2016 (6) TMI 519 - AT - Income Tax

Rate of commission on accommodation entries - Held that - Assessee buys bogus purchase bills and also sales bogus purchase bills. As already stated by the assessee that he is earning commission from bogus entries of issuing sales bills and then he is also buying purchase bills from one Sh. Vaivab Jain therefore he may also be incurring some cost out of that. Further the assessee is also doing this business through many brokers as per para no 3.1 of the assessment order and there might be some cost of those brokers also. Further, in the statement assessee has also submitted the comparative rate of brokerage being charged by other brokers which is also in the range of 0.25% to 0.75%. Further assessee is issuing the bills of goods and also receiving the bills of those goods which are fictitious. As these bills are fictitious to prove their genuineness before VAT authorities assessee need to make payment of VAT or CST. For this assessee submitted the purchase ledger as well as the bank book. Accordingly to the VAT laws it was submitted by the assessee that he has to calculate input VAT and output VAT and pay the differential VAT. The difference between the cheque amount and net amount should also take care of all these nitty gritty of the accommodation transactions. In view of above facts we are of the view that ld CIT(A) has applied correct estimate of rate of commission income @2% which is reasonable and appropriate looking to the facts and circumstances of the case. In view of this we confirm the finding of the ld CIT(A) for all these years i.e. AY 2007-08, to 2009-10. Coming to cross objection filed by the assessee which is against the confirmation of addition by the ld CIT(A) of 2% of the commission on accommodation entries. While deciding the appeal of the revenue we have provided reasons that why CIT(A) is correct in estimating the commission income of the assessee @2% and thereafter granting deduction of 0.5% of the commission income as expenditure. For the same reasons we dismiss the cross objection filed by assessee for all the years. - Decided against assessee.

Summary

Issues Involved:
1. Determination of the rate of commission income earned by the assessee from providing accommodation entries.
2. Validity of the reduction of the commission rate from 5.67% to 2% by the CIT(A).
3. Consideration of VAT and CST in the determination of commission income.
4. Cross objections filed by the assessee against the retention of 2% commission addition.

Issue-wise Detailed Analysis:

1. Determination of the rate of commission income:
The case involves the assessee, who was found to be providing accommodation entries through bogus purchase bills. A search operation under section 132 of the Income Tax Act revealed that the assessee was charging a commission for these entries. The Assessing Officer (AO) determined the commission income to be 5.67% based on seized documents and prepared a chart showing the transactions and commissions. The assessee contended that the commission ranged between 0.25% to 0.75%, arguing that the AO's calculation included VAT and CST, which should be adjusted.

2. Validity of the reduction of the commission rate from 5.67% to 2% by the CIT(A):
The CIT(A) reduced the commission rate from 5.67% to 2%, considering it more reasonable. The CIT(A) noted that there is no fixed rate for such transactions and that the market practices and needs influence the rates. The CIT(A) also considered the assessee's statements during the search and subsequent proceedings, where the commission rate was stated to be between 0.25% to 0.75%. The CIT(A) found the AO's rate of 5.67% to be on the higher side and directed the AO to adopt a 2% commission rate, allowing a 0.5% deduction for expenses.

3. Consideration of VAT and CST in the determination of commission income:
The assessee argued that the AO's calculation of commission included VAT and CST, which should be adjusted. The CIT(A) accepted this argument, noting that the assessee had to make payments for VAT and CST to maintain the legitimacy of the fictitious transactions. The CIT(A) considered the purchase ledger and bank book provided by the assessee, which showed the payments made for VAT and CST.

4. Cross objections filed by the assessee against the retention of 2% commission addition:
The assessee filed cross objections against the CIT(A)'s retention of the 2% commission addition. However, the tribunal upheld the CIT(A)'s decision, finding the 2% rate to be reasonable and appropriate given the facts and circumstances of the case. The tribunal noted that the CIT(A) had correctly estimated the commission income and allowed a deduction for expenses.

Conclusion:
The tribunal dismissed the appeals of the revenue and the cross objections of the assessee for the assessment years 2007-08, 2008-09, and 2009-10. The tribunal confirmed the CIT(A)'s decision to reduce the commission rate to 2% and allow a 0.5% deduction for expenses, finding it to be a fair and reasonable estimation based on the evidence and market practices. The order was pronounced in the open court on 28/04/2016.