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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
This appeal preferred by the assessee is against the order of the Ld. CIT(A)-10, Kolkata dated 22.02.2019 for AY 2015-16.
The sole issue in this appeal of assessee is against the action of Ld. CIT(A) in confirming the addition made by AO of Rs.1,62,00,000/- on account of undisclosed income u/s. 68 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”).
Briefly stated facts as observed by the AO are that the assessee filed his e-return of income on 29.03.2017 declaring total income of Rs.1,49,11,110/-. A survey operation u/s. 133A of the Act dated 22.08.2014 was conducted by the Investigation Wing, Kolkata at the office premises of the assessee. The case was selected for compulsory manual scrutiny as instructed by CBDT, New Delhi dated 07.07.2017. Subsequently, notice u/s. 143(2) of the Act was issued by ITO, Ward-36(4), Kolkata on 12.09.2017 and the same was duly served upon the assessee. Thereafter, the case was transferred from ITO, Ward-46(4), Kolkata to ACIT, circle-36, Kolkata. Thereafter, notice u/s. 142(1) of the Act along with detailed questionnaire was issued on 02.11.2017 and the same were served upon the assessee. During the financial year relevant to assessment year under consideration, the AO noted
2 Uday Shankar Mahawar, AY 2015-16 that the assessee derives his income from salary, house property, business or profession, capital and income from other sources. The AO while completing the assessment observed that during the course of survey operation on 22.08.2014 the assessee’s statement was recorded u/s. 133A of the Act and subsequently on oath u/s. 131 of the Act on 25.08.2014 was also recorded. In such statement, assessee had disclosed a sum of Rs.3,00,00,000/- as his undisclosed income over and above his regular income. And on 27.08.2014 assessee had submitted a disclosure petition in the office of the DIT (Inv.), Kolkata wherein he had stated as under:
"In the course of statement recorded under section 133A earlier I had voluntarily and in good faith offered income of Rs.3 Crores as undisclosed income of the group. The undersigned submits that it managed and controlled various companies which inter alia forms part of the list of companies inventoried in the course of survey. The undersigned had given some accommodation entries from these companies to various persons/ groups. The undersigned obtained accommodation entries and passed accommodation entries to various beneficiaries. The undersigned used to earn commission on the accommodation entries given through their companies and had to pay charges for the accommodation entries obtained. The commission earned from the accommodation entries given ranged from 0.3% to 0.8%. The undersigned had to also incur various expenses/charges in the course of giving such accommodation entries. Based on estimated calculations & workings, the undersigned had made a reasonable estimate and accordingly an aggregate income of Rs.3 Crores will be offered to tax in the hands of the undersigned, Shri Uday Shankar Mahawar for the Fin. Year 2014-15 relevant to A.Y. 2015-16. The aforesaid income being offered to tax represents the income which was originally offered in the course of survey proceedings. "
However, according to AO, on 29.03.2017, when the assessee filed his Income Tax Return for A.Y. 2015-16 he disclosed his Total Income (after giving deduction u/Ch – VIA), at Rs.1,49,11,1l0/-, which the AO noted was far below his disclosure made before the DIT(Inv.), Kolkata on 27.08.2014. During the course of Assessment Proceeding, the AO noted that assessee produced the Profit & Loss Account as well as Balance Sheet. After perusal of the Profit & Loss Account, the AO found that assessee had disclosed only Rs.1,38,00,000/- as 'Disclosed Income’ to the Department. So, according to AO, it is clear that assessee had disclosed an income which is less by Rs.1,62,00,000/- (Rs. 3 cr. – Rs.1,38,00,000/-) from the Income disclosed in his Statement recorded u/s. 131 of the Act on 25.08.2014 as well as in his Disclosure Petition dated: 27.08.2014. Taking note of these developments, the AO during the course of assessment proceedings, through Notice u/ s 142(1) of the Act, Dated: 02.11.2017 asked the assessee to produce complete computation of the Income of Rs.1,38,00,000/- mentioned as 'Disclosed Income to IT'. In response to 3 Uday Shankar Mahawar, AY 2015-16 the Notice, the Authorized Representative (AR), filed the assessee's submission, the relevant content has been recorded by AO in the assessment order which is as follows:-
"Post, survey proceeding at my premises, my name was highlighted by the media, news channels and other agencies. As a result of which, I lost my reputation and credibility among all business groups with which I had good relations and from whom I was supposed to receive the commission income. Also, as a consequence to the survey proceedings at my premises the Income Tax Department consecutively, conducted search and survey operations in almost all business groups in which I had given entries. As a result of which most of the business groups from whom I was supposed to received my commission income, refused to pay me the balance amounts. The amounts which were received in actual were offered for taxation for the A. y. 2015-16. As I failed to recover any further amount and the same seems no more recoverable, hence only the amount actually received by me was shown as 'Income Disclosed to IT'.”
