ALLIANCE INTERMEDIATERIES & NETWORK PVT LTD,SANTACRUZ EAST vs. ITO 14 (1)(1), CHURCHGATE

The brief facts of the case are that the assessee, M/s Alliance Intermediaries & Network Pvt. Ltd., is a company which admittedly carried on the business of providing accommodation entries and formed part of the Mahasagar/Mukesh Choksi group.

For A.Y. 2005-06, the Assessing Officer completed the first assessment under section 143(3) read with section 153A on 08.12.2011 pursuant to the search conducted under section 132 of the Act and assessed the total income at ₹53,82,911/- as against Nil return of income filed by the assessee. The Assessing Officer treated the credits in the assessee's bank accounts, amounting to ₹26,91,45,555/-, as accommodation entries and computed commission income at 2% of such credits. The CIT(A) confirmed the addition made by the assessing officer.

In further appeal, the Tribunal, vide order dated 07.07.2017 in ITA Nos. 6043 to 6048/Mum/2012 for A.Ys. 2005-06 to 2010-11, set aside the assessments and restored the matters to the Assessing Officer for fresh adjudication after giving adequate opportunity to the assessee.

The assessee submitted before the Assessing Officer that the entire amount of ₹26,91,45,555/- credited in its bank accounts could not be treated as the amount on which it had earned commission. According to the assessee, a sum of ₹10,45,80,000/- comprised only transfer/reversal entries involving movement of funds on which no commission income had arisen. The assessee contended that commission should be computed only on the balance amount of ₹16,45,65,555/- and that the appropriate rate of commission was 0.15%, resulting in commission income of ₹2,46,848/-. The assessee further claimed business expenses of ₹4,65,506/-, but voluntarily restricted the claim to 50% of such expenses, i.e. ₹2,32,753/-, and accordingly offered the balance amount of approximately ₹14,095/- as taxable income.

The Assessing Officer did not accept these claims. As regards the rate of commission, the Assessing Officer held that the assessee had not produced any fresh evidence to rebut the findings in the original assessment order and, therefore, continued to compute commission at 2% instead of 0.15%.

The Assessing Officer also rejected the assessee’s claim that a sum of ₹10,45,80,000/- should be excluded from the total bank credits on the ground that these were only transfer entries. The Assessing Officer observed that the assessee did not furnish the names of the sister concerns or other entities to whom these amounts had been transferred. The assessee also did not produce any material to show that these entries were merely transfers of funds and did not give rise to any commission income in its hands. The Assessing Officer further noted that the assessee had not shown whether the corresponding amounts had been considered in the assessments of the concerned group entities. The Ld. AO also found that the assessee had not raised this specific claim either before the CIT(A) or before the Tribunal in the earlier round of proceedings. When the Assessing Officer asked Shri Mukesh M. Choksi to substantiate the claim, he stated that no further evidence was available with him. In these circumstances, the Assessing Officer held that the assessee had failed to establish that the amount of ₹10,45,80,000/- consisted only of transfer entries on which no commission was earned and, therefore, declined to exclude the said amount while computing the commission income.

The Assessing Officer also did not accept the assessee’s claim for deduction of further expenses of ₹4,65,506/- against the commission income. The Assessing Officer observed that the assessee had already claimed its business expenses while filing the return of income in response to notice under section 153A of the Act and had declared Nil income after adjusting such expenses. According to the Assessing Officer, the commission income computed in the original assessment was itself taken as the net commission income and, therefore, no further deduction of expenses could be allowed against the same. The Assessing Officer further noticed that, if the additional expenses of ₹4,65,506/- were allowed in full, the assessee would incur a loss of ₹2,18,658/-. He also observed that the assessee had itself restricted the claim of expenses to 50% only so as to disclose a small positive income instead of a loss. The Assessing Officer therefore rejected the additional claim of expenses and retained the assessed income at ₹53,82,911/- while completing the assessment under section 143(3) read with section 254 of the Act on 27.03.2018.

