2025 (12) TMI 406 - AT - Income Tax

Reassessments u/s 147 invalid where AO shifts from alleged beneficiary to entry provider; commission estimation significantly reduced

ITAT set aside the reassessments u/s 147 as invalid, holding that the AO recorded reasons based on alleged beneficiary status of bogus accommodation ... Reopening of assessment u/s 147 - reliance on information gathered in search action and further information received on the basis of insight portal of department that assessee is a beneficiary of bogus accommodation entry of loans and advances and sale and purchase - HELD THAT:- On perusals of reasons recorded, we find that reassessment was initiated on the basis of information that a search action was carried out on assessee and on the basis of information on insight portal that the assessee is a beneficiary of bogus accommodation entry in the form of loans and advances and sale and purchase aggregating of Rs. 1.66 crore. We find that no such addition as a beneficiary of accommodation entry was made against the assessee. Assessee was treated as accommodation entry provider. His books of account were rejected and his income was estimated as commission income of Rs. 1.26 crore being 0.5% on total sale and purchase and Rs. 6.08 lacs being 3.00% of total loans and advances assumed by assessing officer. Thus, no additions were made on the basis of reasons recorded. Similar reasons for A.Y. 2018-19 were recorded against the assessee that assessing officer was having information from insight portal through DDIT (Inv.), Surat wherein the assessee has made transaction with nine entities who were indulged in activities of routing funds in gems and Diamonds Company on multiple occasions. However, no such addition was made by assessing officer. Rather, additions were made on account of commission income for providing sale and purchase and loans and advances were made. We find that similar view was taken in Mohmed Juned Dadani [2013 (2) TMI 292 - GUJARAT HIGH COURT] Thus, we may safely conclude that assessing officer recorded reasons on a particular issue about escapement of income and no such additions were made, which were basis of such reasons recorded, however, the additions were made on different issue. Thus, no such addition is justified in the reassessment proceedings. Thus, all six appeals are allowed on primary submission of ld. AR of the assessee. Addition on account of sale and purchase entry @0.5% of such transaction and @ 3.00% of loan amount - We have independently examined the assessment order, order of ld CIT(A) and the nature of additions made by assessing officer. On considering all such material and by following the ratio order in Alag Securities (P) Ltd [2020 (6) TMI 304 - BOMBAY HIGH COURT] direct the assessing officer to restrict the addition of commission income on the transaction of loans to the extent of 0.50% on outstanding liability of loan at the end of financial year and in case of sale and purchase to the extent of 0.40% of such transaction. Thus, all the assesses are allowed part relief on estimation of commission income. AO while estimating commission income considered all intra group transaction. Therefore, considering the fact that no such commission income can be earned by assessee from its own transaction. The assessing officer is directed to exclude such transactions which are within group concern. Thus, the grounds of appeal with regard to rate of commission are allowed and the assessing officer is directed to exclude the transaction of group concerns while computing the commission income. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Reassessment validity where no addition is made on the very issue forming the recorded reasons for reopening under sections 147/148. 1.2 Legality of making additions on issues different from those forming the basis of 'reasons to believe' in reassessment proceedings. 1.3 Reasonableness of estimation of commission income for accommodation entries in sales, purchases, and loans, including applicable commission rates. 1.4 Whether intra-group transactions are to be excluded while computing commission income of an accommodation entry provider. 1.5 Status of remaining grounds not argued at the hearing. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Reassessment validity where no addition is made on the issue forming the recorded reasons; legality of additions on different issues in reassessment Legal framework (as discussed): 2.1 The Court examined the scope of section 147 read with section 148, with reference to the ratio of the jurisdictional High Court in 'CIT v. Jet Airways (I) Ltd.' and 'PCIT v. Lark Chemicals (P) Ltd.' (SLP dismissed by Supreme Court), and the decision of the Gujarat High Court in 'CIT v. Mohmed Juned Dadani'. 2.2 As per these decisions, the Assessing Officer must first assess or reassess 'such income' which formed the basis of the belief of escapement of income. Only upon doing so can any other income which comes to notice during the proceedings be assessed. If the original issue is ultimately not added, the Assessing Officer cannot independently tax other income under the same reassessment; a fresh notice under section 148 would be necessary. Interpretation and reasoning: 2.3 In the identified six appeals, the recorded reasons uniformly asserted that the assessees were beneficiaries of bogus accommodation entries in the form of loans, advances, sales or purchases, based on search information and Insight portal data. 2.4 On perusal of the reasons and assessment orders, the Court found that: * In the lead case, reassessment was initiated on information that the assessee was a beneficiary of accommodation entries aggregating to specified amounts. However, no addition was made in the hands of the assessee as beneficiary. Instead, the assessee was treated as an accommodation entry provider, books were rejected, and commission income was estimated on sales, purchases and loans. * Similar divergence between recorded reasons and actual additions was found in the remaining five appeals: reasons alleged beneficiary status or certain specific escapement; final assessments treated the assessees as entry providers and only estimated commission income. 