The Delhi High Court has set aside an Income Tax Appellate Tribunal (ITAT) direction restricting additions arising from unexplained cash transactions and unsecured loans to a lump-sum rate of 8%, holding that such an estimate lacked a legal or evidentiary foundation.

The Bench of Justice Subramonium Prasad and Justice Renu Bhatnagar ruled that once the Tribunal had accepted that the additions were supported by seized electronic records and remained unexplained, it could not reduce them to an estimated percentage merely because the assessee appeared to be conducting an accommodation-entry business.

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The Court allowed the department’s appeals to the extent of setting aside paragraphs 12 and 13 of the Tribunal’s order, which contained the 8% estimation and the consequential directions concerning computation and telescoping. However, it expressly preserved the assessee’s separate appeals for independent consideration. 

The dispute arose from a search and seizure operation conducted under Section 132 of the Income-tax Act, 1961, on December 16, 2016, at various business and residential premises of the Purushottam Lal Soni Group.

During the search, the Income Tax Department seized documents, papers and electronic data, including Tally records maintained on more than one computer. According to the assessment findings recorded in the judgment, the data on different computers contained differing entries.

The Assessing Officer found that several transactions could not be reconciled with the regular books of account. The judgment records that the assessee did not comply with summons or provide the requisite details to facilitate verification.

A notice under Section 153A was issued on October 24, 2017. In response, the assessee requested that the original return filed under Section 139 be treated as the return furnished pursuant to the search assessment notice.

In the assessment order discussed by the High Court, the Assessing Officer determined total income at approximately ₹206.95 crore, against the returned income of approximately ₹1.24 crore.

The additions included ₹14,44,77,515 towards unexplained cash payments, ₹1,89,51,40,780 towards unexplained cash receipts, ₹1,70,54,600 towards unexplained unsecured loans and ₹3,41,092 towards commission on those loans.

The unsecured loans were treated as unexplained under Section 68 because the identity and creditworthiness of the lenders, as well as the genuineness of the transactions, had not been established. The Assessing Officer also estimated commission at 2% in respect of the alleged accommodation entries.

The Commissioner of Income Tax (Appeals), by an order dated January 27, 2025, upheld the additions. The appellate authority found that the assessment relied on substantial seized material and that the assessee had failed to provide a plausible explanation or cogent evidence in rebuttal.

It also rejected objections concerning the absence of incriminating material, compliance with Section 65B of the Indian Evidence Act, natural justice and limitation.

The ITAT similarly rejected the assessee’s objections relating to the seized electronic data, natural justice and limitation.

It accepted that the additions concerning cash payments, cash receipts, unsecured loans and commission were based on electronic data seized from the assessee’s premises.

However, while determining the quantum, the Tribunal observed that the assessee appeared to have carried on an accommodation-entry business involving the receipt and payment of cash for commission. It also noted the absence of evidence establishing a specified commission rate or comparable instances.

On that reasoning, the Tribunal directed that the relevant additions be assessed at a lump-sum rate of 8%, stating that the estimate should not be treated as a precedent.

It further directed that additions under other specific heads would remain confirmed and that telescopic benefit should be considered in accordance with law to avoid double additions.

The department challenged the reduction through seven appeals under Section 260A, covering assessment years 2011–12 to 2017–18.

The principal issue was whether the Tribunal could restrict additions supported by specific incriminating evidence to 8% after accepting the underlying assessment findings.

The Court also considered whether the unexplained cash movements and unsecured loans could be treated as turnover of an accommodation-entry business, with only an estimated commission component brought to tax, despite the statutory provisions governing unexplained income and credits.

Another question concerned the adoption of an 8% estimate without supporting evidence, comparable transactions or material on record.

The High Court held that the Tribunal’s reasoning did not justify the reduction.

It observed that the Tribunal had accepted both the evidentiary basis of the additions and the assessee’s failure to explain the transactions satisfactorily. Having reached those findings, it could not adopt an ad hoc estimate without an adequate basis.

The Court explained that the apparent existence of an accommodation-entry business, coupled with the absence of evidence of a specific commission rate, did not itself justify disregarding the unexplained amounts established from seized records.

It found no statutory provision supporting the restriction to 8%. The Tribunal had also failed to identify any market practice that could support the percentage adopted.

Describing the restriction as “completely perverse”, the Court set aside the relevant portions of the Tribunal’s order.

The Court clarified that the assessee had independently challenged the same ITAT order and that those appeals would be heard separately.

If the assessee’s appeals are also allowed, the impugned order would be remanded to the Tribunal in its entirety. If those appeals are dismissed, the authorities would undertake the computation in accordance with law.

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