Before the learned CIT(A), the assessee submitted that the issue was covered by the decisions of the Tribunal in its own case as well as in the cases of other concerns belonging to the Mukesh Choksi group. The assessee contended that, in those cases, the Tribunal had directed the Assessing Officer to compute commission income at 0.15% of the turnover and had also allowed 50% of the expenses against such commission income. The assessee therefore requested the learned CIT(A) to follow the same approach in the present case.

The learned CIT(A), however, noted that the Hon’ble Bombay High Court had subsequently adjudicated on a similar issue in another concern of the same group in M/s Buniyad Chemicals Ltd., ITA No. 1796 of 2018, order dated 17.03.2025. The learned CIT(A) noted that, in that case, the Hon’ble High Court held that where an assessee engaged in providing accommodation entries identifies the beneficiaries of the credits appearing in its bank accounts, only the commission income on such entries can be brought to tax. However, where the assessee does not identify the beneficiaries, the corresponding bank credits can be treated as unexplained credits under section 68 of the Act. The learned CIT(A) also noted that the Hon’ble High Court had held that the data extracted from the assessee’s computers constituted its books of account for the purpose of section 68 of the Act.

Applying the above decision to the facts of the present case, the learned CIT(A) observed that the Assessing Officer had accepted that the assessee was engaged in the business of providing accommodation entries and had taxed only the commission earned on such services. However, the learned CIT(A) found that the assessee had not furnished the details of the beneficiaries in respect of the credits appearing in its bank accounts. The learned CIT(A) therefore held that the earlier decisions of the Tribunal, in which only commission income had been brought to tax, could not automatically be applied to every credit appearing in the assessee’s bank accounts. According to the learned CIT(A), such treatment could be given only where the assessee was able to identify the beneficiary to whom the accommodation entry had been provided. If the assessee failed to identify the beneficiary of a particular credit, the learned CIT(A) considered that such credit could not simply be treated as part of the accommodation-entry business and taxed only at the commission rate. In such a situation, the corresponding credit was liable to be examined separately under section 68 of the Act. Since this approach could increase the assessee’s taxable income beyond the income assessed by the Assessing Officer, the learned CIT(A) issued an enhancement notice dated 01.09.2025 and required the assessee to explain why the credits for which no beneficiary had been identified should not be treated as unexplained cash credits under section 68 of the Act. The assessee, however, did not file any response to the said enhancement notice.

The learned CIT(A) accordingly directed the Assessing Officer to verify the credits appearing in the assessee’s bank accounts. He directed that, where the assessee identifies the beneficiary, commission income at 0.15% should be computed on such entry; however, where the assessee is unable to identify the beneficiary, the corresponding credit should be taxed under section 68 of the Act. The learned CIT(A) also directed the Assessing Officer to allow 50% of the expenses against the commission income, following the decisions of the Tribunal in the assessee’s own case and in the cases of other group concerns, and partly allowed the appeal.

The assessee is in appeal before us against the order passed by the learned CIT(A). We have heard the rival submissions and perused the material available on record. The dispute before us is whether the credits appearing in the assessee’s bank accounts can be restricted to taxation of commission income because the assessee admittedly carried on the business of providing accommodation entries, or whether the credits can be brought to tax under section 68 of the Act where the assessee fails to identify the beneficiaries of such entries. The assessee has also challenged the findings of the learned CIT(A) on the ground that the Revenue had already seized the computer data containing the relevant information and, therefore, the assessee could not be required to furnish the same information again.

Before dealing with the individual grounds, we consider it necessary to first examine the legal position which is now settled by the judgment of the Hon’ble jurisdictional High Court in Principal Commissioner of Income-tax- 14 v. Buniyad Chemicals Ltd. [2025] 474 ITR 452 (Bom.) / [2025] 304 Taxman 560 (Bom.) / [2025] 172 taxmann.com 462 (Bom.), Income Tax Appeal No. 1796 of 2018, judgment dated 17.03.2025. The importance of this decision in the present appeal is that Buniyad Chemicals Ltd. was also a concern belonging to the Mukesh Choksi group and the Hon’ble High Court considered the same issue concerning accommodation entries, identification of beneficiaries, computer data seized by the Department and taxation under section 68 of the Act.

