ACIT, NEW DELHI vs. SH. RAKESH GUPTA, NEW DELHI

The revenue has raised that the ld CIT(A) has erred in law and on facts of the case in reducing the rate of commission income earned by providing accommodation entries to 2% from 5.6 % on the total turn over taken by the AO.

A search and seizure operation u/s 132 of the Act was conducted by the investigation wing of the department on 26.04.2010 on Shri Vishesh Gupta and Shri Rakesh Gupta. Based on the search notice u/s 153A of the Income Tax Act was issued to the assessee on 11.04.2011. In response to that assessee submitted a letter dated 30.05.2012 stating that return filed u/s 139 showing income of Rs. 66081/- may be treated as return filed in response to notice u/s 153A of the act.

During the course of search, it was found that the assessee is engaged in providing accommodation entries through bogus purchase bills from the firms owned and controlled by the assessee. In the statement u/s 132 the assessee admitted this fact. The assessee is operating the business of accommodation entry in close association with another entry providers by the name of Shri Vaivab Jain and Shri Navneet Jain. Therefore, it is an undisputed fact that the appellant is one of the entry providers of the group. Statement on 26.04.2010 of the appellant was recorded wherein he has stated that he is charging 25 paisa to 75 paisa for per Rs. hundred as commission for providing accommodation entries. In answer to Question No. 13 of that statement assessee further submitted that other persons are also charging commission at Rs. 0.25 to Rs.0.75 per hundred and therefore his charges are also ranging accordingly. Statement of the assessee was further recorded on 04.08.2010 wherein in answer to Q. No. 4 assessee submitted that he is paying Rs. 2000 to 3000/- per month to the Page 3 of 12 proprietor of various firms who are also being operated by the assessee. On payment of this sum to those parties they sign various documents regarding accommodation entries. In the same statement assessee gave names of 10 proprietary concerns which are operated by different persons but controlled by the assessee. A further statement of assessee was recorded on 12.02.2013. Based on the above facts the LD Assessing Officer recorded statement of other persons too on similar lines. Based on documents provided it was found that transactions were made in various bank accounts of 11 firms and amount of Rs. 73,38,76,883/- was shown as accommodation entries for various years. The total credit entries shown in the bank accounts on the credit side were treated by ld Assessing Officer as accommodation entry and based on that assessee was asked to show the reason that why these entries should not be treated as accommodation entries to work out commission income of the assessee. Assessee submitted reply on 18.03.2013 submitting the corrected copy of the bank account and requested for correction. Ld AO based on this information issued a show cause notice on 12.03.2013 stating that commission charged by the assessee is ranging to 2% to 18%. In response to the show cause notice the assessee submitted that ld. AO has also included requisite VAT and CST amount in the working of the commission. It was the contention of the assessee that in case of bills of purchases the assessee is also required to adjust the amount of VAT and CST charged on those bills. Assessee submitted that no credit for the same is granted and therefore assessee contended that commission of the assessee earned from these accommodation entries is ranging 0.25 % to 0.5% only. Ld Assessing Officer rejected the contention of the assessee and prepared a chart according to which he worked out the amount of cheque and the net amount written on the page against the cheque of respective annexure held that average commission earned by the assessee is 5.67% on the accommodation entries and worked out commission accordingly. Ld Assessing Officer further allowed deduction of 0.5% of the total profit earned on accommodation entries and granted the same as deduction. The net addition made by the AO for AY 2007-08 was Rs.8841307/-, for AY 2008-09 Rs.15507517/- and for AY 2009-10 Rs.5374146/-. Against this addition assessee preferred before ld CIT(A). Before the ld CIT(A) assessee submitted that the Page 4 of 12 commission is ranging between 0.25% to 0.75% only. Assessee reiterated the same submission which were raised before the ld. AO that while determining the commission he did not include the effect of VAT and CST. It was also contended that the assessee has purchased the goods on the fictitious bills when sale bill is issued as accommodation entries. It was submitted that the assessee has never issued accommodative sales bill without obtaining accommodative purchase bill of the same material and therefore ld AO should have given the effect of VAT and CST involved in the transactions which is required to be paid. For this it was submitted that assessee has produced the purchase register and bank book. Therefore it was submitted that commission income cannot exceed the rates stated by the assessee. In support of the above submission assessee submitted two decisions wherein it has been held that that commission income is 0.5 % to 0.35% in case of accommodation entries. For this assessee relied on the decision of Manoj Agarwal Vs. DCIT 113 ITD 377 (SB)(Del). On the basis of above submission ld CIT(A) has held that rate of 2% of the commission is very reasonable and directed the AO to adopt this percentage and further grant deduction of 0.5% on the same to calculate the net amount of commission. In view of this decision of CIT(A) revenue is in appeal before us contesting that ld CIT(A) has erred in law in reducing the percentage of commission income to 2% from 5.6% adopted by the AO. Assessee has also against the retention of the addition of 2% of the commission preferred cross objection for these years.

Despite notice none appeared before us on behalf of the assessee therefore the appeal is decided on the merits of the case considering the available material on record.

Ld DR submitted that ld CIT(A) has reduced the rate of commission applied by the ld Assessing Officer @5.67% which is based on seized material and it is backed by the evidence. The ld CIT(A) has also wrongly held that the commission income of the assessee is to be estimated @ 2% of the accommodation entries. Ld DR took us to the order of Ld. AO wherein ld AO has prepared a table which is backed by the annexures seized during the course of search and showing date wise entry including the name of the parties. She further submitted that on the same pages against the cheque amount, amount returned in cash is also mentioned therefore the difference Page 5 of 12 amount is commission of the assessee. The percentage worked out by the Assessing Officer are based on these statement. Further she also referred to the finding of the ld CIT(A) and submitted that ld CIT(A) has applied rate of 2% commission against the documents found during the course of search which shows the rate of the commission is 5.67%. Therefore she submitted that the order of the ld AO may be restored.

We have carefully considered the contention of the ld DR and material available on record. Undisputedly assessee is an entry provider and explained his modus operandi stating that it is engaged in providing bogus purchase bills from various proprietary concerns of the family members of the assessee. From this proprietary concern the assessee used to issue fictitious sales bills without goods to the end users through many brokers. He opened various bank accounts of those proprietary firms. On issue of the bogus bills, cheques are received from the parties which was deposited in the bank accounts of the propertory firm and subsequently cheques were issued in the name of another concern controlled by one Shri Vaivab Jain who was engaged in issuing bogus bills without actual delivery of goods for showing purchase of goods sold by the assessee controlled firms. This cheque was deposited in the bank account of those parties. Subsequently equivalent amount of cash was withdrawn and paid to the original party who had taken the bogus purchase bills. From the cash withdrawn the commission amount is deducted. During the course of search on Sh. Vishesh Gupta and Sh. Rakesh Gupta (assessee) were found to be controlling 11 such entities. In their statement they submitted that they have earned the commission @ 0.25% to 0.75%. in their statement dated 26.04.2010 of Sh. Rakesh Gupta in answer to Q. NO.13 it is mentioned that other parties are also charging the commission on accommodation entries @0.25% to 0.75%. and therefore he is also charging the commission in the same range. Further statement recorded on 12.02.2013 u/s 131 of Sh. Rakesh Gupta in answer to Q. No.4 he reiterated the same rate of commission. Ld AO tabulated the transaction based on the annexure A-31 to A-71 showing the dates and the parties to whom the sales bills are issued along with the cheque amount. Against this ld Assessing Officer further tabulated the net written against those cheques and based on this worked Page 6 of 12 out the commission at the average rate of 5.67% being income of the assessee. Ld CIT(A) has dealt with this issue as under:- “8. I have considered the-facts of the case and the written submissions of the appellant. I have also perused the case laws relied upon by the appellant. During the course of the search & seizure operation, the appellant admitted that he was engaged in the business/activity of providing accommodation entries by way of purchase and sale bills to the needy parties by routing the entries through bank accounts of his own concern and also the bank accounts of the concerns operated in the names of his employees and relatives which were otherwise controlled by him. The appellant was using all these firms for the purpose of providing sale bills for which he was earning commission. In the statement recorded u/s 131 of the IT Act, 1961 during the course of the proceedings u/s 153A on 12.02.2013, the appellant though conclusively re-admitted his stand that he was engaged in the business/activity of providing accommodation entries, differed with regard to the receipt of rate of percentage of commission. In the former statement it was stated that the gross commission earned was 25 paise to 75 paise whereas in the latter statement, the same was stated to be at 25 paise to 50 paise. In the course of assessment proceedings also, vide submissions dated 4.03.2013, the appellant reiterated his stand that the gross margin of commission earned by him from the activities of accommodation entries varied from 0.25% to 0.50%. On the basis of seized documents, the Assessing Officer found that the appellant was charging commission anywhere between 2% to 18%. On the basis of the seized documents, the Assessing Officer prepared a tabular form of chart mentioning therein the amount of commission charged from various parties and incorporated the : same in the assessment order and worked out the percentage of weighted average commission charged by the appellant at 5.67%. It is also seen that before applying the percentage of commission at the rate of 5.67% on the total transactions of accommodation entries provided by the appellant, the Assessing Officer issued a showcause notice dated 12.03.2013. In response to the same, the letter dated 18.03.2013 filed by the appellant was not accepted by Page 7 of 12 the Assessing Officer. On perusal of the said reply dated 18.03.2013, I find that the appellant did not furnish any documentary evidence to substantiate that the rate of commission charged by him at 0.25% to 0.50% and as claimed by him was correct and that the percentage of commission worked out by the Assessing Officer on the basis of the seized documents in the individual cases given in the chart incorporated in the order was incorrect and exorbitant. There is no set formula or fixed rate of commission while conducting such transactions in providing accommodation entries. .Such business/activity is based on the practices prevalent in the market and on the basis of needy. There are several people who are engaged in the activity of providing accommodation entries, and would normally charge 2% as commission on the amount that is transacted in providing such accommodation entries. The Assessing Officer assessed the commission by applying 5.67% which according to me is on a higher side. Considering the facts and circumstances of the case and also the instances of rate of commission cited by the Assessing Officer in the chart incorporated in the order, in my view, a rate of 2% commission is very reasonable. Accordingly, the Assessing Officer is directed to adopt the percentage of gross, commission at 2% and allow the expenses at 0.5% on the same to calculate the net commission for the year under consideration.”