According to AO, the above reply of the assessee is clearly a story for non-payment of the disclosed amount. But, according to AO, even the assessee had failed to substantiate the amount offered for taxation in his ITR as to how could he derived at that figure. In relation to the above mentioned facts and failure on his part to substantiate his claim in ITR, he was Show Caused vide letter dated 11.12.2017 as to why such difference of Rs.1,62,00,000/- (Rs.3,00,00,000 - Rs.1,38,00,000) should not be treated as his “Undisclosed Income” and added back to the total income for the A.Y. 2015-16. According to AO, the assessee appeared before AO on 18.12.2017 and submitted that the amount that he has disclosed at the time of Survey u/s. 133A dated 22.08.2014 was unpaid commission. According to assessee, such receivable had become ‘Bad Debt’ after the department conducted raid on the beneficiary’s premises. However, according to AO, the reply of the assessee is not acceptable as the source of the amount was from providing accommodation entries as an Entry Operator and as the assessee has already disclosed the same during the course of Survey Operation dated 22.08.2014. And according to AO, the disclosed sum of Rs. 3,00,00,000/- was earned by the assessee while making such accommodation entries in a subversive manner against the law to benefit people to reduce their taxable income. And, therefore, such income cannot be treated as Bad Debt as it was done to abuse the tax laws. Therefore, since he had disclosed Rs. 3,00,00,000/- at the time of Survey and in his disclosure petition, hence, he is liable to disclose the entire sum. Hence, the difference of Rs.1,62,00,000/- (Rs.3,00,00,000 - Rs.1,38,00,000) was treated as his ‘Undisclosed Income’ and added back to the total income for the A.Y. 2015-16.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that a survey operation was conducted on 22.08.2014 and statement was recorded by the department wherein assessee offered Rs. 3 cr. as his undisclosed income. The assessee reiterated the same on 25.08.2014 as well as by filing a disclosure petition on 27.08.2014 which has been reproduced at para 3 supra. We note that though the assessee offered Rs.3 cr. as his undisclosed income during the relevant assessment year in the year of survey, but when he filed return of income he offered only Rs.1,38,00,000/-. On being asked why he has brought down his undisclosed income from Rs. 3 cr. to Rs.1,38,00,000/-, the assessee had offered an explanation which states that after the survey action by the department at his office premises, his name was adversely highlighted by the media and news channels and other agencies. As a result of the adverse publicity/media glare, he lost his reputation and credibility as an entry-operator among all business groups with which he had good relations and from whom he was supposed to receive the commission income (for the service he rendered to give accommodation entry). Also, as a consequence to the survey proceedings at his premises, the Income Tax Department consecutively, conducted search/survey operations in almost all business groups in which he had given accommodation entries, which action in turn annoyed and enraged them and so they consequently distanced from him and refused to pay the commission for his service. Resultantly, most of the business groups beneficiaries from whom he was supposed to receive his commission income, refused to pay him the balance due amounts. According to assessee, the amounts which were received in actual [real income] were offered for taxation for the A. Y. 2015-16. And since he failed to recover any further amount and the same seems not possible in future hence, only the amount actually received by him was shown while filing the return of income.
From the aforesaid facts and circumstances discussed, when we analyze the facts as revealed by the disclosure petition, we note that immediately after the survey operation the disclosure petition which was filed on 27.08.2014, the relevant statement of assessee can be culled out as under:
5 Uday Shankar Mahawar, AY 2015-16 “…….The undersigned submits that it managed and controlled various companies which inter alia forms part of the list of companies inventoried in the course of survey. The undersigned had given some accommodation entries from these companies to various persons/ groups……. Based on estimated calculations & workings, the undersigned had made a reasonable estimate and accordingly an aggregate income of Rs.3 Crores will be offered to tax in the hands of the undersigned, Shri Uday Shankar Mahawar for the Fin. Year 2014-15 relevant to A.Y. 2015-16.”
