Brief of the Case
Delhi High court in the case of JRD Stock Brokers (P) Ltd. vs. CIT. held that the admission of assessee under Section 132(4) where he admitted about the possession of incriminating material would suffice to initiate the necessary proceedings.
Facts of the Case
The brief facts are that a search operation was carried in the office of assessee. The books of accounts, documents and other materials were seized. The assessee, when called upon to file the return, filed a NIL return for the relevant block period, on 11.10.2002. The AO completed assessment under Section 158BC(c) which comprised of inter alia undisclosed provisional income arrived at by adopting a flat rate of 1.5% on the aggregate of all credit entries in the bank account statements of the assessee. Other than this amount, the AO also added sums of money on the basis of unexplained cash deposits and negative balances; the CIT(A) directed the cancellation of the sums added on account of negative balances. However, the CIT(A) rejected the assessee’s contentions with respect to addition. The assessee had, in the original returns, declared the amounts to be derived on account of share trading transactions. The assessee’s contentions were rejected because the AO and the CIT(A) found that in the statement recorded under Section 132(4) of theIncome Tax Act, 1961 (hereafter referred to as “the Act”), the assessee had admitted that the said sum of Rs. 1,04,76,94,004/- was actually not entirely based on share transactions but was also based on accommodation entries. The assessee had stated in the returns that the commission received on the share transactions ranged between 0.25% and 0.5%. The CIT(A), found commission of upto 1% even on the share transactions. In these circumstances, the estimated income added back by the AO on the basis of his assessment of the true income (on the business activity of providing accommodation entries which the assessee was engaged in) was to the extent of 1.5% of the total turnover indicated.
Contention of the Assessee It was submitted on the behalf of the Ld. Counsel that the pre-condition for imposition of penalty under Section 158BFA(2) is that the “undisclosed income” determined by the AO is necessarily linked with the undisclosed income found which in turn is based on some material. Arguing that in the present instance, the assessee had concededly declared a sum of Rs. 1,04,76,94,004/- in the books of accounts, learned counsel highlighted that in the circumstances, the penalty could not have been imposed. It was argued in this context that any income determined in the course of block assessment proceedings must necessarily relate to that adjudicated upon and must be based on objective material found. In other words, it cannot be based on an estimation or a voluntary act of the assessee such as surrender. By relying on some Judgments it was submitted that Section 158BFA(2) textually empowers the AO to levy penalty on the undisclosed income determined by him but that the power does not extend to imposing penalty in the cases excluded in the first proviso.
Contention of the Revenue
The Revenue authorities have applied @ 1.5% to the entire turnover irrespective of the nature of entries whether long term, short term gain etc. The gross rate of commission charged by the assessee can also not be said to be profit exigible to tax. The credit for the expenses incurred in running the business is also required to be considered while estimating the income from business of providing accommodation entries. The assessee’s contentions were rejected because the AO and the CIT(A) found that in the statement recorded under Section 132(4), the assessee had admitted that the said sum of Rs. 1,04,76,94,004/- was actually not entirely based on share transactions but was also based on accommodation entries. The CIT(A), however, found that there was material suggestive of receipt of commission of upto 1% even on the share transactions.
Held by the ITAT
The Hon’ble ITAT observed that as far as application of rate of 1.5% to the turnover was concerned, the learned CIT(A) referred to seized documents which showed that commission of 1% to 1.25% was charged, whereas the same was shown between 0.05% to 0.1% in the accommodation bills as per books of accounts. The balance commission was settled outside the books of accounts and received in cash. The assessee did not dispute that quantum of turnover for providing the accommodation entries to various clients during the year as computed by the AO at Rs.1,04,76,94,004/- is not correct. The commission stated to have been charged and admitted by the assessee ranged from .25% to .5%. The rate as evident from the seized material which has been referred to by the lower authorities, does reflect that the assessee had charged a rate as high as 1%. The total turnover also includes some genuine transactions carried on by the assessee on which rate of commission was admittedly much lower ranging between 0.25% to 0.50%. Therefore, having regard to the entire gamut of facts, circumstances and material which is available on record, there does not appear to be justifiable reasons to estimate the commission/brokerage of the assessee by applying rate of 1.5% of the total turnover. Therefore, it would be in the fitness of the things that the income earned by the assessee by way of commission/brokerage on the turnover including accommodation entries provided to its clients is computed @ .6% on the total turnover of Rs.1,04,76,94,004/- on which there is no dispute. Accordingly, AO was directed to compute income on count of commission/brokerage.
Held by the CIT(A)
After considering facts and circumstances of the case, the learned CIT(A) observed that the AO in this case after giving due consideration to assessee’s submissions and information available as per seized record and gathered during the course of search, was justified in applying rate of 1.5% to compute commission earned by the assessee in the block period. Accordingly, addition of Rs.1,57,15,409/- was upheld.
Held by the Hon’ble High Court
The Hon’ble High court while dismissing the Appeal of the assessee held that the admission of assessee in the course of search proceedings under Section 132(4) of the Act, that the said amount including accommodation entries forming part of the turnover. The admission radically changed the complexion of the nature of declaration made and certainly formed the basis for materials discovered during the course of proceedings and also changed the character of the income originally declared.