In Buniyad Chemicals Ltd. (supra), the assessee admitted that it was engaged in the business of providing accommodation entries and contended that the amounts credited in its bank accounts belonged to its customers and only the commission earned for providing such entries could be taxed in its hands. The Hon’ble High Court rejected the proposition that this admission by itself discharged the assessee’s obligation under section 68 of the Act. The Hon’ble High Court held that the assessee must furnish details of the beneficiaries so that the Revenue can verify whether the credits actually belong to those beneficiaries. The Hon’ble High Court approved the approach adopted by the CIT(A) in that case: where the beneficiary is identified, only commission income can be computed in the hands of the accommodation-entry provider; however, where the beneficiary is not identified, the corresponding credit remains unexplained and can be brought to tax under section 68. The Hon’ble High Court specifically held that taxation of commission income and taxation of unexplained cash credits are two separate matters and cannot be mixed together. It is to be noted that the argument raised by the assessee before us regarding the seized computer data is similar to the argument raised before the Hon’ble Bombay High Court in Buniyad Chemicals Ltd. The assessee in that case had specifically contended that the records containing the names and addresses of the beneficiaries were in the possession of the Income-tax Department and copies of the computerized documents had not been furnished to it. Despite this contention, the Hon’ble High Court held that the assessee could not escape its obligation to explain the credits. The Court noted that the data had originally been extracted from the assessee’s own computer system and Shri Mukesh Choksi had admitted that books of account were maintained and the Department had extracted the data from those very books. The Hon’ble High Court consequently held that such computerized data constituted the assessee’s “books” for the purpose of section 68 of the Act.

The Hon’ble High Court further considered the statement of Shri Mukesh Choksi and specifically noticed that, in respect of 3,321 cases, he had stated that details of the customers were not available. The Hon’ble High Court found it unacceptable that an accommodation-entry provider handling transactions running into crores of rupees could claim that it did not know the persons for whom the funds had been received and withdrawn. The Court therefore held that, in the absence of the details of the beneficiaries, the assessee could not contend that the credits should nevertheless escape section 68 of the Act and only the commission component should be taxed.

The same principle has thereafter been followed by the Coordinate Bench in Axtron Tex-Chem (India) Private Limited v. DCIT, ITA Nos. 4786 to 4789/Mum/2024 and ITA Nos. 5175 & 5178/Mum/2024, order dated 30.05.2025. In that case also, the assessee admitted that it provided accommodation entries. The Coordinate Bench noticed that the assessee had not furnished complete supporting evidence and had only partly identified the beneficiaries. Following Buniyad Chemicals Ltd. (supra), the Tribunal restored the matter to the Assessing Officer for a de novo examination and directed the assessee to furnish the details of the identified beneficiaries and documentary evidence regarding the commission actually earned from them. The Tribunal specifically directed the Assessing Officer to decide the matter in accordance with the principle laid down by the Hon’ble jurisdictional High Court in Buniyad Chemicals Ltd.

Thereafter, in UGC Text and Build Private Limited v. ITO, ITA Nos. 1922, 1926 & 1927/Mum/2025, order dated 13.08.2025, the Coordinate Bench once again considered the issue. The Tribunal specifically observed that Buniyad Chemicals Ltd. lays down the principle that, in the case of an admitted accommodation-entry provider, where the assessee fails to disclose the identity of the beneficiaries, the credits are liable to be examined under section 68; where the beneficiaries are identified, only the commission rate becomes applicable. Since the assessee in that case had failed to furnish the necessary details, the Tribunal restored the issue to the Assessing Officer for fresh adjudication in accordance with the judgment of the Hon’ble jurisdictional High Court.