The ld CIT(A) has reduced the gross commission income determined by the ld AO @5.67 % of the accommodation entry to 2% as commission income for following reasons:- a. In the statement recorded u/ 131 the assessee has admitted the same rate of percentages as it was stated by him during the course of search. b. Vide submission 04.07.2013 the appellant further reiterated his stand that the gross margin of commission earned by the assessee varies from 0.25% to 0.50%. c. The letter dated 18.03.2013 the assessee has submitted various contentions, which were not accepted by the LD AO. Vide this letter assessee submitted as under:- "Further as regards details of commission charged on these transactions by the assessee a detailed explanation along with a Page 8 of 12 number of explanatory entries supported with following documentary evidences of a. Purchase/Sales Invoices / extracts of seized material portions and b. extracts of ledger accounts such as purchase register , sales register, stock register, VAT/CST ledger, bank book and VAT returns evidencing basis and quantum of commission charged being ranging between 0.25% - 0.50% gross per 100 on total of turnover have been duly submitted and explained to your goodself vide our submission dated'04.03.2013 in case of Rakesh Gupta A.Y 2010-11 which is duly stated to be applicable in all cases (i.e Rakesh Gupta, Vishesh Gupta & Shashank Mittal from A.Y 2006-07 to A.Y 2011-12. Further as per working of the department given in annexure given by your honour with show cause dated 12.03.2013 stating commission charged ranging to 2% -18% provided to the assessee and seeking explanation, it is humbly submitted that the assessee has gone through the seized material and all books of accounts and the other relevant records available to him and within the short time span available to him to submit the reply along with the explanation of all these entries, he has worked out detailed working of some of those entries as provided in the annexure which indicates that the department has picked up from the seized material, only those portion of bill 'payment made in part, from which the requisite VAT/CST and commission was deducted and the percentage was worked out on that portion only, while the balance payment of the same bill was duly returned to party in full without any deduction from them, which were ignored by passed by the department. Further the department has also ignored to consider facts that out of VAT/CST retained from sales invoices, assesssee has paid full/ almost all amount of VAT/CST on purchase bills so as to retained gross margin comes 0.25 to 0.50 per 100 because for giving the output of VAT to client who had taken the sale bills input of VAT must required le. through Purchase Bills and the assessee had Page 9 of 12 made all the purchases from outside and payments were made through bank only. For these facts we have already submitted the purchase ledger and bank book. Assessee has never provided the sale bills without taking the purchase bills. This is also clear from payment received from Vaibhav Jain to whom cheques for purchase were given and he has retained the VAT/CST periodically without a definite period and for which working of Vaibhav Jain was already submitted and we - are attaching more annexures to justify our claim. Workings of such several cases are resubmitted to your honour herewith for kind consideration in support of our above & earlier submission (A copy of the above said documents, as submitted to the learned A.O., is enclosed in " paper book on page no. from ___to __) Further the supporting documents of above said submission i.e. copies of relevant purchase/sale bills, extract of ledger accounts, extracts of stock ledger and relevant copies of seized documents are enclosed in paper book on page no. _____ for your ready reference. In this regard it is humbly submitted that all these documents were already available with the learned A.O. as submitted by the assessee during the course of assessment with books of account and other seized materials already with the learned A.O. seized at the time of search proceedings and hence submission of the same to your goodself does not amount to providing additional evidence. The above all cases were duly explained to the learned A.O. during the course of assessment It is to be noted that the learned A.O. has not objected authenticity and genuineness of any transaction of the submission of the assessee, based upon seized material/bank statements already available to the learned A.O. and/ or Purchase/Sale bills, whose copies submitted to learned A.O. Hence, the contention of the assessee was rejected by the learned A.O. without any reasonable basis, only based upon his own presumption.

Firstly we do not find any infirmity in the order of ld CIT(A) in estimating the commission income of the assessee @ 2% and our reasons are enumerated hereinafter. While working out the commission rate by the ld Assessing Officer it was submitted that the difference in the amount of accommodation entry cheque and the ‘net’ amount written against that is the commission income of the assessee. This statement is not correct because even Page 11 of 12 Assessing Officer in the chart tabulated has taken the figure ‘Net written on the page against the cheque amount’. It is not certain that this means ‘net returned on the page against the cheque’. Moreover, assessee is engaged in the business of issuing fictitious bills and it also purchases fictitious bills. For this the assessee has submitted the purchase ledger of the assessee and also given the name of one Shri Vaivab Jain which is also mentioned in para No.3.1 of the assessment order. Therefore it is apparent that assessee buys bogus purchase bills and also sales bogus purchase bills. As already stated by the assessee that he is earning commission from bogus entries of issuing sales bills and then he is also buying purchase bills from one Sh. Vaivab Jain therefore he may also be incurring some cost out of that. Further the assessee is also doing this business through many brokers as per para no 3.1 of the assessment order and there might be some cost of those brokers also. Further, in the statement assessee has also submitted the comparative rate of brokerage being charged by other brokers which is also in the range of 0.25% to 0.75%. Further assessee is issuing the bills of goods and also receiving the bills of those goods which are fictitious. As these bills are fictitious to prove their genuineness before VAT authorities assessee need to make payment of VAT or CST. For this assessee submitted the purchase ledger as well as the bank book. Accordingly to the VAT laws it was submitted by the assessee that he has to calculate input VAT and output VAT and pay the differential VAT. The difference between the cheque amount and net amount should also take care of all these nitty gritty of the accommodation transactions. Further in the case of Manjo Aggarwal Vs DCIT 113 ITD 377, Delhi SB it has been held in case of accommodation entry provider as under:- “13. We have carefully considered the facts and the rival contentions. In our view, the CIT (Appeals) was justified in adopting 0.35 paise as the net income by way of commission. From the details available on record, it is seen that the commission varies from 0.10 paise to even Rs.

The CIT (Appeals) has noted that the assessee himself had stated that he received commission at the rate of 0.50 paise. From this, he has allowed 0.15 paise for expenses and has estimated the net income at 0.35 paise. The CIT (Appeals) in our opinion has been fair and reasonable in holding that the assessee received 0.50 paise out of Page 12 of 12 which he has paid 0.15 paise and the balance of 0.35 paise is the net income of the assessee as commission. The provisions of Explanation below section 37(1) are not applicable since the payment is not illegal and it has been paid for services rendered by the mediators. We accordingly confirm the decision of the CIT (Appeals) and dismiss the first ground in the assessee’s appeal.”