Protective Additions Cannot Be Sustained When Substantive Income Is Already Taxed: ITAT Delhi on Conduit Companies

Overview

The Delhi Bench of the Income Tax Appellate Tribunal in the case of ACIT Vs B R R Securities Pvt. Ltd. has reiterated a crucial principle of tax assessment: where the Revenue has already brought the full substantive income to tax in the hands of the real operators of an accommodation entry network, it cannot continue to retain a protective addition on the same income in the hands of a conduit company.

The Tribunal dismissed the Revenue’s appeals for Assessment Years 2014-15 to 2017-18, affirming the relief granted by the CIT(A) to B R R Securities Pvt. Ltd., and also noted that any alleged commission on accommodation entries, once assessed in the hands of the principal entry operators, cannot again be brought to tax in the hands of the conduit entity without resulting in double taxation.

Background of the Case

Search on Jain Brothers Group

1. A search and seizure operation under the Income Tax Act 1961 was conducted on 17.12.2015 in the cases of Shri Anand Kumar Jain and Shri Naresh Kumar Jain (referred to as Jain Brothers).
2. During this search, from the premises of employee Shri Kaushal Kumar, the Department seized Annexure No. 13, containing tally data (hard disk) and ledgers titled “AJ & Kt”.
3. The Investigation Wing, based on these seized materials, concluded that several companies were being used as accommodation entry conduits, including B R R Securities Pvt. Ltd.

Initiation of Proceedings Against B R R Securities Pvt. Ltd.

• Return filing:
  • The assessee company filed its original return of income on 24.09.2014, declaring a nominal income of INR 18,490.
• Section 153C proceedings:
  • The Assessing Officer (AO) of the searched persons recorded a satisfaction note that the seized materials pertained to the assessee.
  • The AO of the assessee then recorded his own satisfaction and initiated proceedings under Section 153C on **29.12.2017, issuing notice on **30.12.2017.
  • In response, the assessee again filed a return on 12.01.2018, declaring the same income as originally returned.

Nature of Allegations

The assessee, engaged in the business of a non-banking financial company, was alleged to be part of an accommodation entry structure operated by Jain Brothers:

• Funds were allegedly received in the assessee’s bank account from entities controlled and managed by Jain Brothers.
• These funds were then transferred to identified beneficiaries after charging a commission.
• The Investigation Wing treated the identified beneficiaries as the ultimate users of the unaccounted funds.

Additions Made by the Assessing Officer

Protective Addition Under Section 68

The AO concluded that the assessee had received funds aggregating to INR 4,12,37,962 from 17 paper companies allegedly managed by Jain Brothers.

• He treated these receipts as unexplained cash credits under Section 68 of the Income Tax Act 1961 on a protective basis in the hands of the assessee company.
• The logic was that while substantive assessment might ultimately lie elsewhere, a protective addition was required in the assessee’s case to safeguard the Revenue’s interest.

Substantive Addition of Commission Income

In addition, the AO computed alleged commission income for arranging accommodation entries:

• Commission @ 0.25% on total credits of INR 4,12,37,962 was calculated at INR 1,03,095.
• This amount was added on a substantive basis in the hands of the assessee, treating it as commission income from providing accommodation entries.

Findings of the CIT(A)

The assessee challenged these additions before the CIT(A)-29, New Delhi, who passed orders dated 26.03.2019 for AY 2014-15 to 2017-18 under Section 250.

Conduit Company and Flow-Through of Funds

The CIT(A) examined the seized material, assessment records and findings in connected cases of Jain Brothers and observed: