Bogus share transactions and accommodation entries: limits tax to 2% commission instead of taxing full transaction value

Addition under section 68 challenged as bogus short-term capital loss on shares; the tribunal found the transactions to be pre-arranged accommodation entries and treated the assessee as a conduit, holding that principal amounts did not constitute real income while only the embedded commission represented taxable income. Applying the conduit transaction principle and in absence of reliable evidence of exact commission, the tribunal directed the assessing officer to compute the addition by applying a 2% commission rate on the aggregate value of the non-genuine share transactions; grounds partly allowed.

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Issues: Whether the transactions in share purchase and sale were non-genuine accommodation entries attracting addition under section 68; and if so, whether the entire transaction value can be taxed or only the embedded commission, and the appropriate basis/quantum for such taxation.

Analysis: The record shows that the assessee participated in pre-arranged, layered transactions and acted as a conduit for accommodation entries, with corresponding non-genuine short-term capital loss and gain disclosed. The principal amounts passing through a conduit do not constitute the conduit's income; only the marginal commission or profit retained is taxable. Considering the nature of the transactions, the role of the assessee, and the absence of complete reliable evidence of actual commission, a conservative estimation method is appropriate. A 2% rate on the aggregate value of the non-genuine share transactions is adopted as a reasonable estimate of the commission element to be taxed.

Conclusion: The addition under section 68 treating the entire value of the non-genuine share transactions as income is not sustained; instead, taxable income is to be estimated at 2% of the aggregate value of the impugned purchase and sale transactions, in favour of the assessee to that extent.

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