ITAT Grants Relief on Demonetisation Deposits, Sustains Circular Trading Findings

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on May 29 held that cash deposits made during the demonetisation period cannot be treated as unexplained money under Section 69A of the Income-tax Act, 1961, where sufficient prior cash withdrawals are reflected in the bank records. However, the Tribunal upheld the addition of commission income estimated on circular trading transactions undertaken by entities belonging to the Shirish C. Shah Group.

The Assessing Officer had completed the assessment after noting that the assessee was part of the Shirish C. Shah Group, which had been linked to accommodation entry activities. On examining the books, the AO concluded that sales and purchases recorded by the assessee were merely circular transactions lacking genuine business substance. Treating the turnover as accommodation entries, the AO estimated commission income at 1% of the turnover, amounting to Rs 90.87 lakh, and added the same to the assessee’s income.

The AO also treated cash deposits of Rs 34.66 lakh made during the demonetisation period as unexplained money under Section 69A. The claim of brought forward losses was also denied.

Before the Tribunal, the assessee argued that a substantial portion of the turnover related to transactions with group companies and that no commission could be attributed to such transactions. It further contended that the cash deposited during demonetisation was sourced from cash earlier withdrawn from bank accounts, details of which were furnished through a cash flow statement.

“Circular trading and accommodation entry transactions are essentially transactions lacking genuine underlying commercial substance or real movement of goods. Such arrangements deserve to be strongly discouraged, as they distort the true state of affairs and defeat the objective of fair tax administration.”

The Tribunal observed that the transactions in question were admittedly circular trading arrangements among group concerns and lacked any independent commercial rationale. It held that mere movement of funds between related entities could not establish the genuineness of the transactions in the absence of real economic substance. Accordingly, it found no reason to interfere with the addition of commission income sustained by the lower authorities.

“Once the availability of cash from prior withdrawals stands demonstrated from the bank records, the cash deposits made during the demonetization period cannot be brought to tax merely on surmises without disproving the nexus between the withdrawals and redeposits.”

The Tribunal held that, after deletion of the Section 69A addition, there was no basis for applying the provisions of Section 115BBE. It also directed the Assessing Officer to tax the estimated commission income at the rates applicable to business income, observing that the addition had been assessed under the head “Profits and Gains of Business or Profession”.

With regard to brought forward losses, the Tribunal directed the Assessing Officer to consider the claim in accordance with the outcome of appellate proceedings relating to AY 2015-16.

Thus, the appeal was partly allowed.

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