2.5 The Court held that the additions made were on issues distinct from, and not traceable to, the precise escapement alleged in the recorded reasons. The income for which 'reason to believe' was formed (beneficiary accommodation entries or specified suspicious transactions) was not brought to tax at all. 2.6 Applying the principle laid down in 'Jet Airways (I) Ltd.' and 'Lark Chemicals (P) Ltd.', the Court noted that where the income which formed the sole basis of reopening is ultimately not assessed, the Assessing Officer is not empowered under the same reassessment to tax other income discovered later. Such action renders the reassessment invalid. Conclusions: 2.7 Since no addition was made on the very issues forming the basis of the recorded reasons, and the additions were confined to a different head (commission as entry provider), the reassessments in the six identified appeals were held to be bad in law. 2.8 All six such appeals were allowed by annulling the reassessment orders. Issue 3: Reasonableness of estimation of commission income for accommodation entries in sales, purchases, and loans Legal framework (as discussed): 3.1 The Court proceeded on the basis that the assessees were accommodation entry providers and that estimation of commission income was permissible, but subject to judicially accepted norms on reasonableness. 3.2 The Court considered: * 'PCIT v. Alag Securities (P) Ltd.' (Bombay High Court), upholding commission income estimation in similar accommodation entry cases at around 0.1% to 0.15%. * Decision of the Surat Bench in 'Sanjay Kumar Choudhary (HUF) v. ACIT' concerning commission rates and treatment of intra-group transactions. * Recent Mumbai Tribunal decision in 'Buniyad Chemicals Ltd. v. ACIT', which, following earlier Tribunal and Bombay High Court views (including in 'Goldstar Finvest Pvt. Ltd.'), restricted commission to 0.15% of deposits in accommodation entry cases and accepted that estimation necessarily involves approximation guided by precedent. Interpretation and reasoning: 3.3 In the remaining appeals (other than the six allowed in full), the assessments arose from search and investigation findings on a group alleged to be providing accommodation entries in diamonds and loans. The Assessing Officer: * Rejected the books of account. * Estimated commission at 0.5% of total sales and purchases. * Estimated commission at 3% of total loans and advances. 3.4 The Court noted that the Assessing Officer claimed to rely on statements of key persons (including statement answers indicating commission/premium of 10 to 14 paisa per hundred rupees on daily outstanding), but his working in the order extrapolated this to 2%-3% on loans and 0.5% on sales/purchases, without cogent supporting material. 3.5 On scrutiny of the relevant statement (particularly answer to question referring to 12 paisa per Rs.100 on daily outstanding), the Court held that the Assessing Officer's conclusion that commission ranged from 10 to 50 paisa per hundred, representing 10% to 50% of interest charged, and justifying 2%-3% on loans and 0.5% on sales/purchases, was contrary to the statement itself and unsupported by independent evidence. 3.6 The Court took note that in comparable accommodation entry cases, including those referred to in 'Alag Securities (P) Ltd.' and 'Buniyad Chemicals Ltd.', commission rates judicially upheld were in the narrower band of about 0.1%-0.15%, and that the tax department itself had in other entry-provider cases generally accepted substantially lower rates than 3% on loans and 0.5% on sales/purchases. 3.7 Recognising that estimation of commission is necessarily approximate but must be based on evidence and consistent with prevailing judicial norms, the Court found the Assessing Officer's estimates of 3% on loans and 0.5% on sales/purchases to be excessive and not justifiable on the record. Conclusions: 3.8 Following the ratio of the jurisdictional High Court in 'Alag Securities (P) Ltd.' and consonant Tribunal decisions, the Court directed that: * Commission on loan transactions be restricted to 0.50% of the outstanding loan liability at the end of the financial year. * Commission on sales and purchase transactions be restricted to 0.40% of such transactions. 3.9 All assessees in the second group of appeals were granted partial relief by reducing the commission additions to the above rates. Issue 4: Exclusion of intra-group transactions from computation of commission income Interpretation and reasoning: 4.1 The Court observed that, while estimating commission income, the Assessing Officer had included transactions between group concerns (intra-group or within the same controlled entities) in the base figures for sales, purchases, and loans. 4.2 Referring to the principle recognised in the Surat Bench decision in 'Sanjay Kumar Choudhary (HUF) v. ACIT' and the general commercial logic, the Court held that an entity cannot be said to earn commission income from its own group concerns for mere routing of internal funds. 4.3 Therefore, including intra-group transactions in the turnover base would artificially inflate the commission income, contrary to the real nature of the activity. Conclusions: 4.4 The Court directed the Assessing Officer, in all appeals where commission estimation survives, to exclude intra-group transactions (transactions within the assessee's own group concerns) while computing commission income. Issue 5: Status of other grounds not argued Interpretation and reasoning: 5.1 The assessees had raised multiple additional grounds (including challenges to rejection of books under section 145(3), levy of interest and initiation of penalty, and other legal/contentious issues). 5.2 At the time of hearing, the authorised representative confined submissions to the two principal sets of issues: (i) validity of reassessment where no addition was made on the recorded reasons, and (ii) reasonableness and scope of commission estimation (including intra-group exclusion). No arguments were advanced on the remaining grounds. Conclusions: 5.3 The Court treated all other grounds, on which no submissions were made, as not pressed and dismissed them accordingly.