Facts of the Case

The Revenue filed multiple appeals under Section 260A of the Income-tax Act, 1961 challenging a common order dated 20.09.2024 passed by the Income Tax Appellate Tribunal for Assessment Years 2012-13 to 2017-18. The Tribunal had affirmed the orders of the Commissioner of Income Tax (Appeals) deleting additions made in the hands of the respondent-assessee, Third Generation Traders Pvt. Ltd.

The proceedings arose pursuant to a search conducted on 17.12.2015 at the premises of an employee of the Jain Brothers, alleged accommodation entry operators. Based on documents found during the search, the Assessing Officer recorded satisfaction under Section 153C and issued notices to the assessee. The Assessing Officer treated the assessee as a conduit company used for routing accommodation entries and made protective additions under Section 68 equal to the amounts credited in its bank accounts, along with substantive additions towards alleged commission income at 0.25%.

Issues Involved

Whether protective additions under Section 68 could be sustained in the hands of a conduit or shell company when substantive additions on the same amounts had already been made in the hands of the ultimate beneficiaries, and whether any substantial question of law arose from the deletion of such additions by the appellate authorities.

Petitioner’s Arguments (Revenue)

The Revenue contended that the assessee failed to explain the credits appearing in its bank accounts and had not produced concrete evidence to establish genuineness of the transactions. It was argued that protective assessments do not prejudice the assessee and are permissible until final determination. Reliance was placed on judicial precedents to submit that protective additions can be sustained even where substantive additions are made elsewhere.

Respondent’s Arguments (Assessee)

The assessee submitted that it was merely a pass-through entity with no real income of its own and that all credits were matched by corresponding debits. It was argued that substantive additions had already been made in the hands of the identified beneficiaries and therefore the same amounts could not be taxed again in the hands of the assessee on a protective basis. The assessee relied on earlier decisions involving similarly situated companies controlled by the Jain Brothers.

Court Order / Findings

The Delhi High Court examined the assessment records and the tabular statements placed on record, which showed that the opening and closing balances in the assessee’s bank accounts were substantially the same with only marginal differences. The Court noted that no cash deposits were found in the assessee’s bank accounts and that the assessee merely routed funds received from certain entities to others under the control of the alleged accommodation entry operators.

The Court held that the real income, if any, was earned by the beneficiaries or by the accommodation entry operators and not by the assessee, which functioned only as a conduit. Since substantive additions had already been made in the hands of the beneficiaries, there was no justification for sustaining protective additions in the hands of the assessee. The Court further observed that the assessment orders were vague and did not clearly identify specific accommodation entries attributable to the assessee.

Important Clarification

The Court clarified that while protective assessments may be permissible in principle, they cannot survive once substantive additions on the same income have been validly made in the hands of the real beneficiaries. Taxation of conduit entities in such circumstances would amount to unjustified duplication.

Final Outcome

All appeals filed by the Revenue were dismissed. The Delhi High Court held that no substantial question of law arose for consideration and upheld the deletion of protective additions under Section 68 and related commission additions made in the hands of Third Generation Traders Pvt. Ltd.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769677186_PR.COMMISSIONEROFINCOMETAXDELHI7VsTHIRDGENERATIONTRADERSPVT.LTD..pdf

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