The Income Tax Appellate Tribunal, Ahmedabad Bench, in Mukesh Rasiklal Shah v. Assistant Commissioner of Income-tax (ITA Nos. 3217 & 3218/Ahd/2015), examined whether amounts received by the assessee by fraudulently encashing income-tax refunds, which were subsequently recovered by the Government, constituted taxable income under the Income-tax Act, 1961, for Assessment Years 1992-93 and 1993-94.

The assessee, a Chartered Accountant by profession, was subjected to search and seizure proceedings under Section 132 following detection of large-scale fraudulent encashment of income-tax refunds based on fabricated challans filed along with returns in bogus or benami names. Based on statements recorded, seized material, and departmental records, the Assessing Officer held that the assessee had fraudulently obtained and utilised refund amounts of ₹2,47,943 for A.Y. 1992-93 and ₹19,36,095 for A.Y. 1993-94. These amounts were brought to tax as income from other sources.

In the first round of litigation, the matter was restored by the Tribunal to the Assessing Officer for fresh adjudication after supplying statements and materials relied upon. In the second round, the Assessing Officer reiterated the additions, which were confirmed by the CIT(A). The assessee contended that the refund amounts belonged to the Government of India, had been fully recovered, and therefore did not constitute income within the meaning of Section 2(24). It was further argued that recovery of the amounts represented allowable expenditure or loss and that similar additions for A.Y. 1991-92 had been deleted by the appellate authority.

The Tribunal analysed the nature of the receipts and the settled legal position governing taxation of illegal or tainted income. It was observed that the assessee had complete possession, dominion, and control over the fraudulently obtained amounts during the relevant previous years and had utilised the funds for investments and other purposes. The subsequent recovery by the Government did not alter the character of the receipts at the time they were received and enjoyed by the assessee.

Relying on authoritative judicial precedents including CIT v. S.C. Kothari (82 ITR 794, SC), CIT v. Piara Singh (124 ITR 40, SC), and T.A. Quereshi v. CIT (287 ITR 547, SC), the Tribunal reiterated that income derived from illegal or unlawful activities is nonetheless taxable, and that the Income-tax Act is concerned with the factum of receipt and accrual of income, not with the legality or morality of the source. The Tribunal further held that recovery of the amounts by the Government was not expenditure incurred wholly and exclusively for earning such income and therefore could not be allowed as a deduction under Section 57.

The Tribunal distinguished the appellate order for A.Y. 1991-92 on facts and held that non-filing of appeal by the Revenue in that year did not create a binding precedent, particularly when the additions in the present years were supported by detailed material and findings. It was further held that alleged violation of principles of natural justice was not made out, as adequate opportunity had been provided in the remand proceedings.

Accordingly, the Tribunal upheld the additions made for A.Ys. 1992-93 and 1993-94, holding that the fraudulently encashed refund amounts constituted taxable income from other sources in the hands of the assessee. The appeals were dismissed.

Source- https://itat.gov.in/public/files/upload/1735644782-RyU7e2-1-TO.pdf

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