2025 (6) TMI 1744 - AT - Income Tax

Protective additions to the income of the appellants - alleged accommodation entries and unaccounted commission income - substantive additions having been made and confirmed in the hands of directors/related persons. HELD THAT - Hon ble apex court in Lalji Haridas Vs. ITO 1961 (7) TMI 8 - SUPREME COURT has settled the issue long back that when there arises a doubt in the mind of the AO that a particular income might be taxable in more than one assessee s hands he could indeed make such protective addition so as to protect the interest of the Revenue as per ex-abundat cautela i.e. as a matter of abundant caution. We now advert to the Revenue instant identical sole substantive grievance wherein it seeks to revive the impugned protective additions. We are of the considered view that allthough there would be no dispute about the foregoing settled legal propostion involving a protective assessment the facts herein stand on a different footing since there is a clear cut finding that the corresponding substantive additions in case of Diroctor/Sh. Arun Tyagi involving former Sh. Ram Prakash Bhatia in the latter assessees case had been duly confirmed. And also that both these assessees are found to be mere namelanders only without having derived any independent taxable income. We accordingly are of the considered view that the learrned CIT(A) has rightly deleted the impugned protective additions after only confirming the corresponding substantive additions and therefore the Revenue s instant identical sole grievance deserves to be rejected. Ordered accordingly.

Summary

The core legal questions considered by the Tribunal in these consolidated appeals are:

1. Whether the Assessing Officer (AO) was justified in making protective additions to the income of the appellants on account of alleged accommodation entries and unaccounted commission income under the Income Tax Act, despite corresponding substantive additions having been made and confirmed in the hands of related persons.

2. Whether the deletion of such protective additions by the Commissioner of Income Tax (Appeals) [CIT(A)] was legally sustainable given the facts and evidence on record.

3. The applicability and scope of the principle of protective assessments under the Income Tax Act, particularly in light of the Supreme Court precedent establishing the AO's power to make protective additions "ex abundanti cautela" (as a matter of abundant caution).

4. The evidentiary basis for concluding that the appellants were mere "namelanders" or conduits, without independent taxable income, and the consequent effect on the protective additions.

Issue-wise Detailed Analysis

Issue 1: Justification for Protective Additions on Accommodation Entries and Commission Income

The legal framework involves Sections 132, 143(3), 147, 153A, 250, and 68 of the Income Tax Act, 1961. Section 132 authorizes search and seizure operations; Section 153A deals with assessments following search; Section 147 pertains to reassessment; Section 68 deals with unexplained cash credits; and Section 250 governs appellate proceedings.

The AO, following search and seizure operations, found that various bank accounts linked to the appellants were used to facilitate accommodation entries-bogus sales and purchases with no actual business transactions-during the demonetization period. The AO relied on statements recorded under Section 131 and 131(1A) from key persons including Shri Atul Tyagi and Shri Ram Prakash Bhatia, who admitted operating multiple bank accounts and providing accommodation entries for commission ranging from 0.15% to 12%.

Extensive documentary evidence, including seized diaries with coded entries and corroborative statements from beneficiaries who disclosed additional income corresponding to accommodation entries, supported the AO's findings. The AO quantified the accommodation entries and commission income for multiple assessment years, making substantive additions in the hands of the directors or related parties and protective additions in the hands of the appellants.

The CIT(A) confirmed the substantive additions in the hands of the persons who admitted operating the accommodation entry schemes but deleted the protective additions made in the appellants' hands on the rationale that once substantive additions are confirmed against the actual income earners, corresponding protective additions in the hands of the appellants cannot logically be sustained.

The Tribunal noted that the appellants failed to substantiate the genuineness of the transactions or rebut the evidence of being mere conduits. The AO's additions were based on concrete evidence and not mere suspicion. The CIT(A) had provided ample opportunity for the appellants to be heard, but they did not participate in the proceedings, leading to ex-parte decisions.

Issue 2: Legality and Sustainability of Deletion of Protective Additions by CIT(A)

The CIT(A) orders in both sets of cases-those of M/s Sahil Tradewell Marketing Pvt. Ltd. and Smt. Saroj Bhatia-rested on the principle that protective additions are permissible only to safeguard the Revenue's interest pending confirmation of substantive additions in other related assessments. Once the substantive additions were confirmed against persons who admitted earning the commission income and operating the accommodation entry schemes, continuing protective additions against the appellants was unwarranted and amounted to double taxation.

The CIT(A) relied on the factual matrix that the appellants were "mere namelanders" without independent income, and the substantive additions in the hands of the actual income earners were upheld. Hence, deletion of protective additions was justified.

The Tribunal upheld the CIT(A)'s approach, emphasizing that protective assessments are a tool of caution and cannot be used to impose double liability once substantive liability is established elsewhere.

Issue 3: Applicability of Protective Assessments and Supreme Court Precedent

The Revenue invoked the Supreme Court decision in Lalji Haridas v. ITO, which affirms the AO's power to make protective additions "ex abundanti cautela" when there is doubt about the taxability of income in more than one assessee's hands. This principle is well-settled and permits the AO to protect the Revenue's interest pending final adjudication.

However, the Tribunal distinguished the present facts from the general principle. Here, there was no doubt or dispute about the substantive additions in the hands of the actual income earners, which had been confirmed. The appellants were found to have no independent income and were only conduits for accommodation entries. Therefore, the rationale for protective additions no longer applied, and the CIT(A)'s deletion of such additions was legally sound.

Issue 4: Evidentiary Basis for Treating Appellants as Namelanders

The Tribunal analyzed the statements recorded under oath, the seized documents, the pattern of cash deposits and withdrawals during demonetization, and admissions by beneficiaries. These collectively established that the appellants' bank accounts were used for layering bogus transactions and accommodation entries.

Further, the appellants failed to offer any explanation or documentary proof to establish genuine business activities or independent income. The burden of proof lay on the appellants to substantiate the genuineness of transactions, which was not discharged.

Consequently, the Tribunal accepted the findings that the appellants were mere namelanders, and the substantive additions against the actual income earners were rightly confirmed.

Treatment of Competing Arguments

The Revenue's argument for reinstating protective additions was based on the principle of abundant caution and the need to safeguard Revenue interests. The Tribunal acknowledged this principle but emphasized the factual distinction that substantive additions were already confirmed, negating the need for protective additions.

The appellants' non-appearance and failure to challenge the findings or provide evidence weakened their position. The CIT(A)'s deletion of protective additions was thus upheld as a matter of law and fact.

Conclusions

The Tribunal concluded that the CIT(A) did not err in deleting the protective additions once substantive additions were confirmed in the hands of persons who admitted earning unaccounted commission income through accommodation entries. Protective additions cannot be sustained to impose double taxation on namelanders without independent income. The Revenue's appeals were dismissed accordingly.

Significant Holdings

"Once the additions have been made and confirmed in the hands of Shri Atul Tyagi on substantive basis, it is logical to infer that the same additions cannot be made in the hands of the appellant on protective basis. Accordingly, the quantum additions made in the hands of the appellant are deleted."

"The onus was upon the appellant to substantiate genuineness of business activities carried out by him through various proprietary concerns in his name. Such onus has not been discharged."

"The inferences drawn by the AO are based upon independent evidence gathered, which have been confronted to the appellant. Adequate opportunity of being heard has been provided to the appellant during the assessment and appellate proceedings."

"Protective additions are made ex abundanti cautela to protect Revenue's interest, but once substantive additions are confirmed, continuing protective additions is not appropriate and amounts to double taxation."

"The appellants are mere namelanders without having derived any independent taxable income."

"The Revenue's instant identical sole grievance deserves to be rejected."