Sanchayita Lahkar

The Bombay High Court has set aside an order of the Income Tax Appellate Tribunal (ITAT) that had restricted additions made under Section 68 of the Income Tax Act, 1961, against M/s Buniyad Chemicals Ltd., holding that the Tribunal adopted “a very casual approach to such a serious matter of rampant tax evasion.” A Division Bench comprising Justice M.S. Sonak and Justice Jitendra Jain restored the order of the Commissioner of Income-tax (Appeals) [CIT(A)], subject to modification, and further directed that relevant regulatory and enforcement authorities initiate appropriate investigations.

The Court recorded that “the Tribunal has not given any reasons as to if the respondent-assessee does not explain the beneficiary's identity, then why the whole amount should not be added under Section 68, but only 0.15% of the said deposit.” The Bench found that unexplained credits could not escape addition merely because the assessee declined to disclose beneficiary details.

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The appeal before the Court arose from a challenge by the Principal Commissioner of Income-tax to the ITAT’s decision dated 30 May 2017, relating to the assessment year 2009-10. The respondent-assessee, M/s Buniyad Chemicals Ltd., had filed a nil return of income, which was selected for scrutiny. The assessment order passed under Section 143(3) on 28 December 2011 recorded additions of ₹10,73,52,553/- under Section 68, treating unexplained deposits in the assessee’s disclosed and undisclosed bank accounts as cash credits.

During the assessment proceedings, the assessee admitted that it was providing accommodation entries to third parties but did not disclose the identities of the beneficiaries. The CIT(A), in its order dated 4 October 2012, held that in cases where beneficiaries were identified, a commission of 0.37% should apply. If the beneficiaries were not identified, the entire deposit amount was liable to be treated as unexplained under Section 68.

The Tribunal later reduced this rate to a flat 0.15% on all deposits—whether explained or unexplained—applying the rate adopted in prior assessment years.

The revenue submitted that the Tribunal’s approach effectively nullified the assessee’s duty to disclose beneficiary details. The petitioner argued that “the Tribunal erred by ignoring the condition imposed by the CIT(A) for unidentified deposits, which required the entire amount to be taxed under Section 68.”

The respondent-assessee admitted it provided accommodation entries but contended that since the deposits did not appear in its books of accounts, Section 68 could not apply. The assessee further argued that it maintained no books and thus the provision was inapplicable.

The Court examined these contentions and found that the assessee had filed audited financial statements and tax audit reports, which constituted its books of accounts. Referring to the director’s statement recorded under Section 131 of the Act, the Court noted that data extracted from the respondent’s computer system, stored in CDs, constituted “books” within the meaning of Section 68.

The Bench recorded, “the respondent-assessee cannot contend that they will not give details of beneficiaries, but at the same time, credits cannot be assessed in its hands.” The Court observed that accepting this argument would result in “admitted unaccounted income” escaping tax liability, which is impermissible.

Rejecting reliance on Bhaichand H. Gandhi, the Court stated that the factual matrix was distinguishable and held that even absent books of accounts, unexplained credits could be taxed based on bank account records.

The Court recorded, “any interpretation which would make admitted unaccounted income tax free based on the denial by the assessee/persons to give details has to be rejected.”

The Court further remarked: “by ignoring the material on record, we would be failing in our duty and our oath if the activities of such persons are not directed to be investigated into and taken to their logical conclusion. Inaction only encourages more persons to engage in illegal activities as admitted by the counsel for the respondent-assessee during hearing.”

The Bench stressed the need for deterrence in such matters, observing that “as a Court of law, we cannot permit such a thing to happen in the future or at least this Court should ensure that action against persons involved in such activities should be a deterrent for other persons to think on such line.”

The Court further stated: “this is a case where the low deterrent effect of the law has worked on a professional talent to become a habitual economic and financial offender, and this should be stopped in the larger interest of our country.”

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The Court reversed the Tribunal’s order, restoring paragraph 4.3 of the CIT(A)’s order of 4 October 2012, subject to the commission rate being capped at 0.15% as accepted by the Tribunal.

The Court recorded: “we answer question (a) in favour of the appellant-revenue and against the respondent-assessee. Insofar as question (b) is concerned, we answer the same against the appellant-revenue and in favour of the respondent-assessee.”

The Bench further directed the Registry to forward a copy of the judgment to:

1. The Disciplinary Committee of the Institute of Chartered Accountants of India
2. The National Financial Reporting Authority
3. The Commissioner of Police, Economic Offence Wing, Mumbai
4. The Enforcement Directorate under the Prevention of Money Laundering Act
5. The Chief Commissioner of Income Tax, Mumbai
6. The Ministry of Corporate Affairs

Additionally, the Court noted that the Chief Commissioner of Income Tax, Mumbai, should inform the Court “whether any prosecution is launched under the Income Tax Act and, if not, why it is not launched.”

Advocates Representing the Parties

For the Appellant: Mr. Suresh Kumar

For the Respondent:  Mr. Aditya Sharma i/b M.A. Narvekar

Case Title: Principal Commissioner of Income-tax-14 v. M/s Buniyad Chemicals Ltd.
Neutral Citation: 2025:BHC-OS:4245-DB
Case Number: Income Tax Appeal No. 1796 of 2018
Bench: Justice M.S. Sonak, Justice Jitendra Jain

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