Facts of the Case

  • The assessee was engaged in stock broking and later operated through a private limited company.
  • A search operation revealed that the assessee was involved in providing accommodation entries through fictitious bank accounts.
  • Cash was deposited in multiple bank accounts (including feeder accounts) and routed through transactions to beneficiaries.
  • The Assessing Officer:
    • Added ₹3,99,35,142 as unexplained cash credit under Section 68.
    • Added commission income at 1.5% of total turnover.
  • CIT(A) upheld the additions.
  • ITAT:
    • Deleted the Section 68 addition.
    • Reduced commission rate to 0.60%.

Issues Involved

  1. Whether deletion of addition under Section 68 by ITAT was legally sustainable.
  2. Whether unexplained cash credits can be taxed despite inclusion in overall turnover.
  3. Applicability of peak credit theory in accommodation entry cases.
  4. Whether ITAT erred in reducing commission rate.

Petitioner’s Arguments (Revenue)

  • Assessee failed to prove:
    • Identity of creditors
    • Creditworthiness
    • Genuineness of transactions
  • Section 68 squarely applies where explanation is unsatisfactory.
  • Reliance placed on Kale Khan Mohammad Hanif v. CIT (SC) to argue:
    • Estimated income does not bar separate addition of unexplained credits.
  • Peak credit addition is valid even if transactions are part of larger turnover.

Respondent’s Arguments (Assessee)

  • Entire turnover (₹104 crores) already considered for taxation.
  • Separate addition of peak credit leads to duplication.
  • Section 68 cannot be applied to bank entries, only to books of account.
  • Cash deposits represented business transactions (entry providing activity).
  • ITAT correctly followed earlier orders in assessee’s own case 

Court Findings / Judgment

  • The High Court partly allowed the Revenue’s appeal.
  • Held:
    • Section 68 can be invoked even if income is estimated or included in turnover.
    • Failure to prove identity, genuineness, and creditworthiness justifies addition.
    • ITAT erred in completely deleting the addition.
  • However:
    • Due to inconsistent findings and partial explanations accepted, only ₹3,99,35,142 was upheld as taxable.
  • Commission rate reduction by ITAT was not interfered with.

Court Order

  • Addition of ₹3,99,35,142 under Section 68 restored.
  • Appeal allowed partly in favour of Revenue.
  • No order as to costs.

Important Clarifications

  • Section 68 applies even when income is estimated; no bar due to turnover inclusion.
  • Accommodation entry providers must fully disclose sources and flow of funds.
  • Peak credit theory cannot override statutory requirements under Section 68.
  • Bank entries linked with books can still attract Section 68 scrutiny.
  • Burden of proof lies on the assessee to establish:
    • Identity
    • Creditworthiness
    • Genuineness

Sections Involved

  • Section 68 of the Income Tax Act, 1961
  • Section 260A of the Income Tax Act, 1961
  • Relevant reference: Section 69 (discussion context)

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:5886-DB/SRB12092018ITA5442005.pdf

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