Facts of the Case

·         The Respondent-Assessee (M/s. G.G. Medical Health Care Ltd.) was assessed at a loss of ₹7,34,190 for the Assessment Year 1993-94.

·         The Assessing Officer (AO) received information from the ACIT that a third party, Inter Kardio (P) Ltd., claimed to have paid a commission of ₹13,26,801 to the Assessee during the relevant financial year.

·         Inter Kardio (P) Ltd. further asserted that a current account (No. 4380) had been opened with the Bank of Rajasthan in the name of the Assessee to deposit these funds.

·         The Assessee completely denied receiving any such commission and vehemently disowned the bank account, stating it was opened fraudulently without its knowledge or authorization.

·         Demonstrating bona fide intent, the Assessee filed a First Information Report (FIR) with the Karol Bagh Police Station against the fraudulent opening of the bank account and requested the bank to unearth the fraud.

·         Despite the denial, the AO noted that the bank account reflected a total credit of ₹33,30,301 (inclusive of the alleged commission) and added this entire amount to the Assessee's income on a "protective basis".

Issues Involved

·         Whether a protective addition under the Income Tax Act can be sustained against an Assessee based purely on the declarations or claims of a third party, in the absence of any independent corroborative evidence linking the Assessee to the income.

·         Whether the deletion of the protective addition of ₹33,30,301 by the CIT(A) and the Income Tax Appellate Tribunal (ITAT) was legally sound given that the Assessee had disowned the underlying bank account and lodged a criminal complaint (FIR).

Petitioner’s (Revenue's) Arguments

·         The Revenue argued that the addition was justified on a protective basis because the third-party entity, Inter Kardio (P) Ltd., had explicitly disclosed payments to the Assessee, including disclosures under the Voluntary Disclosure of Income Scheme (VDIS).

·         They contended that since a bank account existed in the name of the Assessee showing credit balances matching the alleged transactions, the amount ought to be taxed to safeguard the interests of the Revenue.

Respondent’s (Assessee's) Arguments

·         The Assessee maintained that it had absolutely no connection with the alleged commission or the bank account opened with the Bank of Rajasthan.

·         The Assessee emphasized its prompt and consistent conduct in lodging an FIR with the Karol Bagh Police Station to investigate the identity theft and fraudulent bank account creation, proving it did not control or benefit from the funds.

·         It argued that no addition could be sustained purely on the self-serving statements or voluntary disclosures of a third party without any incriminating material directly linking the Assessee to the receipt of the money.

Court Order / Findings

·         The Delhi High Court observed that the Commissioner of Income Tax (Appeals) ['CIT(A)'] and the ITAT had correctly deleted the addition after finding no material to connect the Assessee with the payment of the commission.

·         The Court took into account that the Assessee acted consistently with its plea by filing a police FIR against the fraudulent creation of the bank account.

·         The High Court noted that even though Inter Kardio (P) Ltd. later claimed to have paid certain amounts to the Assessee in subsequent years, there was absolutely nothing on record to indicate that any such amounts were actually received by or paid to the Assessee.

·         Finding no incriminating evidence on record against the Assessee and concluding that no substantial question of law arose, the High Court dismissed the Revenue's appeal.

Important Clarification

This ruling clarifies that the Income Tax Department cannot make or sustain protective additions against an Assessee merely because a third party names them or utilizes their identity fraudulently. For an addition to hold ground, the Revenue must discharge its burden of proof by bringing on record independent, incriminating evidence that directly establishes the receipt of income or control over the disputed bank account by the Assessee.

Sections Involved

·         Section 143(3) of the Income Tax Act, 1961 (Scrutiny Assessment).

·         Section 260A of the Income Tax Act, 1961 (Appeal to the High Court).

 

Link to download the order – nhttps://delhihighcourt.nic.in/app/case_number_pdf/2007:DHC:981-DB/SMD23082007ITA4652006.pdf  

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