Bogus Job-Work Expenses and Share Allotment Not Benami Under Section 2(9)(C): SAFEMA Tribunal’s Analysis in DCIT Vs R. Bharathi & Anr.

The Appellate Tribunal under SAFEMA, New Delhi, in DCIT Vs R. Bharathi & Anr. (along with connected matters), has delivered an important decision on the interface between alleged bogus expenditure, income-tax evasion, and the concept of “benami property” under the Prohibition of Benami Property Transactions Act, 1988.

The Tribunal dismissed a batch of 18 appeals filed by the DCIT, Benami Prohibition Unit, Chennai (“BPU”), affirming the Adjudicating Authority’s refusal to confirm provisional attachment orders over certain shares. The core finding was that, even assuming bogus job-work expenses and potential income-tax evasion, the specific statutory conditions of Section 2(9)(C) of the Prohibition of Benami Property Transactions Act, 1988 (“Benami Act”) were not satisfied.

This ruling is highly relevant for assessees facing parallel proceedings under the Income Tax Act 1961 and the Benami Act, particularly where business entries are alleged to be sham or tax-motivated.

Background of the Case

Origin of Proceedings: Search in Case of Shobikaa Impex Pvt. Ltd.

The proceedings originated from a search and seizure operation under Section 132 of the Income Tax Act 1961 in the case of M/s Shobikaa Impex Pvt. Ltd. (“M/s SIPL”). During this action and subsequent discreet enquiries, the authorities suspected that certain job-work and contract expenses recorded in the books of M/s SIPL were not genuine.

Key factual elements noted in the investigation included:

  • M/s SIPL was alleged to have:
    • Recorded “bogus expenses” towards job workers/contractors.
    • Shown these as “Trade Payables” without any actual supply of goods or services.
    • Not made genuine payments to such job workers in respect of these liabilities.
  • These liabilities appeared as trade creditors in the company’s balance sheet and were matched by:
    • Increases in investments,
    • Fixed deposits, and
    • Closing stock.

As per the material referred to in the order, the balance sheet of M/s SIPL showed an amount of Rs.117,65,37,129/- under the head “Trade Payables”, outstanding for more than one year as on 31.03.2017.

Conversion of Trade Payables into Share Capital

During Financial Year 2017-18, the alleged trade-payable balances, which were said to be standing for more than a year, were converted into share capital and premium:

  • Equity shares of face value Rs.100/- were allotted at a premium of Rs.750/- per share.
  • These shares were allotted in the names of “job workers” or contractors of M/s SIPL.
  • There were similar allotments to 22 entities.
  • Subsequently, there were buy-back transactions or transfers of these shares.

The BPU viewed these shares as “benami property” under Section 2(9)(C) of the Benami Act and passed Provisional Attachment Orders (PAO) against them.

Allegations by the Benami Prohibition Unit

Alleged Creation of Artificial Job Worker Structure

The BPU alleged that M/s SIPL had, in effect, set up a façade around its job workers to disguise the true nature of the arrangements. As part of this, it was claimed:

  • Separate bank accounts, email IDs, letterheads and other business documents were created in the names of job workers.
  • These facilities, however, were said to be controlled and operated by persons connected with M/s SIPL.
  • The purpose stated was to:
    • Satisfy statutory and banking formalities, and
    • Create the appearance of real commercial transactions and fund flows, even though the underlying activities might not have actually occurred.

Specific Case of Smt. R. Bharathi and M/s AabaaKnittings

One of the focal instances was that of M/s AabaaKnittings, a proprietary concern of Smt. R. Bharathi:

  • In the books of M/s SIPL:
    • M/s AabaaKnittings appeared under “Trade Payables” in FY 2016-17.
    • It was later reflected as a liability under “Share Capital” for FY 2017-18.
  • However, as per income-tax records and ITRs of M/s AabaaKnittings:
    • There were no corresponding assets or receivables reflecting these balances.
  • During search and related enquiries:
    • Unsigned share certificates of M/s SIPL in the name of Smt. R. Bharathi,
    • Cheque books,
    • Letterheads, and
    • Blank bills of M/s AabaaKnittings
      were allegedly found in the premises of M/s SIPL, not with the proprietor.

The BPU’s case was that Smt. R. Bharathi was not genuinely participating in these transactions and was unaware of: