Case Law Details: PCIT Vs Buniyad Chemicals Ltd. (Bombay High Court), Income Tax Appeal No. 1796 of 2018, 17/03/2025, 2009-10
Case Background and Procedural History
In this tax judgment, which has far reaching impact on cases involving allegation of providing ‘accommodation entries’ and ‘unexplained credits in bank accounts’, from the Hon’ble Bombay High Court, while adjudicating an appeal filed by the Principal Commissioner of Income Tax against the order of ITAT in relation to the assesse ‘Buniyad Chemicals Ltd’ for assessment year 2009-10. The case arose from an order by the Income Tax Appellate Tribunal (ITAT) dated May 30, 2017, which was challenged under Section 260A of the Income Tax Act, 1961.
Buniyad Chemicals had initially filed a tax return declaring ‘NIL’ income on August 29, 2009. This return was selected for scrutiny assessment, culminating in an assessment order dated December 28, 2011, which assessed the company’s income at ₹10,73,52,550. The assessment added this amount under Section 68 of the Income Tax Act as “Income from other sources,” treating credits in the company’s bank accounts as unexplained cash credits since the company failed to provide satisfactory explanations regarding the identity, source, and genuineness of such credits. While CIT(A) had confirmed the action of AO, the Ld. ITAT had reduced the additions made u/s 68 to just 0.15% of the total credits, without citing any reason and merely accepting the contention raised by the assesse company.
Legal Questions
The High Court admitted the appeal on two substantial questions of law:
1. Whether the Tribunal was justified in restricting additions made under Section 68 to just 0.15% of unexplained cash credits when the assessee failed to explain the identity of parties and the genuineness of transactions
2. Whether the Tribunal was correct in limiting the addition to commission income at 0.15% without considering evidence that commission rates varied between 1.5% and 3.5%
The Company’s Business and Admissions
During proceedings before AO, the assesse company made the remarkable admission that it operated “a racket of illegal business of providing accommodation entries” – essentially a money laundering service. The company’s director, Mukesh Choksi (a former Chartered Accountant who surrendered his Certificate of Practice in 1993), admitted in a recorded statement that:
1. The company charged a commission of 0.15% for providing accommodation entries
2. The company could not provide details for 3,321 transactions
3. Documents provided for accommodation entries were “not genuine”
4. The company had abetted tax evasion by various beneficiaries
5. The business involved money laundering activities
The company’s defense rested on the claim that only the commission earned (0.15% of transactions) should be taxable, not the entire amount of deposits, as these funds belonged to clients rather than the company itself.
Legal Arguments and Court’s Analysis
Section 68 Applicability to Bank Statements
The assesse-company argued that Section 68 (which allows taxation of unexplained credits found in “books of an assessee”) did not apply since bank statements don’t constitute “books of account of an assessee.” The court rejected this argument on multiple grounds:
1. The company had, in fact, maintained books of accounts as evidenced by the profit and loss statements and tax audit reports they had filed
2. Data extracted from the company’s computers onto CDs constituted “books” under the modern interpretation of Section 68
3. The court cited Section 2(12A) of the Income Tax Act, which defines “books or books of account” to include electronic data storage devices
4. The court relied on precedent from Sheraton Apparels v. CIT ((2002(5)BOMCR19) to support this interpretation
Failure to Identify Beneficiaries
The High Court emphasized that the Commissioner of Income Tax (Appeals) had taken a fair approach by ruling that:
- If beneficiaries were identified, only 0.15% of those amounts would be added as income
- If beneficiaries remained unidentified, the entire amount would be confirmed as unexplained cash credits under Section 68
The court criticized the Tribunal for directing a blanket 0.15% addition on all deposits without providing reasons for deviating from the CIT(A)’s balanced approach.
Legal Obligation to Maintain Books
The court stressed that as a company registered under the Companies Act and a business with substantial turnover, Buniyad Chemiscals was legally required to maintain books of accounts. The court cited the principle that “a person cannot take benefit of their own wrong,” rejecting the notion that failure to maintain required records could be used as a defense against Section 68 additions.
The court referenced Arunkumar J. Muchhala v. The Commissioner of Income-Tax (INCOME TAX APPEAL No. 363 of 2015), which established that when an assessee engaged in business fails to maintain proper books, they cannot use this failure to evade tax liability.
Court’s Ruling
The High Court partially allowed the appeal, ruling that:
1. On question (a): The Tribunal erred in applying a blanket 0.15% rate to all deposits. The CIT(A)’s balanced approach was restored – full taxation for unidentified beneficiaries, commission-only taxation for identified ones.
2. On question (b): The appropriate commission rate was confirmed at 0.15% (not 0.37%) for transactions where beneficiaries were identified.
Additional Directives and Broader Implications
The court expressed serious concern about the admitted illegal activities and issued directives for investigations by multiple authorities:
1. The Institute of Chartered Accountants of India to investigate potential professional misconduct by Mukesh Choksi
2. Police investigation for potential fraud under the Indian Penal Code/BNS, 2023
3. Enforcement Directorate investigation under the Prevention of Money Laundering Act, 2002
4. Inquiry from the Chief Commissioner of Income Tax regarding prosecution status under the Income Tax Act
The court emphasized its constitutional duty not to ignore evidence of serious economic crimes, noting that “inaction only encourages more persons to engage in illegal activities.” It characterized the case as one where “low deterrent effect of the law has worked on a professional talent to become a habitual economic and financial offender,” which “should be stopped in the larger interest of our country.”
Legal Significance
This judgment clarifies several important principles for tax law in India:
1. The modern interpretation of “books of an assessee” includes electronic records and data storage and in particular the ‘Bank account statement’
2. Entities/Companies operating “accommodation entry” businesses cannot evade tax liability by refusing to identify their clients
3. The courts will not allow admitted money laundering operations to escape tax liability through technical arguments, besides other legal consequences.
4. Professionals involved in facilitating tax evasion may face consequences from multiple regulatory and law enforcement agencies
The judgment reflects the judiciary’s serious concern with money laundering schemes and demonstrates a holistic approach to addressing financial crimes beyond merely resolving the tax dispute at hand.
Author Bio
