Facts of the Case

The case pertains to Assessment Year 1992–93 where the assessee, a stockbroker and member of the Delhi Stock Exchange, filed a return declaring income of ₹3,96,960. During scrutiny, the Assessing Officer (AO) discovered a bank account not disclosed in earlier balance sheets.

The AO noted significant transactions involving pay orders aggregating to ₹5,17,45,958 received through Standard Chartered Bank. These funds were used for purchase and sale of securities and units, including UTI units.

The assessee contended that the transactions were carried out on behalf of a third party (Mr. D.D. Chaturvedi) and that he merely acted as a broker earning nominal commission. However, the AO treated the entire amount as unexplained income under Section 69A of the Income Tax Act.

The CIT(A) and ITAT deleted the addition, holding that there was no evidence that the funds belonged to the assessee.

Issues Involved

  1. Whether the addition of ₹5,17,45,958 under Section 69A of the Income Tax Act was justified.
  2. Whether the assessee could be treated as the owner of the funds.
  3. Whether the burden of proof regarding unexplained income was discharged by the assessee.
  4. Applicability of legal principles laid down in similar case laws regarding unexplained income.

Petitioner’s Arguments (Revenue)

  • The assessee failed to establish the source of funds received through pay orders.
  • Statements of involved parties (Jaideep Pathak and Sneh Pathak) denied transactions, weakening the assessee’s claim.
  • The burden of proof shifted to the assessee once unexplained transactions were detected.
  • Reliance was placed on:
    • CIT v. K. Chinnathamban
    • Sumati Dayal v. CIT
  • The transactions indicated that funds originated from the assessee himself through a financial arrangement.

Respondent’s Arguments (Assessee)

  • The assessee acted merely as an intermediary or conduit for transactions carried out on behalf of Mr. Chaturvedi.
  • Documentary evidence, including bank letters, confirmed:
    • No instructions were given by the assessee to issue pay orders.
    • No funds were deposited by the assessee in the issuing bank.
  • Statements of Mr. Chaturvedi supported the assessee’s version.
  • CBI investigation linked the funds to third parties and not the assessee.
  • No benefit accrued to the assessee apart from nominal brokerage.

Court’s Findings / Order

The Delhi High Court upheld the decision of the ITAT and ruled in favor of the assessee:

  • Section 69A requires the assessee to be the owner of the money, which was not established in this case.
  • Evidence showed that:
    • The funds originated from fraudulent banking transactions involving third parties.
    • The assessee acted only as a conduit.
  • No material evidence proved that the assessee benefited from the transactions.
  • The same amount had already been added in the hands of another person (Jaideep Pathak), making double addition impermissible.
  • The burden of proof under Section 69A was not discharged by the Revenue.

Held: Addition under Section 69A was unjustified; appeal of Revenue dismissed.

Important Clarification

  • Mere routing of funds through an assessee’s account does not establish ownership.
  • For Section 69A applicability:
    • Ownership must be clearly proven.
    • Absence of satisfactory explanation alone is insufficient without proving possession and ownership.
  • Where an assessee acts as a conduit or intermediary, addition cannot be made without evidence of benefit or control.

Sections Involved

  • Section 69A – Unexplained money
  • Section 142(2A) – Special audit
  • Section 40A(3) – Disallowance for cash payments
  • Section 144A – Directions by higher authority

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:4112-DB/SMD22082019ITA9272005.pdf

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