Thus, the legal position from the above decisions is clear. The mere fact that an assessee admits that it is an accommodation-entry provider does not mean that every credit in its bank account must automatically be treated as money belonging to some unidentified customer and only a small percentage by way of commission can be taxed. The assessee must establish, credit by credit, that the amount belongs to an identifiable beneficiary. Once the beneficiary is identified and the nature of the accommodation entry is established, only the commission earned by the assessee on such transaction can be brought to tax in its hands. However, where the assessee does not identify the beneficiary and does not explain the nature and source of the corresponding credit, the entire corresponding credit, and not merely the commission element, can be considered under section 68 of the Act. This is the principle which we shall apply while deciding the grounds raised before us.

In Ground No. 1, the assessee has challenged the finding of the learned CIT(A) that the assessee failed to disclose the identities of the beneficiaries. The assessee contended that the Department had seized the computer data and that such data remained in the exclusive possession of the Revenue. According to the assessee, the learned CIT(A) could not hold against it that the beneficiaries were not identified without first giving it reasonable opportunity to examine and obtain the information from such seized data.

We are unable to accept this ground. The record shows that during the set-aside assessment proceedings the Assessing Officer repeatedly asked the assessee to explain its claim regarding the transactions. Shri Mukesh Choksi appeared before the Assessing Officer, but in respect of the transfer entries of ₹10,45,80,000/- he did not furnish the names of the concerns to whom the entries belonged nor did the assessee provide any supporting evidence. The assessee submitted that no further evidence was available with him.

More importantly, before making an enhancement, the learned CIT(A) issued an enhancement notice dated 01.09.2025 asking the assessee to explain why the unidentified credits should not be considered under section 68 of the Act. The assessee did not respond to the enhancement notice. Thus, this is not a case where the learned CIT(A) drew an adverse conclusion without putting the proposed action to the assessee.

The argument that the computer data was in possession of the Department also does not, by itself, discharge the assessee’s obligation. This very argument was raised in Buniyad Chemicals Ltd. (supra). The Hon’ble Bombay High Court held that the assessee, being the person operating the accommodation-entry business, was required to furnish particulars of the beneficiaries. The Court specifically noted that the data had been extracted from the assessee’s own computer and rejected the contention that the assessee could avoid section 68 of the Act merely because the Department had possession of the extracted data. The relevant observations of the Hon’ble High Court are as under:

Thereafter, while specifically dealing with the obligation of an accommodation-entry provider to identify its beneficiaries, the Hon’ble High Court observed as under:

At the same time, principles of natural justice require that the assessee should have access to material which the Assessing Officer proposes to use against it. Therefore, while giving effect to the directions of the learned CIT(A), if the assessee makes a specific request for inspection or copies of the relevant seized computer data on which the Assessing Officer proposes to rely, the Assessing Officer shall provide reasonable access to such material in accordance with law. This procedural safeguard, however, does not shift the statutory burden from the assessee to identify and explain the beneficiaries of the credits.

Subject to the above clarification, we find no merit in Ground No. 1 and the same is dismissed.

In Ground No. 2, the assessee contended that the learned CIT(A) took two inconsistent positions. According to the assessee, the learned CIT(A), on the one hand, treated the computer data as part of the assessee’s books and, on the other hand, held that the assessee failed to disclose the information contained in those very books, although the Department already possessed the data.

We do not find any contradiction in these findings. The question whether the computer data constitutes “books of the assessee” and the question whether the assessee has satisfactorily explained a particular credit appearing in those books are two different questions. The fact that an entry can be found in the computer data does not by itself explain who deposited the money, for whose benefit the entry was given, to whom the corresponding payment was made, and whether the assessee’s contention that the money belonged to a particular beneficiary is correct.

The Hon’ble Bombay High Court in Buniyad Chemicals Ltd. has directly dealt with this distinction. The Court held that data maintained in the computer and extracted by the Department constituted books of the assessee for the purpose of section 68 of the Act. The Court also held that the assessee remained under an obligation to explain the credits by furnishing the details necessary to establish that those credits belonged to its customers. Thus, there is no inconsistency between treating computerized records as books and requiring the assessee to explain the nature and source of the entries contained therein.

We therefore find no merit in Ground No. 2 and the same is dismissed.

In Ground No. 3, the assessee contended that the learned CIT(A) wrongly placed the burden upon it to furnish information which, according to the assessee, remained exclusively in the possession of the Revenue after the search and seizure action. The assessee submitted that such requirement is an impossible performance and the burden under section 68 could not be placed upon it in these circumstances.

We are unable to accept this contention. Section 68 of the Act puts the initial responsibility upon the assessee to explain the nature and source of a credit appearing in its books. In the peculiar facts of an accommodation-entry business, this necessarily requires the assessee to identify the person for whom the entry was provided. Merely stating that the amount does not belong to the assessee and belongs to an unidentified customer does not constitute an explanation of the credit.

The observations of the Hon’ble Bombay High Court in Buniyad Chemicals Ltd. are directly applicable. The Court held that the accommodation- entry provider must give details of its customers and that only thereafter can the Revenue verify whether the credits actually belong to those customers. The Court further observed that an assessee cannot decline to furnish the details of the beneficiaries and simultaneously contend that the unexplained credits cannot be assessed in its hands. The Court specifically rejected a construction which would permit unexplained money to escape taxation merely because the accommodation-entry provider refuses or fails to identify the actual beneficiary.

The facts before us make the position even clearer. The assessee itself carried on the accommodation-entry activity through its bank accounts. The assessee therefore cannot merely state that the Department should discover for itself the persons for whom the assessee operated those transactions. If the assessee claims that a particular credit belongs to another person and only commission income accrued to the assessee, the primary facts necessary to establish that claim have to be furnished by the assessee.

As stated while deciding Ground No. 1, the Assessing Officer shall allow the assessee reasonable access to relied-upon seized material if a specific request is made. However, such access does not alter the basic burden under section 68 of the Act.

In Ground No. 4, the assessee contended that once the Revenue had seized and extracted the complete data from its computer system, the Revenue could not thereafter claim that the assessee had failed to furnish information which was already in the possession of the Department.

We find that this ground proceeds on an incorrect understanding of the requirement under section 68 of the Act. Possession of raw information by the Department and explanation of a credit by the assessee are not the same thing. The Revenue may possess bank statements, computer data and transaction entries, but it is the assessee which claims that a particular credit belongs to a particular beneficiary and that the assessee earned only commission thereon. The assessee must therefore establish the connection between the credit and the beneficiary.

In Buniyad Chemicals Ltd.the Bombay High Court has answered this argument. The data in that case had also been extracted by the Department from the computer of the Mukesh Choksi group concern. Nevertheless, the Hon’ble High Court required the assessee to furnish details of the customers and approved the taxation of unexplained credits where the beneficiaries were not identified.

Further, the learned CIT(A) has not directed the Assessing Officer to tax every bank credit under section 68 of the Act. The learned CIT(A) has adopted a credit-wise approach: where the beneficiary is identified, only commission at 0.15% is to be computed; only the assessee is unable to identify the beneficiary then the corresponding credit to be examined under section 68 of the Act. This is in principle the very approach which the Hon’ble Bombay High Court described as fair in Buniyad Chemicals Ltd.

In Ground No. 5, the assessee contended that the learned CIT(A) erred in upholding the applicability of section 68 of the Act without confronting the assessee with the specific unexplained credits appearing in the seized data and without giving an opportunity to explain such credits.

We find that the learned CIT(A) did not himself make a blanket addition of all the bank credits under section 68 of the Act. The learned CIT(A) first issued an enhancement notice dated 01.09.2025 in which he proposed the application of section 68 of the Act to the credits for which beneficiaries were not identified. The assessee did not respond to that notice. Thereafter, the learned CIT(A) directed the Assessing Officer to undertake verification and to apply section 68 of the Act only to those credits in respect of which the beneficiaries remain unidentified.

We therefore find no infirmity in the principle adopted by the learned CIT(A), particularly when the same follows the law laid down in Buniyad Chemicals Ltd. and subsequently applied in Axtron Tex-Chem (India) Private Limited and UGC Text and Build Private Limited.

However, since the actual amount liable to be considered under section 68 of the Act will arise only after beneficiary-wise verification, we consider it appropriate to clarify that before treating any particular credit as unexplained under section 68 of the Act, the Assessing Officer shall identify the specific credit proposed to be so treated and give the assessee reasonable opportunity to furnish the name and particulars of the beneficiary and the supporting material relating to that credit. Where the assessee points to information already forming part of the seized material or the Department’s records, the Assessing Officer shall examine such material before drawing any adverse conclusion. If the beneficiary is established from the material on record, the Assessing Officer shall treat the entry as an identified beneficiary entry and compute only the commission income in accordance with the direction of the learned CIT(A). Only the credits which remain unexplained after such exercise can be considered under section 68 of the Act.

With the above clarification, Ground No. 5 is dismissed.

In Ground No. 6, the assessee contended that the Department had identified about 5,400 beneficiaries and had not taken action in about 3,321 cases because, according to the assessee, those entries were transfer entries and the sister concerns themselves were beneficiaries. The assessee further contended that this itself establishes that the Department had extracted the complete beneficiary data and had taken action by issuing notices, including notices under section 133(6) of the Act.

We do not find that this general argument is sufficient to discharge the assessee’s burden in respect of the individual credits appearing in its bank accounts. The significance of the figure of 3,321 cases has already been considered by the Hon’ble Bombay High Court in Buniyad Chemicals Ltd. The Hon’ble High Court, while examining the statement of Shri Mukesh Choksi, specifically observed that in respect of 3,321 cases the assessee did not have the details of the customers. The Court treated this as a failure to explain the corresponding credits and rejected the contention that such credits could nevertheless be taxed merely at the commission rate.

Therefore, the assessee’s present contention that the figure of 3,321 itself establishes that those were only transfer entries cannot be accepted without supporting evidence connecting each such entry with the concerned sister concern or specific beneficiary. A general statement that the Department had issued notices to various beneficiaries also does not establish that every credit appearing in the assessee’s bank accounts has been identified and explained.

At the same time, if the Department has already identified a beneficiary in respect of a particular credit, or if the Department’s own record establishes that the corresponding amount was treated as belonging to a particular beneficiary, such credit cannot thereafter be treated as an unidentified credit merely because the assessee has not furnished the same information in a different form. The direction of the learned CIT(A) itself requires verification. Accordingly, the Assessing Officer shall consider the material already available on the Department’s record once the assessee identifies the relevant transaction or points out the relevant material. If such verification establishes the beneficiary, the Assessing Officer shall apply only the commission rate as directed by the learned CIT(A). However, where the assessee neither identifies the beneficiary nor points to any material from which the beneficiary can be verified, the corresponding credit would remain unexplained and section 68 of the Act would apply in accordance with Buniyad Chemicals Ltd. (supra).

This approach is also consistent with Axtron Tex-Chem (India) Private Limited (supra), where the Coordinate Bench directed beneficiary-wise verification and application of Buniyad Chemicals Ltd., and with UGC Text and Build Private Limited (supra), where the Coordinate Bench held that the commission approach can apply only after the beneficiaries are identified.

In view of the above discussion, we find that the learned CIT(A) has correctly applied the principle subsequently settled by the Hon’ble jurisdictional High Court in Principal Commissioner of Income-tax-14 v. Buniyad Chemicals Ltd. [2025] 474 ITR 452 (Bom.) / [2025] 304 Taxman 560 (Bom.) / [2025] 172 taxmann.com 462 (Bom.), which has thereafter been followed by the Coordinate Benches in Axtron Tex-Chem (India) Private Limited v. DCIT, ITA Nos. 4786 to 4789/Mum/2024 & ITA Nos. 5175 and 5178/Mum/2024, order dated 30.05.2025, and UGC Text and Build Private Limited v. ITO, ITA Nos. 1922, 1926 & 1927/Mum/2025, order dated 13.08.2025. The consistent principle in these decisions is that where the beneficiary of an accommodation entry is identified and the entry is established as belonging to such beneficiary, only the commission income can be brought to tax in the hands of the accommodation-entry provider; however, where the beneficiary remains unidentified and the assessee fails to satisfactorily explain the corresponding credit, the entire corresponding credit can be considered as unexplained cash credit under section 68 of the Act.

