DCIT Vs Santosh Kumar Krishna Shastrula (ITAT Hyderabad)
Knowing an Accommodation Entry Is Not the Same as Earning From It – ₹3.48-Crore Commission Addition Deleted for Missing Money Trail
The Hyderabad Bench of the ITAT has held that an individual cannot be assessed for estimated commission income merely because he was associated with companies which allegedly provided accommodation entries and was aware that their transactions did not involve the physical movement of goods. The Revenue must establish through a money trail, seized material, third-party statement or other corroborative evidence that the commission was actually received by or accrued to the individual.
The assessee, Santosh Kumar Krishna Shastrula, was covered by a search u/s 132 on 23.12.2015 along with the Aster group. Consequent to the search, notice u/s 153A was issued for AY 2015-16. The assessee filed his return declaring a total income of ₹5,90,340.
During the assessment proceedings, the AO examined transactions entered into by two companies—Krishnadhatu Trading Pvt. Ltd. and Krishna Shastrula Trading Pvt. Ltd. These companies had originally been incorporated by the assessee.
The companies had recorded purchases and sales aggregating to approximately ₹214.82 crore during the relevant year. In the statement recorded during the search, the assessee acknowledged that there was no physical movement of goods in respect of these transactions and that they represented accommodation entries.
The AO referred to certain other cases in which accommodation-entry providers were stated to have earned commission ranging between 1.5% and 1.7% of the turnover. Applying an average rate of 1.62% to the turnover of ₹214.82 crore, the AO estimated commission income of ₹3,48,00,938 and assessed the entire amount in the assessee’s individual hands.
The assessment was completed u/s 143(3) r.w.s. 153A at a total income of ₹3,53,91,278.
The CIT(A) deleted the addition. The Revenue challenged that relief before the Tribunal.
The Department contended that incriminating evidence concerning the accommodation entries had been found from the assessee’s residence during the search. It argued that although the assessee was no longer formally a director during the relevant period, he continued to run the operations of the companies and had himself admitted the absence of physical movement of goods.
The Department further argued that the assessee had transferred his shares in the companies but had not received the consideration for that transfer. Since he had incorporated the entities and continued to look after their affairs, he should be regarded as the real beneficiary of the accommodation-entry business.
The assessee responded that he had transferred his shareholding on 04.04.2014 and resigned from the directorship of both companies on 10.04.2014. Thereafter, he was associated with them only as an employee or consultant handling accounting and finance-related functions.
It was submitted that even if the transactions of the companies were treated as bogus, that fact did not establish that the assessee had personally earned commission. No part of the alleged commission was found in his bank accounts, and no cash, ledger, receipt or other seized document evidenced payment to him.
Further, no director, employee, counterparty or alleged beneficiary of the accommodation entries had stated that any commission had been paid or was payable to the assessee.
The Tribunal observed that the transactions were recorded in the books of the two companies and that the corresponding turnover belonged to those companies. The essential question was not merely whether the transactions were genuine, but whether the alleged commission income belonged to the assessee personally.
The CIT(A) had recorded a categorical factual finding that the assessee transferred his shareholding on 04.04.2014 and resigned as director on 10.04.2014. The Department failed to produce material contradicting these findings or demonstrating that the assessee continued as the beneficial owner of the companies.
The AO had not identified any actual receipt of commission. No amount was traced to the assessee’s bank account. No cash or document was seized showing payment to him. There was also no statement from any beneficiary alleging that the assessee had charged or received commission.
The Tribunal acknowledged that the material relied upon by the AO might demonstrate that the companies had undertaken non-genuine transactions. However, there remained a clear missing link between the companies’ transactions and the assessee’s alleged personal income.
The assessee’s statement acknowledging the nature of the transactions did not fill this evidentiary gap. Knowledge of, or involvement in, accounting and operational matters is different from proof that the resulting financial benefit accrued to the person concerned.
In the absence of evidence establishing the financial nexus, the AO could not apply a commission rate derived from other cases and tax ₹3.48 crore in the assessee’s hands. The CIT(A)’s order deleting the addition was upheld, and the Revenue’s appeal was dismissed.
Author’s Comments
The ruling makes an important distinction between three separate propositions: the transaction is bogus; the assessee knows it is bogus; and the assessee earned income from it. Proof of the first two does not automatically establish the third.
The assessee’s admission regarding the absence of physical movement of goods was undoubtedly incriminating as regards the companies’ transactions. But it was not an admission that he had received commission. An admission must be read for what it actually says and cannot be enlarged through inference.
The AO’s estimation at 1.62% suffered from two weaknesses. First, the rate was borrowed from other accommodation-entry cases without proving comparability. Second, and more fundamentally, the Revenue had not first established that any commission belonged to the assessee. Estimation can quantify income after its existence is proved; it cannot prove the existence of income.
Separate corporate personality was also relevant, though not conclusive. If evidence showed that the assessee remained the beneficial owner, controlled the bank accounts, received cash or appropriated the profits, the corporate structure would not protect him. In the present case, however, the recorded transfer of shares and resignation from directorship remained uncontroverted.
Search assessments frequently involve loose documents, statements and operational records. But even in a search case, attribution of income requires an assessee-specific nexus. The Department should trace the bank flow, identify beneficiaries, examine company personnel and establish who received the consideration for the entries.
The decision does not legitimise the accommodation transactions. It merely identifies the correct evidentiary burden before their presumed profit can be taxed in someone’s individual hands. Association creates suspicion; receipt or accrual creates taxable income.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
