MANAS KUMAR NAGURI,KOLKATA vs. DCIT, CENTRAL CIRCLE - XIII, KOLKATA, KOLKATA

Date of hearing: 21.12.2016 Date of pronouncement: 08.02.2017 For the Appellant: Shri M. D. Shah, AR For the Respondent: Shri Rajat Kumar Kureel, JCIT, Sr. DR ORDER

Per Dr. A. L. Saini, AM:

Manas Kumar Naguri, AY. 2010-11 working in conduit for providing accommodation entries, Cash represent amount received from the beneficiaries from where he used to get the commission. No commission was received from contra and clearing cheques who were working in conduits. Therefore, the undisclosed commission has been calculated only on the amount of cash deposited in the bank account. In the course of assessment proceedings, the AO asked the assessee to explain the source of cash deposited in his above mentioned bank accounts, to furnish the details along with address and PAN of ultimate beneficiaries receiving the accommodation entries, details of immediate beneficiaries to whom cheques were issued after depositing the cash and to furnish the details of persons from whom cash was received. The AO also asked the assessee to explain as to why the provisions of section 68 of the Act should not be invoked in his case. In response, it was submitted by the assessee that in the course of search in the case of Shri Shashi Kant Khetan, some bank accounts belonging to him (assessee) were inventorized and attached u/s 132(3) of the Act. It was submitted by the assessee that these bank accounts are undisclosed accounts and used by him for the purpose of providing book entries and earning commission. He used to earn commission to the tune of 25p to 50p on all the cheques issued consequent to cash deposits in such bank accounts. It was stated by him that since, he was not able to substantiate the quantum of earning and to avoid further litigation agreed to offer the commission income at the rate of 50p which comes to Rs.2,57,715/- for the year under consideration. The income so earned was redeployed in the bank balance(s). It was submitted by the assessee that he is engaged in the business of converting the cash into cheques and did not maintain any books of account and records of deposits and withdrawals of the undisclosed bank accounts. Therefore, he was not in position to furnish the details of the persons from whom cash was received or the immediate beneficiaries or the ultimate beneficiaries. However, the deposits in the undisclosed bank accounts were inter-related with the withdrawals, being inherent to the nature of the transactions in the aforesaid bank accounts. With regard to applicability of provisions of section 68 of the Act, it was contended by the assessee that his main business activity wasearning commission on converting cash into cheque and he has not maintained any books of account wherein he had credited any sum. He was maintaining only the bank accounts wherein the cash of beneficiaries was deposited and cheques were issued to them.

Manas Kumar Naguri, AY. 2010-11 The assessee submitted before the AO that the cash or cheques deposited in the undisclosed bank accounts did not belong to him and, therefore, there is no question of invoking provisions of section 68 of the Act in his case. It was also submitted by the assessee before the AO that judicially it has been held by various courts that the bank passbook or bank statement is not books of account. Hence, any deposit made in the bank account cannot be added u/s 68. The Assessee also submitted to the AO that even provisions of section 69,69A, 69B and 69C of the Act are not applicable in his case, However, the contention of the assessee was not accepted by the AO and it is held by him that the provisions of section 68 are applicable in the case of assessee because the assessee has failed to prove the identity of the service-takers, their creditworthiness and genuineness of the transactions. As per the AO, in the course of assessment proceedings, the assessee without prejudice to his contention that section 68 is not applicable, made an alternative plea that the department at the best can bring to tax the peak amount. The assessee offered sum of Rs. 2 lakhs on account of peak credit. The AO accepted the contention of the assessee that keeping in view the nature of business activity of providing book entries and as held by the ITAT,Kolkata in similar nature of cases, the peak credit theory is applicable in the assessee's case. However, the AO was not convinced with the working of the peak credit provided by the assessee and, therefore, after considering both the bank accounts, he himself arrived on a combined peak figure of Rs,52,50,000/- which is added to the income. The AO also added the commission income which was shown by the assessee in the return of income as disclosed in the course of search.

“5. I have considered the submission of the appellant and perused the assessment order. On facts there is no dispute that in the course of search operation it was gathered that the appellant was maintaining bank accounts in the name of his proprietorship concerns and, admittedly, these bank accounts were undisclosed. There is also not dispute on the fact that the appellant was engaged in the activity of providing accommodation entries to various beneficiary parties. That the appellant used to deposit the cash in his bank accounts and issuing the cheques to be reached to the ultimate beneficiaries. In the bank accounts the cheques were also deposited which were received by the appellant from the persons working

Manas Kumar Naguri, AY. 2010-11 in the chain of providing accommodation entries. It is claimed by the appellant that he was receiving the commission for the services rendered to the beneficiaries for providing book entries and the commission was charged only on the amount of cash deposits and the rate varies from 25p to 50p. In the course of search operation, theappellant disclosed commission income @ 0.50% on the amount of cash depositedin the undisclosed bank accounts and same was shown in the return of income filed for the year under consideration. During thecourse of assessment proceedings the AO asked various details from the appellant like, source of cash deposited in the bank accounts, name and addresses of the immediate and ultimate beneficiaries and the name and addresses of the persons from whom cash and cheques were received by him. The AO also asked as why provisions of section 68 of the Act should not be invoked. In response, it was submitted before the AO that the appellant has not maintained any books of account or records of the persons for whom work was done and, therefore, he was not in the position to provide any details of the persons as called for by the AO. It was also submitted by the appellant that the provisions of section 68 of the Act are not applicable in his case because no sum was found credited in his books of account and that the bankpassbook or the bank statement cannot be treated as appellant's books of account. However, the appellant came forward with an alternate plea that keeping in view the nature of activities carried on by him, in his case, at the most peak credit theory may be applied and the peak credit may be assessed in his hands. In support of this plea, the appellant relied on various decisions of ITAT, Kolkata. The appellant worked out the peak credit at Rs. 2 lakhs and offered the same for tax. The AO, in principle accepted the contention of the appellant that in his case peak credit theory is applicable to assess the income. However, he did not accept the contention of the appellant that provisions of section 68 are not applicable in his case. He also did not accept the working of peak credit provided by the appellant to offer the sum of Rs. 2 lakhs for tax. The AO was of the opinion that the appellant has simply offered the amount of initial deposits in the bank accounts as peak balance. After rejecting the working of the peak credit furnished by the appellant, the AO himself worked out the combined peak taking into account all the entries in the undisclosed bank accounts and arrived on a figure of Rs.52,50,000/-. The said amount of peak is added by the AO to the income of the appellant. The AO also added the income on account of commission as disclosed by the appellant in the return of income. In the course of appellate proceedings the appellant has argued that the AO has worked out the excessive peak amount and secondly, once the AOhas added the peak amount he should have not added the commission incomeagain because the commission is part of the peak and same was redeployed in bank balance. On careful consideration of the facts, I am of the opinion that the AO has rightly invoked provisions of section 68 of the Act and has also rightly applied the combined peak credit theory after considering all the entries in the undisclosed bank accounts. The reliance is placed on the decision in the case of ITO, Ward 36(4), Kolkata vs. Uday Shankar Mahawar, CIT vs. Praveen Kumar Agarwal, IT (SS) A No.61 & 74/Ko1/2003 and CIT vs. Loknath Prasad Gupta, IT (SS) A No.185 & 190/Ko1/2003, wherein on similar issue the Hon'ble ITAT, Kolkata upheld the addition to the Income by combined peak credit theory. I am of the opinion that the AO was justified in rejecting the peak amount worked out by the appellant because it was nothing but the amount of initial deposits made in the undisclosed account. He has not considered all the entries of the bank accounts to arrive on the figure of peak. Under the circumstances, I find no reason to disturb the peak amount arrived by the AO to make the addition to the income of the appellant and, therefore, the addition of combined peak credit of Rs.52,50,000/- made by the AO is confirmed. I am also not inclined to agree with the submission of the appellant that if once the AO has added peak credit, then the commission income cannot be added to the Income of appellant. There is no dispute on the fact that the appellant had earned commission income which was admitted by him and accordingly also disclosed in the return of income. In view of above, the addition on account of commission income is also confirmed. The ground nos. 1, 2 and the additional ground are dismissed.”

Manas Kumar Naguri, AY. 2010-11

3. Not being satisfied with the order of the Ld. CIT(A) the assessee is in further appeal before us and has taken the following grounds of appeal: “1. For that in the facts and circumstances of the case, the Ld. A.O. erred in incorrectly applying the 'peak credit' theory in the appellant's case. The action of the A.O. was wholly unreasonable, uncalled for and bad in law. The Ld. CIT(A) was unjustified in confirming the action of the A.O.