So, it is discerned from the above statement in the Disclosure petition of the assessee and during the survey and after survey the assessee has admitted that he managed and controlled various companies and had given accommodation entries from these companies to various beneficiaries and got commission for his services. Based on the estimated calculations and workings, for his services rendered to the beneficiaries, he had projected/estimated an income of Rs. 3 cr. during the assessment year 2015-16 when the survey took place on 22nd October, 2014. After the statement and disclosure petition has been filed in good faith as stated, the assessee found that the persons/beneficiaries who took benefit of the accommodation entries refused to pay him for the services he rendered to them, since his reputation as an accommodation entry provider was badly hit and stood exposed by the media glare; and simultaneously the department started knocking at the doors of the beneficiaries which in turn enraged them and made them distancing from him. And consequently they refused to pay the commission as promised to him for the services rendered to them. Because of this negative development, the assessee found that he was out of his business/ profession of providing accommodation entry and in that back-lash he could realize only Rs.1.38 cr. in place of Rs. 3 cr. as estimated earlier. Therefore, in this back ground, we note that the assessee while filing the return of income had offered his undisclosed income only at Rs.1.38 cr. in place of Rs. 3 cr. which he estimated to be his income while filing the disclosure petition. However, his claim of realizing only Rs.1.38 cr. from the market was not believed/accepted by the AO/Ld. CIT(A). According to AO, it was an afterthought to wriggle out of the commitment made by filing disclosure petition wherein assessee on his own volition disclosed his undisclosed income to the tune of Rs. 3 cr. So he was pleased to add the difference of Rs.1.62 cr. to the total income of the assessee, which action of AO has been upheld by the Ld. CIT(A). We do not countenance this action of the authorities below in the back-drop of facts and circumstances discussed (supra). Though we acknowledge that admission is a best piece of evidence, here on the facts of the case, admission alone cannot be the basis for mulcting the addition. We have 6 Uday Shankar Mahawar, AY 2015-16 to note that the survey took place on 22.10.2014, and the assessee when asked by the Investigation Wing to offer his ‘undisclosed income’ was intended for the entire financial year, so he has to offer the income for the entire AY 2015-16, i.e. upto 31.03.2015, which means the assessee had to estimate/work out the income which he would get for his service of accommodation entry providing rendered to his customers upto 31.03.2015. It has to be appreciated that the assessee has offered through his disclosure petition dated 27.08.2014 Rs. 3 cr. as his undisclosed income for AY 2015-16, which was based on estimation. And it is also noted from a reading of assessment order and the first appellate order that the case of department/AO is not that incriminating material seized during survey on 22.08.2014 suggest hidden income of Rs. 3 cr. on the date of survey and based on the incriminating materials the assessee had offered Rs. 3 cr. In other words, the survey team had incriminating material to support assessee’s undisclosed income of Rs. 3 cr. and the disclosure petition of assessee, even if discarded could independently support the addition of Rs. 3 cr. And even if that is the case of AO, then also the assessee’s explanation as to why he had to scale down his estimated undisclosed income from Rs. 3 cr. to Rs.1.38 cr. needs to be appreciated and cannot be brushed aside unless there is material to suggest that the explanation given by the assessee is a lie and only intended to mislead the department and since that is not the case in hand, moreover we note that the AO and the Ld. CIT(A) has accepted/not disputed that the assessee was engaged in the activity of providing accommodation entry to the customers/beneficiaries which is not a legally recognized service and is a pernicious illegal activity, so the assessee was engaged in the illegal activity of providing accommodation entry to the customers for a commission which the assessee estimated his undisclosed income at Rs. 3 cr. on 27.08.2014 cannot be the basis of AO to make the addition of Rs.1.68 cr., for the reasons that even if for argument sake, the estimated income of assessee for AY 20-15-16 is taken as Rs. 3 cr. then also due to the factual circumstance which developed after the survey, we had noted that the customers/beneficiaries refused to pay for his services since the department started rounding up the beneficiaries. The survey attracted undue media attention, which resulted in putting a full stop to the assessee’s business/profession of illegal activity of providing accommodation entry and thus he was out of business/profession and the income expected did not come into his coffers, had to be accepted in the given facts and circumstances discussed (supra) and, therefore, the income which came into the hands of assessee which 7 Uday Shankar Mahawar, AY 2015-16 he has offered in his ITR can only be taxed in the absence of any evidence to disprove the explanation rendered by the assessee. So, resultantly even if it is accepted that the assessee’s estimate of Rs.3 cr. as his undisclosed income is correct, still, since he could retrieve only Rs.1.38 cr. this year and there is no possibility to recover the balance of Rs.1.68 cr., this balance amount non-recoverable to the tune of Rs.1.68 cr. is loss suffered by the assessee which is incidental to his illegal activity of providing accommodation entry. We also note that during assessment proceeding, the assessee’s plea that balance of the income could not be recovered and the same to be treated as bad debt could not find favour with the AO, who did not accept the same because the assessee was doing an illegal activity of providing accommodation entry to the beneficiaries to jack-up their expenditure and in turn reduce their profit. So, we note that the AO accepted the fact that the assessee was in the illegal activity which is the source of his undisclosed income. Further we note that in the disclosure statement the assessee in no uncertain terms had admitted to be an accommodation entry provider. This admission of the assessee has been accepted by the AO and the Ld. CIT(A) as discussed before. So, the amount he could not recover from his illegal activity has to be allowed as loss. For that proposition we rely on the ratio decidendi of the Hon’ble Supreme Court in the case of CIT Vs. Piara Singh (1980) 124 ITR 40 (SC) will be attracted. The head-notes read as follows:
“The respondent, who was carrying on smuggling activity, was apprehended by the Indian police, while crossing the border into Pakistan, and a sum of Rs. 65,000/- in currency notes was recovered from his person. On interrogation he stated that he was taking the currency notes to Pakistan to purchase gold there and smuggle it into India. The customs authorities confiscated the currency notes. The income-tax authorities found that the assessee was carrying on the business of smuggling and that he was liable to income-tax on income from that business and such income was assessed to tax. The question was whether the assessee was entitled to deduction under s. 10 of the Indian I.T. Act, 1922, of the loss of Rs. 65,000, arising by the confiscation of the currency notes: Held, that the carriage of the currency notes across the border was an essential part of the smuggling operation and detection by the customs authorities and consequent confiscation was a necessary incident and constituted a normal feature of such an operation. The confiscation of the currency notes was a loss occasioned in pursuing the business of smuggling: it was a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It was a loss which sprang directly from the carrying on of the business and was incidental to it and its deduction had to be allowed under s. 10.”
