ITAT Surat Lowers Estimated Commission on Cheque Discounting to 0.35% and Deletes Addition on Alleged Unexplained Income

Background and Context

The Income Tax Appellate Tribunal, Surat Bench, recently dealt with a pair of connected appeals filed by Surajnath Bhimnath Sidh Vs ITO (ITAT Surat) concerning Assessment Years 2012-13 and 2013-14. Both matters involved a common factual matrix relating to:

  • Estimation of commission income from cheque and draft discounting activity, and
  • Addition of an amount received through banking channels as unexplained income.

The Tribunal passed a consolidated order, treating the appeal for A.Y. 2012-13 as the lead case. The key disputes involved:

  1. The rate at which commission income from cheque discounting should be estimated, where large bank credits were noticed.
  2. Whether a specific credit of ₹43,00,000 in one of the assessee’s bank accounts represented unexplained income or merely cheque discounting receipts yielding commission.

The decision is important for assessees involved in cheque and draft discounting operations and similar fund-routing activities conducted through formal banking channels.

Facts of the Case

Filing of Returns and Reassessment

For A.Y. 2012-13:

  • The assessee originally filed a return of income on 09.06.2012, declaring taxable income of ₹4,77,770.
  • Subsequently, a notice under Section 148 of the Income Tax Act 1961 was issued.
  • In response, the assessee furnished another return on 02.04.2019.

During the reassessment proceedings, the Assessing Officer (AO) examined the assessee’s bank accounts and noticed aggregate credit entries of ₹170.09 crore spread across several accounts, as detailed in the assessment order.

Nature of Business and Assessee’s Explanation

The assessee consistently maintained that:

  • He was carrying on the business of cheque and draft discounting.
  • The large credits represented amounts passing through various bank accounts as part of this activity.
  • His earnings from this business were limited to a small commission margin, which had already been disclosed in the return.
  • For A.Y. 2012-13, commission income of ₹3,27,298 was shown as part of the total income.

The assessee also pointed out that all such dealings were routed through regular bank accounts forming part of the books of account, and not via any undisclosed or benami accounts.

AO’s Approach: Estimation of 1% Commission

Estimation Based on Total Bank Credits

The AO was not satisfied with the assessee’s explanation, primarily because the assessee could not furnish:

  • The full list of parties whose cheques and drafts had been discounted, and
  • Detailed confirmations from such parties.

On this basis, the AO:

  1. Treated the entire bank credits of ₹170.09 crore as turnover from cheque/draft discounting.
  2. Estimated commission at 1% of total credits.
  3. Arrived at estimated commission/profit of ₹1,70,09,150.
  4. Gave credit for commission already disclosed of ₹3,27,298.
  5. Made a net addition of ₹1,66,81,852 to the total income.

Thus, the AO substantially enhanced the income on the assumption that a 1% commission rate was justified for this line of business.

Second Addition: ₹43,00,000 Treated as Unexplained Income

Investigation Findings Linking RIPL and Madan Overseas

Based on an investigation report from DDIT (Inv.), Surat, the AO recorded the following:

  • An entity, RIPL, allegedly controlled by Prashant Sethi, was engaged in export of waste and cheap garments from India to Dubai.
  • Funds received by RIPL were stated to be routed partly through an entity Madan Overseas (Neeru Madan).
  • The assessee was considered one of the beneficiaries of this routing.
  • A sum of ₹43,00,000 was credited into the assessee’s Bank of India Account No.270020110000952.

When called upon to explain, the assessee reiterated that: