Entire Accommodation Entry Purchases Cannot Be Treated as “Unexplained Cash”: ITAT Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 23 February, held that even if purchases are accommodation entries, once they are recorded in regular books of account and routed through banking channels, they cannot be treated as “unexplained expenditure” under Section 69C of the Income Tax Act.

The Bench, comprising Accountant Member Om Prakash Kant and Judicial Member Ms. Kavitha Rajagopal, was hearing cross-appeals in the case of Balaji Bullions and Commodities India Pvt. Ltd. for Assessment Year 2017–18.

The Tribunal observed:

“The purchases, though tainted by the character of accommodation entries, could not be treated as 'unexplained expenditure' within the meaning of section 69C.”

The Assessing Officer had reopened the assessment based on investigation findings alleging bogus entities linked to the Punamiya group. It was alleged that the assessee had booked purchases of Rs. 417.87 crore from paper entities providing accommodation entries. The AO added the entire amount as unexplained expenditure under Section 69C and taxed it at a higher rate under Section 115BBE.

The CIT(Appeals) upheld the reopening of assessment but deleted the addition under Section 69C, noting that the purchases and corresponding sales were recorded in regular books and paid through banking channels, and there was no evidence of unaccounted cash outflow.

It emphasised that Section 69C applies only to unexplained expenditure, and properly recorded transactions could not be treated as unexplained merely because they involved accommodation entries.

However, the CIT(A) rejected the books of accounts under Section 145(3), holding that the assessee was functioning as an accommodation entry operator. Consequently, only the estimated commission income arising from such transactions was taxed, computed at 0.5% of the total turnover of purchases and sales.

The ITAT affirmed this approach, observing that while the investigation confirmed the entities were engaged in providing accommodation entries, adding the entire purchase amount under Section 69C was not legally sustainable when the transactions were recorded in books and routed through banking channels.

Accordingly, the ITAT upheld the deletion of the Rs. 417.87 crore addition under Section 69C, while confirming that the CIT(A)'s estimation of commission income for taxation purposes in the facts of the case was sustainable.

Appearance for the Assessee: Shri Sharwan Kumar Jha, Adv. (Virtually Appeared)

Appearance for the Department: Ms. Shabana Praveen, CIT. DR and Shri Leyaqat Ali Aafaqui, Sr. AR.