2. For that in the facts and circumstances of the case, the Ld. A.O erred in making additions u/s 68 of I.T. Act, in so far as the appellant was not maintaining any books of accounts. The action of the A.O. was wholly unreasonable, uncalled for and bad in law. The Ld. CIT(A) was unjustified in confirming the action of the AO.

3. Without prejudice to the above, the Ld. A.O. erred in not restricting the addition under 'peak credit theory' to the extent to appellant's own funds and not examining the explanation with respect to the same filed at the assessment stage. The action of the A.O. was wholly unreasonable, uncalled for and bad in law. The Ld. CIT(A) was unjustified in disregarding the explanation without passing any speaking order.

4. Without prejudice to the above, in the facts and circumstances of the case, the Ld. AO erred in making addition of Rs. 52,50,000/- as unexplained cash credit u/s 68 of Income Tax Act, 1961 under 'peak credit theory'. The action of the AO was wholly unreasonable, uncalled for and bad in law. The Ld. CIT(A) was unjustified in confirming the action of the A.O.

5. For that in the facts and circumstances of the case, the ld. A.O. erred in taxing income both under 'peak credit theory' and the 'undisclosed commission earnings. Thus, he has taken both mode of earning and application of such earnings. The action of the A.O. was wholly unreasonable, uncalled for and bad in law. The Ld. CIT(A) was unjustified in confirming the action of the A0.

6. For that in the facts and circumstances of the case, the Ld. A.O. erred in charging interest u/s. 234A, 234B and 234C and/or incorrectly calculating the same. The action of the AO was wholly unreasonable, uncalled for and bad in law. The Ld. CIT(A) was unjustified in confirming the action of the AO.”

4.1. Ld. AR for the assessee has submitted before us that the AO did the addition of Rs.52,50,000/- as unexplained cash credit under the head peak credit theory. During the course of search and seizure operation, the search team found out two unaccounted bank

Manas Kumar Naguri, AY. 2010-11 accounts and the assessee under consideration gave the statement and submitted to the search party that these two bank accounts did not belong to him, the entries therein belonged to other parties. The assessee was working as an accommodation entry provider. The assessee used to provide the accommodation entries to various parties and he used to get the commission. The assessee has offered the commission for taxation purpose in his return of income. The AO cannot make the addition on both ways i.e. based on the peak credit theory and based on the undisclosed commission earned by the assessee i.e. the AO has taken both mode of earnings, therefore, addition cannot be made based on both mode of earnings, it will be either peak credit theory or commission received. The Ld. AR for the assessee submitted in detail that search operation u/s. 132 of the Act was conducted in ‘Shashi Kant Khetan Group’ on 08.12.2009. Search operation was also conducted at the premises of the assessee. During the course of search it was found that the assessee is maintaining two undisclosed bank accounts in the name of his proprietorship concerns and these bank accounts were used by him to provide the accommodation entries. In other words, the assessee was engaged in the business of converting the cash into cheques and earning of commission income. The rate of commission varies from 25p to 50 p. The assessee submitted that in the undisclosed bank accounts there were credits on account of cash as well as the cheques. The cheques were deposited by the persons who are working in conduit for providing accommodation entries. The assessee had received commission only on the cheques issued by him by depositing the cash. No commission was received on deposits of cheques as they were the part of the chain providing book entries to various beneficiaries. The Ld AR for the assessee submitted that in the course of search, he voluntarily offered commission income of Rs.2,57,715/- for tax and same was also included in the return of income filed u/s 139(1) of the Act. It is further submitted by the assessee that during the course of assessment proceedings, he voluntarily offered additional income of Rs. 2 lakhs under the peak credit theory as the appellant was not able to give details of undisclosed transactions in the bank account. The AO, while accepting the fact that the peak credit theory is applicable in the case of assessee, came to conclusion that Income under peak credit theory should have been Rs.52,50,000/- as against Rs. 2 lakhs offered by the assessee and accordingly, he assessed the total income at Rs.56,72,690/-,which is wrong. While

Manas Kumar Naguri, AY. 2010-11 assessing the income, in addition to peak credit, he also made the addition on account of commission income without appreciating that the commission income was redeployed in the bank deposits.The Ld. AR for the assessee stated that the AO did not accept the peak credit of Rs. 2 lakhs offered by him for the reason that the assessee had offered only the initial deposit in the bank account. However, he failed to appreciate that the cash or cheques deposited in the bank account were not the money of the assessee and he was having liability to repay them. Under the circumstances, the peak of that money which was deposited by the appellant on his own account could be assessed under peak credit theory because entire deposits in the bank account are not owned by the assessee. But, the AO rejected the claim of the assessee and he worked out the peak credit after considering all the deposits in the bank accounts and made the addition. It is further argued on behalf of the assessee that the AO was of the opinion that provisions of section 68 of the Act are applicable in the case of assessee. However, he failed to appreciate that the provisions of section 68 are applicable only when a sum is found to be credited in the books of account of the assessee. In his case, no sum was found to be credited in his books of account as the assessee has not maintained any books of account. The bank passbook or bank statement cannot be treated as books of account maintained by the assessee as held by the various courts. It is contended by the assessee that, on the facts of the case, the AO be directed to accept the peak amount offered by the assesseevoluntarily in the course of assessment proceedings. It is also argued by the Ld. AR for the assessee that the AO was not justified in adding commission income, once he has added amount of combined peak credit appearing in the bank account. Hence, both the amounts of commission and peak deposit cannot be added simultaneously and AO be directed to exclude the peak deposit amount from the total assessed income.The Ld. AR for the assessee also placed reliance on a decision of Hon’ble Allahabad High Court in the case of Bhaiyalal Shyam Behari Vs. CIT (2005) 276 ITR 38 (All), wherein the Hon’ble Court has held as under: “6. The applicant submitted that as the amount of cash credit has been treated to tax by invoking the provisions of Section 68 of the Act and the said amount have been treated as income from the unexplained source, the applicant was entitled to take up a plea of addition of the aforesaid peak credit as the entire deposits have been treated to be income of the applicant. The contention is wholly misconceived. For adjudicating upon the plea of peak credit the factual foundation has to be laid by the assessee. He has to own all cash credit entries in the books of account and only thereafter the question of peak credit can be raised. As in the present case the amount of cash credits were standing in the names of different

Manas Kumar Naguri, AY. 2010-11 persons which all along the applicant had been claiming to be genuine deposit, withdrawal/payment of the amount to different set of persons during the previous years would not at all entitle the applicant to claim benefit of peak credit.”

Ld. AR for the assessee further placed reliance on a decision of ITAT, Delhi “H” Bench in the case of Shri Sanjay Kumar Garg Vs. ACIT in 1502 & 3531 to 3534 (Del) of 2009 for AYs 2000-01 to 2005-06 dated 28.01.2011, wherein it has been held as under: “62 We have heard both the parties and gone through the material available on record. During the course of survey operations, statement of the assessee was recorded wherein it has been categorically admitted that no purchase and sale activities are undertaken in the names of firms. The assessee was using the firms for the purpose of providing sale bills for which he was collecting commission. The assessee was depositing cash in the bank accounts of the dummy firms as well as his own firms through which he was carrying out accommodation entry business. At the time of survey no evidence was found to suggest that the assessee was engaged in realcommission business. No other source of income was also found. It is also the case of assessing officer that the assessee was carrying on business of entry provider. The assessments were reopened for this purpose only. The Id. CIT (Appeals) has given a finding of fact that the assessee was engaged in the business of providing accommodation entries and, therefore, the amounts deposited in the account of dummy concerns was to be treatedas total receipts on which commission was to be determined. Therefore, we are in agreement with the view of the Id. CIT(A) that only commission can be determined on the deposits made in the bank accounts of the dummy concerns. Therefore, we do not find any infirmity in the order passed by the Ld. CIT (A) that the amount deposited in the account of dummy concerns cannot be treated as income of the assessee. Therefore, the Ld. CIT(A), in our considered opinion, is justified in treating the cash deposited in various bank accounts controlled and operated by the assessee as the turnover of the accommodation entry business and commission income has to be estimated thereon.” 4.2. On the other hand, the Ld. DR for the revenue has primarily reiterated the stand taken by the Ld. CIT(A), which we have already noted in earlier para and is not repeated again for the sake of brevity.

4.3. Having heard the rival submissions and perused the material available on record, we are of the view that there is merit on the submission of the assessee as the proposition canvassed by the Ld. AR for the assessee are supported by the facts narrated above.As he has explained before us clearly that the AO cannot tax the income under two heads viz., peak credit theory or based on commission received. The assessee under consideration has already offered the commission for taxation purpose and the commission income is getting reflected in his return of income. Therefore, we are of the view that the addition made by Manas Kumar Naguri, AY. 2010-11 the AO based on the peak credit theory and confirmed by the Ld. CIT(A) needs to be deleted. Accordingly, we delete the addition.