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Facts
The revenue appealed against the CIT(A)'s order deleting additions made by the AO under Section 68 of the Income Tax Act. The additions pertained to transactions amounting to Rs. 79,84,48,192/- with M/s. Orchid Solutions Pvt. Ltd., which the AO considered as unexplained credit.
Held
The Tribunal held that the assessee, acting as a stockbroker, merely facilitated transactions for its clients, receiving and paying money as per SEBI regulations. The assessee did not own the funds and had only earned brokerage income, which was offered to tax. The nature and source of transactions were duly explained, and thus Section 68 could not be invoked.
Key Issues
Whether the amounts received by a stockbroker for facilitating share transactions for clients constitute unexplained cash credit under Section 68 of the Income Tax Act, when the broker acted as a mere intermediary and the funds were client's money.
Sections Cited
68, 143(3), 147, 148, 148A(b), 250
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Income Tax Appellate Tribunal, ‘C’ BENCH
Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
आदेश / O R D E R PER SANDEEP GOSAIN (J.M): These appeals are filed by the revenue against the order of CIT(A) -54, Mumbai dated 12/08/2024 & 18/12/2024 respectively for A.Y.2014-15, 2015-16 & 2016-17 in the
The grounds raised by the Revenue are inter-related and inter-connected and relates to challenging the order of ld. CIT(A) in deleting the additions made by the AO u/s.68 of the Income Tax Act, therefore, we have decided to adjudicate these grounds through the present consolidated order. We shall take ITA No. No.5686/Mum/2024 as the lead case and the facts narrated therein.
Ld. DR appearing on behalf of the department relied upon the order passed by the AO and also submissions of note cited by him and the same has been reproduced herein below:-
This appeal is filed by the department against the Order of CIT (A) passed u/s 250 of the IT Act pertaining to A.Y. 2014-15 Brief facts of the case:
1. 1. Assessee is engaged in the business of stock broking of equities, commodities and currency.
2. Assessee filed original return of income on 29.09.2014 declaring total income of Rs. 2.23.37.950/- Assessment u/s 143(3) was completed on 21.10.2016 assessing total Income at Rs.2.61,85,030/- 3. Subsequently, case of the assessee was re-opened by issuance of notice of notice u/s 148on 29.06.2021.
4. Based on the order of the Hon'ble Supreme Court in case of Ashish Agarwala & others notice u/s 148A(b) was issued to and others Choice Equity Broking Pvt. Ltd the assessee and subsequently, order u/s 148A(d) was passed on 26.07.2022 and notice u/s 148 issued on 26.07.2022.
Subsequently, assessment order u/s 147 r.w.s 1448 of the Income Tax Act. 1961 was passed on 28.05.2023 assessing total income at Rs.82.07.86.142/-- Gist of the issues involved.
1. Whether on facts and circumstances of the case and in law. Ld. CIT(A) has erred in deleting the addition u/s 68 of the IT Act, 1961 amounting to Rs.79,84,48,192/- being transactions with M/s. Orchid Solutions Pvt. Ltd. despite the fact that the AO has provided details of 5 layers of cash deposit and subsequent RTGS to M/s Orchid Solutions Pvt. Ltd. which was subsequently received by the assessee company and thereby establishing bogus nature of receipt by assessee.
2. Whether on facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition u/s 68 of the IT Act, 1961 amounting to Rs.79,84,48,192/- being transactions with M/s Orchid Solutions Pvt. Ltd. ignoring that the assessee received money from struck off company with no viable business operations or creditworthiness.
3. Whether on facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition u/s 68 of the IT Act, 1961 amounting to Rs. 79,84,48,192/- being transactions with M/s. Orchid Solutions Pvt. Ltd without appreciating the fact that bank account in which the assessee received money from M/s Orchid Solutions Pvt. Ltd. belonged to the assessee and the assessee had sole rights to operate the account.
4. Whether on facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition u/s 68 of the IT Act, 1961 amounting to Rs. 79,84,48,192/- without appreciating that no holding statement is available from the part of M/s. Orchid Solutions Private Limited to establish that the shares and securities claimed to have been bought on their behalf were actually delivered to their DEMAT account. Findings on issues/GOA and others Choice Equity Broking Pvt. Ltd All the GOA are inter-connected and relate to single issue i.e. Addition made u/s 68 to the tune of Rs.79.84.48.192/-u/s 68 of the IT Act & hence taken up together: AO has made additions based on 1. As per the information available on record the assessee company conducted transactions worth Rs.38,88.50,000/- with Jacinda Marketing Private Ltd. Further assessee company has made transactions worth Rs.29,55,50,000/- with M/s. Pratikashya Commosales Pvt. Ltd. (Para 1 Page 1 of AO) 2. As per the information received from DDIT (Inv.)-unit 6(1). Kolkata, Mr. Pradip Kumar Bisa & Bima Maru operate a private limited having current account in the name of Jacinda Marketing Private Ltd. with Kankurgachi branch, West Bengal since 07.10.13. Perusal of account revealed credits consisting of high value cash deposits and proceeds Immediately withdrawn in cash. On perusal of party wise details it was found that assessee company was having transactions of Rs.38,88,50,000/- with the above said persons/entities. (Para 1.2 Page 2 of AO) 3. Another information was received from the DDIT Unit -2(3), Kolkata through insight portal where it was found that assessee company had entered into transaction with shell companies worth Rs.50,00,000/- 4. Similarly based on the information obtained it was found that company named M/s. Pratikshya Commosales Pvt. Ltd. was operating a current account with Kankurgachi branch, West Bengal since 22.11.2022. Perusal of account revealed credits consisting of high value cash deposits and proceeds were immediately withdrawn in cash. On perusal of party wise details it was found that the assessee company was having transactions of Rs.29,55,50,000/- with the above said persons/entities. (Para 1.2 Page 2 of AO) 5. Assessee vide notice u/s 148 dated 29.06.2021 and subsequently vide notice u/s 148A(b) was asked to explain the transactions.
and others Choice Equity Broking Pvt. Ltd 6. In response to the said notices, assessee submitted that it had received amount of Rs.79.83 crores from M/s Orchid Solutions Pvt. Ltd. and not from the above entities namely Jacinda Marketing Private Ltd. and M/s. Pratikshya Commosales Pvt. Ltd. Response not found to be satisfactory hence case was re-opened wrt transaction of all the three parties. (Para 1.3 Page 2 of AO) 7. Assessee submitted copies of ledgers, Demat account and other related documents related to M/s. Orchid Solutions Pvt. Ltd. along with an affidavit of not having done any transaction with Jacinda Marketing Pvt. Ltd. and M/s Pratikshya Marketing Pvt. Ltd. (Para 3.2 Page 3 of AO) 8. Similar money flow of high value deposits could be seen in case in case of M/s Bluesnow Dealcom Private Limited having current account in Axis Bank, CIT Road branch in Kolkata. where multiple rounds of inflow/outflow transactions with Ashamaan Commosales Pvt. Ltd. Brijdham Dealcom, Manner Distributors as well as Orchid Solutions could be seen (Para 3.3 Page 3 and 4 of AO) 9. AO has analysed the transaction/money trail that has taken place and observed that most of these companies were shell companies according to the departmental database.
ITR Analysis of companies made by AO reveals that they did not file any ITR for various years as highlighted in the assessment order. (Page 4 of AO) 11. Also the said companies through which the funds were routed had no substantial business and had negative profit before tax or had no taxable income or negligible taxable income which clearly establishes ingenuineness of transactions and proves that they were only used to route funds to the ultimate beneficiaries including the assessee. (Page 5 of AO) 12. Detailed pattern of how the funds were routed and layered provided by AO (Refer table on Page 6 of AO) 13. Creditworthiness of Orchid Solutions could not be established by the assessee during he assessment proceedings. (Para 4 Page 6 of AO)
Hence addition made by AO to the tune of Rs.79.84.48.192/- as unexplained credit u/s 68 of the IT Act, 1961. (Para 6 Page 7 of AO) CIT(A) has deleted the additions based on: (Para 7 Page 24 onwards) 1. It is clear that as regards the transactions of the appellant with Orchid Solutions Pvt. Ltd. the amount was received for purchase of shares for the client. Being a share broker the role of the appellant was only receipt/payment of money for sale/purchase of shares made by the client. (Para 7.4 page 25 of CIT(A) Order) 2. The amount so received was paid to the stock exchange as per settlement regulations laid down by SEBI and that appellant only earned brokerage income from the said transactions. (Para 7.4 Page 26 of CIT(A) Order) 3. The sum of Rs. 79,84,48,192/- received from Orchid Solutions was a transfer of money from client's current account to client's pool account or the BSE client account. 4. Appellant has duly provided copies of ledgers, demat account, contract notes, KYC of the client which establishes source of money 5. Appellant has earned brokerage/commission income which has been duly offered to tax. 6. Appellant is not beneficial owner/real owner of the cash credit in the SEBI nominated separate bank account nor the owner of shares lying in the demat account of clients maintained by the appellant. Hence provisions of 5.68 cannot be invoked (Para 7.6 Page 27 of CIT(A) Order) 7. No evidence brought on record to suggest that appellant has used his own money which was routed through this company and brought back (Para 7.8 Page 28 of CIT(A) 8. Hence additions made by AO deleted. and others Choice Equity Broking Pvt. Ltd Prayer: Hence taking into consideration facts and circumstances of the case and the legal proposition advanced it is humbly prayed that the appeal filed by the department be allowed and additions made by AO be confirmed.
It was submitted by ld. DR that as per the information available with the AO assessee had made transactions with Jacinda Marketing Private Ltd., Pratikashya Commosales Pvt. Ltd and on scrutiny of the bank accounts of both the companies, it was found that there was high value cash deposits made in respective accounts which was followed by immediate withdrawals. Thus, the case of the assessee was reopened and ultimately, it was found that in the first layer there was cash deposits in the bank account of these companies and thereafter, through various layers of other entities the said account was reached to M/s. Orchid Solutions Pvt. Ltd., and then finally, in the account of the assessee. Since, there was no creditworthiness of M/s. Orchid Solutions Pvt. Ltd., hence, additions u/s.68 of the Income Tax Act was properly made by the ld. AO.
5. Whereas on the contrary, ld. AR while relying upon the order of the ld. CIT(A) submitted that it had only entered into transactions with M/s. Orchid Solutions Pvt. Ltd., in the capacity of stock broker as the assessee is engaged in the business of stock broker of equities, commodities and currency. It was submitted that the company of the assessee is registered as stock broker with SEBI, Bombay Stock Exchange, National Stock Exchange and Multi Commodity and others Choice Equity Broking Pvt. Ltd Exchange of India. It was further submitted that assessee had entered into transactions with M/s. Orchid Solutions Pvt. Ltd., and it had not entered into any transaction with Jacinda Marketing Private Ltd., Pratikashya Commosales Pvt. Ltd. It was further submitted that it was engaged in the business of broking of equities and currency and as regard the transactions with M/s. Orchid Solutions Pvt. Ltd., is concerned, the amount was received for purchase of shares and being a share broker, the role of the assessee was only receipt/payment of money for sale/purchase of shares made by the client. It was further stated that the amount received from the client to the stock exchange as per the settlement regulations laid down by SEBI and that it only earned brokerage income from the said transactions. It was further submitted that money received from the client for the purpose of purchase of shares was kept in a separate bank account, as per SEBI guidelines and the money cannot be used for any other purpose or for its own use. It was also submitted that in order to substantiate its case, the assessee has submitted the copy of bank account, ledger and other documents related to M/s. Orchid Solutions Pvt. Ltd., before the AO during the assessment proceedings and since assessee is only a broker so, it acted as a mediator between the buyer and seller of the shares through the stock exchange and it was not at all the beneficial owner of the amount received in the clients imprest / pool account.
We have heard the Counsels of both the parties and perused the material placed on record, judgments cited before and others Choice Equity Broking Pvt. Ltd us and also the orders passed by the revenue authorities. From the records we noticed that assessee being a broker was only a mediator between the buyer and seller of shares through stock exchange and it was not a beneficial owner of the amount received in the client’s imprest / pool account. In fact the sum of Rs.79.83 Crores were received by the assessee from M/s. Orchid Sales Pvt. Ltd., but said amount was actually transfer of money from the client’s current account to client’s pool account and that there was not transfer / credit in the assessee’s bank account. Undisputedly, assessee was engaged in the business of broking of Equities and Currency and that it was a registered Broker with BSE, NSE and MCX. Orchid Solutions Pvt Ltd was its client, who had used the services of the assessee for purchase of shares. It is seen that the assessee had furnished before the AO the copy of the ledgers, date wise and share wise transactions (Contract Notes) and Demat Accounts related to Orchid Solutions Pvt Ltd. It is also observed that being a share broker, the assessee has done the KYC of its client as per norms laid down by SEBI. It is also apparent that there are very clear SEBI guidelines which lay down that it is compulsory for all stock brokers to keep the money of the clients in a separate account and this money cannot be used by the stock broker for himself/itself or for any other client or for any other purpose. It is noticed that the money received from the client has been deposited in the BSE Client Account with Axis Bank.
Thus, it is clear that as regards the transactions of the assessee with Orchid Solutions Pvt Ltd, the amount was and others Choice Equity Broking Pvt. Ltd received for purchase of shares for the client. Being a share broker, the role of the assessee was only receipt/payment of money for sale/purchase of shares made by the client. The amount received from the client was paid to the stock exchange as per the settlement regulation laid down by SEBI res that the assessee only earned brokerage income from the impugned transactions is also clear that the money received from the client for purchase of shares was kept in a separate bank account, as per SEBI guidelines, and the money could not in any case be used for any other purpose or for its own use. The assessee, being a stock broker, was only a mediator between the buyer and seller of shares through the stock exchange and it was not the beneficial owner of the amount received in the clients Imprest/ pool account. The sum of Rs. 79,84,48, 192/- received from Orchid Solutions Pvt Ltd was a transfer of money from the client's current account to Clients Pool Account or the BSE Client Account and this money could not be used for any other purpose other than purchase of shares based on the instructions of the client. The assessee was not the beneficiary or the beneficial owner of the money received as the money received in the BSE Client Account could not be used for any other purpose other than the purchase of shares as per the client's instructions. The money has been duly transferred to the stock exchange as the settlement system of the stock exchange and the shares so purchased have been credited to the Demat Account of the client. The assessee has duly provided to the AO the copies of the Demat Account of the client, the ledger and the relevant contract notes. It is also seen that the KYC of the client has and others Choice Equity Broking Pvt. Ltd also been done as per the guidelines laid down by SEBI. Thus, it is evident that the assessee has duly discharged its onus to explain the nature and source of the impugned credits. The nature of the transactions has been duly explained as being transactions executed as a stock broker. The source of the money has been proved by the KYC of the client, its ledgers, contract notes and Demat Account statement. The assessee, being a stock broker, has earned brokerage from these transactions, which have been duly offered for tax. The assessee cannot be held responsible for the acts of omission or commission of its client, till the time it has complied with the regulatory guidelines of SEBI.
We are conscious of the fact that ownership of the cash credit is important to determine before making any additions u/s.68 of the Act. On this proposition, reliance is being placed upon the decision of the Hon’ble Supreme Court in the case of CIT vs. Daulat Ram Ramwatmull (1973) 87 ITR 349(SC) held that it is a common feature of commercial and other transactions that securities are offered by other persons to guarantee the payment of the amount which may be found due from the principal debtor. The concept of security and ownership are different and it would be a wholly erroneous approach to hold that a thing offered in security by a third person to guarantee the payment of debt due from the principal debtor belongs not to the surety but to the principal debtor. The onus to prove that the apparent is not the real is on the person who claims it to be so. In the same decision it was further held that a person can be held to be the owner of and others Choice Equity Broking Pvt. Ltd a sum of money if the explanation furnished by him regarding the source of that money is found to be not correct. From the simple fact that the explanation regarding the source of money furnished by A, in whose name the money is lying in deposit, has been found to be false, it would be a remote and far-fetched conclusion to hold that the money belongs to B. The relevant part of the order is as follows:
The onus to prove that the apparent is not the real is on the party who claims it to be so. As it was the department which claimed that the amount of fixed deposit receipt belonged to the respondent firm even though the receipt had been issued in the name of B, the burden laid on the department to prove that the respondent was the owner of the amount despite the fact that the receipt was in the name of B. A simple way of discharging the onus and resolving the controversy was to trace the source and origin of the amount and find out its ultimate destination. So far as the source was concerned, there was no material on the record to show that the amount came from the coffers of the respondent-firm or that it was tendered in B Calcutta branch of the Central Bank, on behalf of the respondent. As regards the destination of the amount, there was nothing to show that it went to the coffers of the respondent. On the contrary, there was positive evidence that the amount was received by B. It would thus follow that both as regards the source as well as the destination of the amount, the material on the record gave no support to the claim of the department.
Therefore, in our view, the respondent being a stock exchange broker is not real owner of cash credit in the SEBI nominated separate bank account nor the owner of the shares lying in the Demat account of the clients. Since the nature and source of the transactions have been duly explained,
10. No new facts or circumstances have been brought before us by the assessee / department in order to controvert or rebut the findings so recorded by the ld. CIT(A), therefore, we have no reasons to interfere into or to deviate from the lawful findings so recorded by the ld. CIT(A), hence, we uphold the order passed by ld. CIT(A) and dismiss the grounds raised by the Revenue. Consequently, grounds raised by the Revenue stands rejected. Since the respondent has moved an application under Rule 27 of the Income Tax Appellate Tribunal Rules, but in view of the fact that we have dismissed the grounds raised by the Revenue and upheld the order of the ld. CIT(A) order, we are not adjudicating the application filed by the assessee under Rule 27 as the same become academic in nature.
In so far as appeals in & 5687/Mum/2024, the facts and issues are identical therefore, our finding given in the aforesaid appeal will apply mutatis mutandis for these appeals also.
Order pronounced on 28th July, 2025.