2025 (10) TMI 354 - AT - Income Tax

Deletion of income-tax addition upheld where assessing officer's finding of conduit/accommodation entries lacked factual support

ITAT upheld the appellate authority's deletion of an income-tax addition, agreeing that the assessing officer's finding-that a company was a conduit ... Undisclosed income of the assessee - AO concluded that the ISRPL was a conduit company engaged in providing accommodation entries - CIT(A) deleted addition - HELD THAT:- CIT(A) has analysed the entire facts of the case carefully and extensively before arriving at his conclusion that the addition deserves to be deleted as based upon proper understanding and appreciation of the facts of the case and therefore we wholly concur with the same. On the issue of reliance upon the order of the lower authorities, we rely upon the order of Global Vantedge Pvt Ltd. [2013 (3) TMI 489 - DELHI HIGH COURT] criticism made by the High Court that the as held Tribunal had “failed to perform its duty in merely affirming the conclusion of the Appellate Assistant Commissioner” is apparently unmerited.” Decided in favour of assesssee. ISSUES PRESENTED AND CONSIDERED 1. Whether the reassessment proceedings initiated under section 147 read with section 153A by issuance of notice under section 148 were valid when reasons to believe relied primarily on statements of directors of a third party and did not account for earlier assessment records. 2. Whether amounts of Rs. 11.54 crore received from a related company (alleged conduit) and subsequently squared up/advanced back constituted undisclosed income/accommodation entries or were genuine inter-company loan transactions forming part of regular business operations. 3. Whether reliance on earlier appellate findings and judicial decisions regarding the source of funds of the alleged conduit company is permissible and, if so, what evidentiary weight such findings carry in determining genuineness of transactions with recipient company. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment proceedings under section 147/148 (Legal framework) Legal framework: Reopening of assessment under section 147/148 requires a valid 'reasons to believe' that income has escaped assessment; such reasons must have a direct nexus and a live link with the opinion formed by the Assessing Officer and should be based on complete and verifiable facts. Precedent Treatment: The Tribunal relied on settled law that sufficiency and justiciability of reasons can be examined where reasons are factually incorrect or not based on complete facts; the Tribunal cited established authority that reasons must have direct nexus with escaped income formation. Interpretation and reasoning: The AO's reasons were founded primarily upon statements of directors of the third-party company (allegedly a conduit) without independent verification of books of accounts or assessment records where the relevant transactions had already been disclosed and assessed under section 153A. The CIT(A) found that the AO did not verify complete facts available on record (including the earlier assessment dated 28.03.2013) and therefore the reasons to believe were not based on complete facts. The Tribunal noted that Revenue did not challenge the CIT(A)'s conclusion on reopening. Ratio vs. Obiter: Ratio - Reopening cannot stand where reasons are founded on incomplete or unverified material that contradicts record and where a direct nexus is absent; reliance solely on third-party statements without independent corroboration is insufficient to sustain jurisdiction under section 147/148. Obiter - Observations on procedural requests for copies of material and timing of notice are explanatory. Conclusions: The reopening under section 148 was held to be bad in law; assessment framed consequent to that reopening assumed nullity. The Court accepted the CIT(A)'s finding and dismissed Revenue's challenge to the legality of reopening. Issue 2 - Genuineness of Rs. 11.54 crore transactions: accommodation entries vs. regular loan transactions (Legal framework) Legal framework: Determination of undisclosed income requires evidence that receipts are not genuine, e.g., accommodation entries, and must be supported by independent corroborative material. Transactions through banking channels, standing alone, do not conclusively prove genuineness. Precedent Treatment: The decision applies CBDT instructions requiring corroborative evidence to sustain allegations of accommodation entries and follows authorities that mere banking channel movement is not decisive. The Tribunal also applied principles that source of funds once established/taxed in one entity impacts subsequent application unless credible evidence to the contrary is available. Interpretation and reasoning: The CIT(A) analyzed ledger/accounts showing running loan accounts between the assessee and the alleged conduit, timing of receipts and repayments, and continuation of such transactions in subsequent years (larger aggregate receipts and repayments leaving a net creditor position). The appellate order in the alleged conduit's own appeal (and High Court confirmation on source of funds for certain years) established that source of funds in that entity was share capital/premium (treated as taxed/clean, though some matters were sub judice). There was absence of independent corroborative evidence that the alleged conduit was engaged in accommodation business for the relevant year; AO had not found transactions with certain groups and had relied on unsubstantiated director statements. The CIT(A) concluded the Rs. 11.54 crore were regular inter-company loan entries transacted through banking channels and for business purposes, not accommodation entries, and deleted the addition. Ratio vs. Obiter: Ratio - Where ledger evidence, pattern of running account, repayments within the year, subsequent large reciprocal transactions, and lack of independent corroboration exist, an addition treating receipts as accommodation entries cannot be sustained. Obiter - Remarks on typical NBFC practices (e.g., showing bad debts) were mentioned by Revenue but not treated as determinative given record evidence. Conclusions: The additions of Rs. 11.54 crore treated as undisclosed income/accommodation entries were deleted as the transactions were held to be genuine inter-company loans supported by books, banking channels and continuity of dealings; AO's contrary inference lacked independent corroboration. Issue 3 - Reliance on earlier appellate/judicial findings about source of funds of the alleged conduit (Legal framework) Legal framework: Findings in earlier assessments and appellate/High Court decisions regarding source of funds of an entity are relevant and may cleanse subsequent applications of those funds unless fresh credible evidence suggests otherwise; administrative instructions require corroboration before treating subsequent applications as accommodation entries. Precedent Treatment: The Tribunal relied on earlier appellate conclusions (and High Court confirmation) in the conduit's own proceedings that the source of funds was share capital/premium and that those additions were deleted; it also referenced CBDT instructions addressing evidence required to prove accommodation entries. Interpretation and reasoning: The Tribunal treated the earlier appellate and High Court findings as materially significant: once the source of funds of the conduit was held to be established/taxed (even if subjudice in other contexts), the subsequent transfers could not be presumed accommodation entries absent credible contrary evidence. The AO had failed to produce corroborative material to contradict the earlier findings. Ratio vs. Obiter: Ratio - Earlier determinations as to source of funds carry evidentiary weight and bar automatic classification of subsequent transfers as accommodation entries unless independent, credible evidence of sham/conduit usage is produced. Obiter - Comments on pending SLP and non-finality were noted but not dispositive because Revenue did not contest the CIT(A)'s legality ruling. Conclusions: Reliance on appellate/High Court findings about the conduit's source of funds was permissible and contributed to the conclusion that subsequent transfers to the assessee were not accommodation entries in absence of credible contradictory evidence. Overall Court Conclusion The Court upheld the CIT(A)'s deletion of the addition of Rs. 11.54 crore and held the reassessment proceedings to be legally infirm where reasons to believe were not based on complete facts; the transactions were held to be genuine inter-company loans supported by accounting records, banking channels and prior appellate findings regarding source of funds of the counterparty. All Revenue grounds were dismissed.