2016 (3) TMI 1449 - AT - Income Tax

Addition u/s 68 - unsecured loans/deposits - HELD THAT - We find that the issue in question is covered in favour of the assessee and against the Revenue by the decision in the case Vijay Conductors India Pvt.Ltd 2015 (9) TMI 1519 - DELHI HIGH COURT wherein had upheld the order of the Tribunal Settlement Commission and determined the income of Mr. S.K. Gupta without making any addition for unexplained cash credit. During the course of assessment Proceedings of the intermediary companies, including the Respondent Assessees, AO sought directions from the ACIT u/s 144-A. Additional CIT passed an order in which after discussing the facts he inter alia directed that it would be in the best interest of the Revenue to tax these transactions in the hands of beneficiaries and Mr. S.K. Gupta without making any additions on this account in the hands of conduit entities . The said orders of the Settlement Commission or of the Additional CIT were binding on the AO. It is not in dispute that the Assessees are the conduit entities and not the beneficiaries. Consequently, the order of the ITAT deleting the addition u/s 68 in their hands does not suffer from any legal infirmity. Respectfully following the decision in the case of PRO CIT vs. Vijay Conductors India Pvt.Ltd. and other cases 2015 (9) TMI 1519 - DELHI HIGH COURT we delete the addition and allow the claim of the assessee.

Summary

Issues Involved:
1. Validity of addition under Section 68 of the Income Tax Act, 1961.
2. Identity, creditworthiness, and genuineness of transactions.
3. Treatment of conduit companies in tax assessments.
4. Applicability of directions under Section 144A.
5. Impact of the Settlement Commission's order.
6. Double taxation and multiple entries in bank accounts.
7. Protective addition and specific reliefs on certain amounts.

Detailed Analysis:

1. Validity of Addition under Section 68 of the Income Tax Act, 1961:
The primary issue revolves around the addition of Rs. 62,70,19,448 under Section 68 of the Income Tax Act, which pertains to unexplained cash credits. The assessee's contention was that it acted merely as a conduit for routing funds and that these credits should not be taxed in its hands. The Tribunal found that the issue was covered in favor of the assessee by the Jurisdictional High Court's decision in the case of PRO CIT vs. Vijay Conductors India Pvt. Ltd., where it was held that conduit entities should not have such additions under Section 68.

2. Identity, Creditworthiness, and Genuineness of Transactions:
The Assessing Officer (AO) had questioned the identity, creditworthiness, and genuineness of the creditors. Despite multiple opportunities, the assessee failed to provide complete details such as PAN and addresses of the creditors. The Tribunal noted that the assessee's inability to substantiate these elements led to the AO's decision to treat the credits as unexplained income.

3. Treatment of Conduit Companies in Tax Assessments:
The assessee argued that it was merely a conduit among 32 companies operated by Sh. S.K. Gupta, who provided accommodation entries. The Ld. CIT(A) disagreed with the view that no addition should be made in the hands of conduit companies, stating that such a stance would inadvertently validate the credits in the books of beneficiary companies. The Tribunal, however, referenced the High Court's decision, which supported the non-taxation of conduit entities.

4. Applicability of Directions under Section 144A:
The Additional CIT had issued directions under Section 144A, suggesting that additions should be made in the hands of Sh. S.K. Gupta and the beneficiaries, not the conduit entities. The Tribunal upheld this view, emphasizing that the directions were binding on the AO and supported by the Settlement Commission's order.

5. Impact of the Settlement Commission's Order:
The Settlement Commission had quantified Sh. S.K. Gupta's income based on a percentage of his total turnover, acknowledging that various companies, including the assessee, were used as conduits. The Tribunal found that the Settlement Commission's order did not support the applicability of Section 68 to the assessee's case, as it primarily addressed the income of Sh. S.K. Gupta.

6. Double Taxation and Multiple Entries in Bank Accounts:
The assessee contended that certain amounts were taxed multiple times due to transfers between its bank accounts. The Ld. CIT(A) and AO did not grant relief, citing the unreliability of the assessee's books of accounts. The Tribunal did not specifically address this issue in detail but focused on the broader applicability of Section 68.

7. Protective Addition and Specific Reliefs on Certain Amounts:
The Ld. CIT(A) had confirmed a protective addition of Rs. 19,55,41,190 and denied relief for amounts transferred from FDRs to bank accounts and interest received on FDRs. The Tribunal, following the High Court's precedent, allowed the assessee's appeal, thereby nullifying these additions and confirming that conduit entities should not face such tax implications.

Conclusion:
The Tribunal, respecting the Jurisdictional High Court's decision, deleted the addition of Rs. 62,70,19,448 under Section 68 and allowed the assessee's appeal, emphasizing that conduit entities should not be taxed for unexplained cash credits. The appeal was thus allowed, and the order was pronounced in open court on 01st March 2016.