2017 (1) TMI 1780 - AT - Income Tax

Addition made as unexplained capital - fictitious capital - survey action u/s 133A - capital building racket was organized by one Surat based Chartered Accountant, Shri Pankaj Danawala, by alluring gullible low income assessees and showing fictitious entries in their balance-sheets filed with their income tax returns incorporating fictitious capital built up. - HELD THAT - Additions have been made only based on the fictitious balance-sheet entries which are accepted by Shri. Pankaj Danawala to be his creation and the assessees had no role therein. Moreover, the fictitious capital has never been used which were paper entries only thus no benefit ever accrued to assessee s. Also find merit in the contention of assessee that in the case of Smt Leenaben Kantilal Nakrani 2010 (6) TMI 892 - ITAT AHMEDABAD the addition was deleted by ld. CIT(A) and the Revenue s appeal was dismissed by ITAT even when the fictitious capital was used in that case by said M/s. M.D. Patel Group and a protective addition was made in the hands of Smt Leenaben. In clear distinction to these facts in the case of assessees in question, the fictitious capital was not at all used or derived any benefit from Shri Danawala or M/s. M.D. Patel Group and the Department has not controverted these facts. Thus, the assessees at the most are guilty of falling prey to the design of an unscrupulous Chartered Accountant who created nefarious design and allured the assessees without any advantage having accrued to them. In the light of these facts, circumstances, observations and following ITAT judgment in the case of Smt Leenaben Kantilal Nakrani (supra), there is no justification in making addition in each case, which is deleted. The assessees appeals are thus allowed.

Summary

Issues Involved:
1. Confirmation of addition of ?17,00,000/- as unexplained capital.
2. Validity of the balance-sheet entries prepared by Shri Pankaj Danawala.
3. Use and existence of fictitious capital entries.
4. Comparison with the case of Smt. Leelaben Kantilal Nakrani.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of ?17,00,000/- as Unexplained Capital:
The primary issue in both appeals is whether the addition of ?17,00,000/- as unexplained capital, confirmed by the Learned Commissioner of Income-Tax (Appeals), was justified. The assessees argued that the capital was fictitiously created by Shri Pankaj Danawala, a Chartered Accountant, without their active involvement or benefit. The Assessing Officer (AO) rejected this explanation, stating that the capital was not shown in the previous year’s balance sheet and thus remained unexplained. The AO added ?17,00,000/- to the total income of each assessee and initiated penalty proceedings for concealment of income by furnishing inaccurate particulars.

2. Validity of the Balance-Sheet Entries Prepared by Shri Pankaj Danawala:
The balance-sheet entries were allegedly fabricated by Shri Pankaj Danawala, who admitted to creating fictitious capital for various assessees. The assessees claimed that these entries were never used and were merely paper entries. The AO, however, did not accept this contention, stating that the capital was shown as advances in the balance sheet for the year under consideration and not in the previous year, thus treating it as unexplained.

3. Use and Existence of Fictitious Capital Entries:
The assessees argued that the fictitious capital entries were never utilized, and no real income or assets were derived from them. They contended that the entries were created by Shri Pankaj Danawala for potential future use, which never materialized. The CIT(A) dismissed these claims, stating that the assessees failed to provide a proper explanation for the entries. However, the Tribunal found merit in the assessees' argument that the fictitious capital was never used and that the balance-sheet entries were solely the creation of Shri Pankaj Danawala.

4. Comparison with the Case of Smt. Leelaben Kantilal Nakrani:
The Tribunal referred to the case of Smt. Leelaben Kantilal Nakrani, where similar fictitious entries created by Shri Pankaj Danawala were deleted by the CIT(A) and upheld by the ITAT. In that case, the fictitious capital was actually used by the M.D. Patel Group, yet the addition was deleted. In contrast, the fictitious capital in the present cases was never used, which strengthened the assessees' position. The Tribunal noted that the Department had not provided any evidence to show that the assessees derived any benefit from the fictitious entries.

Conclusion:
The Tribunal concluded that the additions of ?17,00,000/- in each case were based solely on fictitious balance-sheet entries created by Shri Pankaj Danawala. Since these entries were never utilized and no real income or assets were derived by the assessees, the additions were unjustified. The Tribunal allowed the appeals, deleting the additions and emphasizing that the assessees were victims of the unscrupulous actions of Shri Pankaj Danawala without any advantage accruing to them.

Judgment:
Both appeals filed by the assessees were allowed, and the additions of ?17,00,000/- were deleted.