Also the Hon’ble Supreme Court in the case of Dr. T. A. Quereshi Vs. CIT (2006) 287 ITR 547 (SC) has held as under (head notes):
8 Uday Shankar Mahawar, AY 2015-16 “BUSINESS LOSS - LOSS OF STOCK-IN-TRADE - IS A BUSINESS LOSS - MEDICAL PRACTITIONER - HEROIN FORMING PART OF STOCK-IN-TRADE OF ASSESSEE SEIZED - ASSESSEE ENTITLED TO DEDUCT VALUE OF HEROIN SEIZED FROM GROSS INCOME AS BUSINESS LOSS - THAT POSSESSION OF HEROIN IS AN OFFENCE IRRELEVANT - PROVISION RELATING TO ALLOWANCE OF BUSINESS EXPENDITURE DOES NOT GOVERN DEDUCTION OF BUSINESS LOSS - INCOME- TAX ACT, 1961, s. 37 , Expln BUSINESS EXPENDITURE - PROVISION RELATING TO ALLOWANCE OF BUSINESS EXPENDITURE DOES NOT GOVERN DEDUCTION OF BUSINESS LOSS - INCOME- TAX ACT, 1961, s. 37 , Expln LEGAL PRINCIPLES - CASES TO BE DECIDED NOT ON ONE'S MORAL VIEWS - LAW DIFFERENT FROM MORALITY The assessee, a medical practitioner, claimed deduction of the value of heroin seized from his gross income. The Department denied the deduction. On appeal the Appellate Tribunal held as a fact that heroin was a part of his stock-in-trade and allowed deduction of the estimated value of the heroin seized from the gross income as a business loss. On appeal the High Court held that the rigour of the Explanation to section 37 of the Income-tax Act, 1961, was fully satisfied, that possession of heroin was an offence, that it was disgraceful for. a doctor to indulge in activities against humanity, and that hence the question of claiming deduction of the value of the seized article did not arise. On appeal to the Supreme Court: Held, reversing the decision of the High Court, (i) that the Explanation to section 37 had no relevance as this was not a case at business expenditure but was one of business loss. Business loss was allowable an ordinary commercial principles in computing the profits. Once It was found that the heroin seized formed art of the stock-In-trade of the assessee, it followed that the seizure and confiscation of such stock-in-trade had to be allowed as a business loss. CIT v . PIARA SINGH [1980] 124 ITR 40 (SC) followed.”
To sum up, we note that in this case on hand the assessee for this year had estimated his undisclosed income to the tune of Rs. 3 cr. from his illegal activity of providing accommodation entry after survey on his premises on 22.08.2014. However, since the survey in his premises attracted media attention his customers/beneficiaries distanced from him, which resulted in assessee losing Rs.1.68 cr. (non-recovery of commission from the illegal activity of providing accommodation entry) so, we find that the loss occurred to the assessee springs directly from the carrying on of the business of providing accommodation entry to the beneficiaries and is thus incidental to it has to be allowed as a deduction. We note that though the AO and Ld. CIT(A) noted that the assessee is in the illegal activity of providing accommodation entry did not appreciate the true significance of the distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of law committed in a business inherently unlawful and constituting a normal
9 Uday Shankar Mahawar, AY 2015-16 incident of it’s activity [CIT Vs. Piara Singh (supra)] and, therefore, in the present case in hand since the assessee has suffered the loss in his unlawful activity of giving accommodation entry which resulted in the beneficiaries not giving the income to the assessee is an allowable deduction. Thus, even if the assessee’s estimation of Rs. 3 cr. as his income as per the disclosure petition is accepted, still the assessee’s loss of Rs. 1.68 cr. has to be given as deduction and, therefore, the addition in any case was not warranted. So, we direct deletion of Rs.1.68 cr. as discussed supra.
In the result, the appeal of assessee is allowed.
Order is pronounced in the open court on 15th January, 2020.