We therefore uphold the directions of the learned CIT(A). We, however, clarify that while carrying out the verification, the Assessing Officer shall examine the credits entry-wise, shall give the assessee reasonable opportunity to identify the beneficiaries and furnish supporting material, shall permit reasonable access to the relevant seized material relied upon by him if specifically requested, and shall also consider relevant information already available in the Department’s records to which the assessee specifically points. The Assessing Officer shall apply section 68 of the Act only to those credits which remain unexplained after undertaking the above exercise.

Accordingly, Ground Nos. 1 to 6 raised by the assessee are dismissed, subject to the above clarifications.

This is an appeal by the Department against the order of CIT(Appeals) for same assessment year 2005-06

We have heard the rival submissions and perused the material available on record. The Department has challenged the order of the learned CIT(A) mainly on the ground that the assessee was admittedly engaged in providing accommodation entries and, therefore, no deduction of expenses could be allowed against the commission income.

As regards Ground Nos. 1 and 2, the Department has challenged the direction of the learned CIT(A) allowing 50% of the expenses against the commission income, contending that the assessee was carrying on an activity prohibited by law and that Explanation 3 to section 37(1) of the Act barred such deduction.

We are unable to accept this contention. The prohibition contained in section 37 of the Act applies to an expenditure which is itself incurred for a purpose which constitutes an offence or is prohibited by law. It does not lay down that merely because the source of income arises from an illegal activity, every normal expenditure connected with computation of such income must automatically be disallowed. The Hon’ble Supreme Court in CIT v. S.C. Kothari [1971] 82 ITR 794 (SC) held that even where the business is illegal, the Revenue can tax only the real profits and cannot bring the gross receipts to tax without considering legitimate business outgoings. The same principle was reiterated in CIT v. Piara Singh [1980] 124 ITR 40 (SC).

In the present case, the expenses comprised items such as audit fees, bank charges, salaries and wages, office expenses, telephone charges, printing and stationery and other routine expenditure. The Assessing Officer has not identified any particular expenditure as a penalty, fine, bribe or payment which was itself prohibited by law. This is different from the principle laid down in Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), where the Supreme Court held that a penalty paid for breach of law cannot be allowed as a business expenditure. We therefore find no error in the learned CIT(A) allowing 50% of the expenditure.

In Ground No. 4, the Department has contended that, since the accommodation-entry activity was illegal or sham, the entire gross commission should be taxed without allowing any expenditure. We are unable to accept this proposition. The Income-tax Act taxes income or profits and not gross receipts merely because the activity giving rise to the income is unlawful. The Hon’ble Supreme Court in S.C. Kothari (supra) and Piara Singh (supra) has held that illegality of the activity does not by itself permit the Revenue to ignore legitimate expenditure while computing taxable profits. Accordingly, Ground No. 4 is dismissed.

In Ground No. 5, the Department has referred to the exception contained in paragraph 3.1(h) of CBDT Circular No. 5/2024 for filing the appeal notwithstanding the prescribed monetary limit. This ground concerns the maintainability of the Department’s appeal and does not affect the merits of the additions. Even assuming that the appeal falls within the said exception and is maintainable, the substantive grounds raised by the Department have been dismissed as discussed above. Ground No. 5 therefore does not require any separate adjudication on merits.

Accordingly, we find no reason to interfere with the direction of the learned CIT(A) allowing 50% of the expenses against the commission income. All the grounds raised by the Department are dismissed and the appeal of the Department is dismissed.

In the combined result, both the appeals of the assessee and Department are dismissed subject to directions as given in the preceding paragraphs. Since the facts and issue for consideration are common for the all the appeals before us for various assessment years under consideration, all the appeals by the assessee and Department are being disposed in light of the observations made with respect to respective appeals for assessment year 2005-06.

In the combined result, all the appeals raised by the assessee and Department are dismissed subject to directions as given in the preceding paragraphs.