2020 (1) TMI 686 - AT - Income Tax

Addition on undisclosed income u/s. 68 - Loss from the illegal activity of providing accommodation entry - Survey proceedings - HELD THAT - In this case on hand the assessee for this year had estimated his undisclosed income to the tune of ₹ 3 cr. from his illegal activity of providing accommodation entry after survey on his premises on 22.08.2014. Since the survey in his premises attracted media attention his customers/beneficiaries distanced from him, which resulted in assessee losing ₹ 1.68 cr. (non-recovery of commission from the illegal activity of providing accommodation entry) so, we find that the loss occurred to the assessee springs directly from the carrying on of the business of providing accommodation entry to the beneficiaries and is thus incidental to it has to be allowed as a deduction. Though the AO and Ld. CIT(A) noted that the assessee is in the illegal activity of providing accommodation entry did not appreciate the true significance of the distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of law committed in a business inherently unlawful and constituting a normal incident of it's activity CIT Vs. Piara Singh 1980 (5) TMI 2 - SUPREME COURT and, therefore, in the present case in hand since the assessee has suffered the loss in his unlawful activity of giving accommodation entry which resulted in the beneficiaries not giving the income to the assessee is an allowable deduction. Thus, even if the assessee's estimation of ₹ 3 cr. as his income as per the disclosure petition is accepted, still the assessee's loss of ₹ 1.68 cr. has to be given as deduction and, therefore, the addition in any case was not warranted. So, we direct deletion of ₹ 1.68 cr. as discussed supra. - Appeal of assessee is allowed.

Summary

Issues Involved:
1. Confirmation of addition of ?1,62,00,000 as undisclosed income under Section 68 of the Income Tax Act, 1961.
2. Validity of assessee's explanation for the discrepancy between disclosed income and actual income filed in the return.
3. Consideration of the loss incurred due to non-recovery of commission as a deductible business loss.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of ?1,62,00,000 as Undisclosed Income:
The primary issue in this appeal is the action of the Ld. CIT(A) in confirming the addition made by the AO of ?1,62,00,000 as undisclosed income under Section 68 of the Income Tax Act, 1961. The assessee had initially disclosed ?3,00,00,000 as undisclosed income during a survey operation conducted on 22.08.2014. However, in the income tax return filed for AY 2015-16, the assessee declared a total income of ?1,49,11,110, which included only ?1,38,00,000 as disclosed income. The AO added the difference of ?1,62,00,000 to the total income, treating it as undisclosed income.

2. Validity of Assessee's Explanation for Discrepancy:
The assessee explained that the adverse publicity following the survey operation led to a loss of reputation and credibility, resulting in non-payment of the balance commission income by business groups. The assessee argued that the actual income received was offered for taxation, and the remaining amount was non-recoverable. The AO and Ld. CIT(A) did not accept this explanation, considering it an afterthought to evade the initial disclosure of ?3,00,00,000. The Tribunal, however, acknowledged that the assessee's estimation of ?3,00,00,000 was based on projected calculations and that the subsequent adverse developments justified the reduced actual income of ?1,38,00,000.

3. Consideration of Loss as Deductible Business Loss:
The Tribunal analyzed whether the non-recovery of the balance commission could be treated as a deductible business loss. It was noted that the assessee was engaged in providing accommodation entries, an illegal activity. The Tribunal referred to the Supreme Court's rulings in CIT Vs. Piara Singh (1980) 124 ITR 40 (SC) and Dr. T. A. Quereshi Vs. CIT (2006) 287 ITR 547 (SC), which allow the deduction of business losses incurred in the course of illegal activities. The Tribunal concluded that the loss of ?1,62,00,000 was incidental to the assessee's illegal business and should be allowed as a deduction.

Conclusion:
The Tribunal found that the assessee's explanation for the discrepancy between the disclosed and actual income was plausible and supported by the adverse developments following the survey. It held that the non-recovery of the balance commission income was a deductible business loss, as it directly resulted from the illegal activity of providing accommodation entries. Consequently, the addition of ?1,62,00,000 as undisclosed income was not warranted, and the appeal of the assessee was allowed. The Tribunal directed the deletion of ?1,62,00,000 from the total income.