessing Officer was obliged to obtain third-party confirmations or carry out further inquiries before rejecting the assessee's explanation, given the assessee's admission as to modus operandi and the practical difficulty of obtaining confirmations from beneficiaries of accommodation entries. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 68 to deposits in undisclosed bank accounts used for accommodation entries Legal framework: Section 68 permits treating unexplained cash credits as the assessee's income where the source is not satisfactorily explained. The Assessing Officer must examine documentary material and explanations offered by the assessee. Precedent Treatment: The assessee relied on case law (not specified in the record) but the Tribunal found those authorities inapplicable on the facts. Interpretation and reasoning: The Tribunal accepted the factual finding that the assessee carried on broking/accommodation-entry activity and that undisclosed bank accounts received deposits that were routed as bogus intra-day profits to beneficiaries. Given the admission of the modus operandi, the fundamental applicability of section 68 to unexplained credits was not disputed. The Tribunal therefore proceeded on the basis that some addition under section 68 could be justified unless the deposits were satisfactorily explained as mere pass-through of third-party funds and only the commission earned represented assessable income. Ratio vs. Obiter: Ratio - section 68 applies to deposits in undisclosed bank accounts where the explanatory evidence is deficient or the deposits represent benefits of accommodation entries; obiter - discussion of the modus operandi as background to quantify income. Conclusion: Section 68 is a viable provision to address the undisclosed deposits; the remaining question is quantification and adequacy of inquiries. Issue 2 - Reasonableness of AO's peak single-day credit method to estimate income Legal framework: Quantification under section 68 must be reasonable and based on business realities and available evidence; assessment methodology should approximate actual income attributable to the assessee's activities. Precedent Treatment: The Tribunal reviewed the AO's approach and the CIT(A)'s confirmation but found no cited authority supporting the peak-day methodology as a sound measure in this factual setting. Interpretation and reasoning: The Tribunal held that taking the peak deposit/credit on one day (26.03.2010) as the entire assessable income was not a reasonable mechanism. The AO's approach ignored the assessee's admitted business model (brokerage/commission on broking transactions) and documentary records (contract notes, bank statement showing immediate transfers to beneficiaries). Given that deposits were followed by transfers and supported by contract notes on a sample basis, the Tribunal concluded that an estimation based on the business commission rate would better reflect income realistically attributable to the assessee. Ratio vs. Obiter: Ratio - the peak single-day credit method is an unreasonable and unacceptable mechanism to quantify income from such pass-through accommodation entries where evidence shows routine broking/commission activity; obiter - remarks on the sufficiency of the sample contract notes and transactional pattern. Conclusion: The AO's peak-credit estimation is set aside as unreasonable; the quantification must reflect the assessee's brokerage role and be based on a commission percentage of total deposits. Issue 3 - Proper quantification of taxable income: commission rate (0.2%) vs entire deposits Legal framework: Where deposits represent receipts in the course of a business and simultaneously pass-through payments to third parties, only the net income (e.g., commission/brokerage) ordinarily attributable to the taxpayer should be taxed; tax should be assessed on a reasonable estimate consistent with the taxpayer's business practice and supporting records. Precedent Treatment: The assessee claimed entitlement to be assessed only on commission; the CIT(A) rejected that approach and taxed the peak credit; the Tribunal accepted the commission-based approach on the record facts. Interpretation and reasoning: The Tribunal noted that (a) the assessee's business is broking in commodities, (b) the assessee charged commission in the normal course (evidence indicated a brokerage rate), and (c) contract notes and bank entries showed immediate onward transfers to beneficiaries. Taking these facts together, the Tribunal found it reasonable to treat the total deposits in the undisclosed accounts as pass-through sums and to tax only the commission earned. The Tribunal adopted a commission rate of 0.2% (expressed as 0.20 per Rs.100) and directed the Assessing Officer to compute additions by applying 0.2% to the aggregate deposits in the undisclosed accounts for each assessment year, thereby reducing the addition substantially compared with taxing the whole deposits. Ratio vs. Obiter: Ratio - where deposits are demonstrably pass-through by a broker providing accommodation entries, taxation under section 68 should be confined to the broker's commission, reasonably estimated (here, 0.2%); obiter - choice and justification of the exact commission percentage based on the factual material before the Tribunal. Conclusion: The Tribunal directed that additions be limited to commission at the rate of 0.2% of aggregate deposits in the undisclosed bank accounts: (a) for AY 2010-11, 0.2% of Rs.1,45,79,027 resulting in an addition of Rs.29,158 and deletion of the balance of the AO's addition; (b) for AY 2011-12, 0.2% of Rs.4,76,52,126 resulting in an addition of Rs.95,304 and deletion of the balance. Issue 4 - Adequacy of AO's enquiries and requirement for third-party confirmations Legal framework: The Assessing Officer has the duty to inquire and verify explanations; however, the extent of inquiry required turns on factual practicability and the nature of the transactions. Where the taxpayer admits the modus operandi and where third parties benefiting from accommodation entries are unlikely to confirm transactions, the absence of confirmations is less fatal to the department's case. Precedent Treatment: The CIT(A) upheld the AO's decision in part on the ground that confirmations could not reasonably be obtained, given the admitted accommodation-entry scheme; the Tribunal accepted that further inquiry for confirmations was not obligatory in these circumstances. Interpretation and reasoning: The Tribunal observed the assessee had itself described the scheme and, by doing so, recognised practical impossibility of obtaining confirmations from beneficiaries. Given the admissions and documentary patterns (contract notes, transfer activity), the Tribunal concluded there was no omission by the AO in failing to secure confirmations; still, the AO's quantification method remained unreasonable and was replaced by the commission-based estimate. Ratio vs. Obiter: Ratio - where the taxpayer admits participation in accommodation-entry arrangements and beneficiaries are unlikely to confirm, the AO is not necessarily obliged to obtain third-party confirmations before making an addition; obiter - caveat that each case depends on its factual matrix and documentary material. Conclusion: No infirmity in the AO's decision to proceed without confirmations in the particular factual context, but the AO's chosen measure of income required correction as set out above.