Accommodation entry operators also obtain PAN, file ITRs, open bank account

Accommodation entry operators also routinely obtain PAN, file ITRs, and maintain bank accounts, to give a facade of legitimacy to sham transactions.

In a recent judgment, Chhattisgarh High Court confirmed addition u/s 68 holding that accommodation entry operators also routinely obtain PAN, file ITRs, and maintain bank accounts, which are used to give a facade of legitimacy to sham transactions. Such superficial compliance cannot, by itself, prove creditworthiness or genuineness.

ABCAUS Case Law Citation:
4850 (2025) (11) abcaus.in HC

Important Case Laws relied upon by Parties:
CIT v. Rathi Finlease Ltd
CIT Vs. Nova Promoters and Finlease (P) Ltd.
CIT Vs. N.R. portfolio Pvt. Ltd.
Rajmandir Estate Pvt. Ltd.
CIT v. Nivedan Vanijya Niyojan Ltd.
CIT v. Lovely Exports (P) Ltd.
PCIT v. NRA Iron & Steel (P.) Ltd.

In the instant case, the Income Tax Department had challenged the order passed by the ITAT setting aside the order of CIT (Appeals) by deleting addition u/s 68 of the Income Tax Act, 1961 (the Act) made by the AO.

The respondent was a Pvt. Ltd. Company. Asearch and seizure operations were carried out under Section 132 of the Act at the factory and office premises of the respondent/assessee.  In response to notice u/s 153A of the Act the assessee filed returns of income for six AYs.

The Assessing Officer (AO) observed that the assessee had received a large amount on account of share capital/premium and there was a clear modus operandi of introducing unaccounted income into the books of account in the guise of such share capital and share premium.

It was observed that the so-called investor companies were nothing but shell/paper entities, mostly based in Kolkata, which, though possessing PAN and filing income tax returns, neither carried on any genuine business activities nor had any independent financial worth. These entities were created and controlled by entry operators and professionals for the sole purpose of providing accommodation entries in lieu of commission. The enquiries revealed that the funds, ostensibly shown as share application money, originated from assessee business group. The trail of bank statements established that cash deposits or cheques issued by group concerns were routed through a series of layering transactions involving multiple intermediary accounts of entry operators, and ultimately returned to the assessee group in the garb of share application money and premium.

The AO further noted that survey action and independent verifications further confirmed that the alleged investor companies were not traceable at their registered addresses, their directors were only name-lenders, and their balance sheets showed no genuine financial strength to justify such investments. Statements of key persons corroborated the fact that these entities were under the control of the assessee Group and had been used solely to channel its undisclosed funds into the books.

The AO observed that despite adequate opportunities, the assessee failed to discharge its statutory onus under section 68 by proving the threefold requirement of (i) the identity of the investors, (ii) their creditworthiness, and (iii) the genuineness of the transaction.

The AO further observed that mere production of incorporation certificates, PAN details, or reliance on routing transactions through banking channels cannot, by themselves, establish the genuineness of the investment, as repeatedly held by the Hon’ble Supreme Court and various High Courts. Also, it is a settled proposition that the apparent is not real, and the Assessing Officer is empowered to lift the corporate veil to ascertain the true nature of the transaction.

In view of the above, the amounts so credited were treated as unexplained cash credits representing the unaccounted income of the assessee Group, and added under section 68 of the Act.

The CIT(A) observed that appellant failed to furnish any details of the company despite various opportunities given from time to time.  It was clear that the lender was not having any business activity. It was having meagre income from which it was clear that it was paper/shell companies of meagre means and engaged in giving accommodation entries to the beneficiaries in the garb of share capital including share premium.

The CIT(A) further observed that onus was on the appellant to prove genuineness of the transactions shown by them but it failed to do so. The said investor companies were not doing any business activities and these were engaged in giving accommodation entries.

The CIT(A) opined that merely submission of the name and address of the lender, income tax returns, Balance Sheet/statement of affairs of the lender and bank statement is not as well as to the genuineness of the transaction entered into.

The CIT(A) further opined that creditworthiness is not proved by showing issue and receipt of a cheque or by furnishing a copy of statement of bank account, when circumstances requires that there should be some more evidence of positive nature to ensure that the subscriber had made genuine investment.

Therefore, the CIT(A) upheld the addition holding that the AO was fully justified in making addition on account of unexplained cash credit u/s 68 of the Act.

The assessee against the order of CIT(A) preferred an appeal before the ITAT which allowed the appeal by the impugned order.

Before the Hon’ble High Court the Revenue contended that ITAT brushed aside the incriminating material unearthed by the AO and CIT(A), and placed undue reliance on superficial compliance documents such as VSVS declarations, ignoring the settled legal position that accommodation entry operators also file returns and obtain PAN, which cannot by itself prove genuineness. The VSVS scheme, being a settlement mechanism, cannot override the requirement of Section 68 that the assessee must establish the creditworthiness and genuineness of the transaction in its own books.

It was further submitted that by failing to examine the “source of the source” as mandated by the amended Section 68 post Finance Act, 2012, the assessee’s explanation remained wholly unsatisfactory. In view of the above, it was submitted that the findings recorded by the ITAT were perverse, contrary to the evidence on record, and inconsistent with binding precedents of the Hon’ble Supreme Court.

On the other hand the respondent assessee submitted that the it had duly discharged its statutory burden under Section 68 of the Act by proving the identity of the investor, furnishing ITRs, computation of income, audited accounts, bank statements, assessment orders, as well as compliance under VSVS wherein the investor company had already paid due taxes on disclosed income.

It was also submitted that it is settled law, as laid down by the Hon’ble Supreme Court that that once the identity of the investor is established, the Department is free to proceed against such investor in accordance with law but the same cannot be taxed in the hands of the assessee.

Further, the assessee placed reliance on the recent judgment of the Hon’ble Delhi High Court wherein it was held that once the assessee furnishes all primary documents and the investor is assessed to tax, the onus shifts to the Revenue to make further enquiries.

The Hon’ble High Court observed that the law in this regard is fairly well settled that the assessee must satisfactorily establish three cumulative ingredients: (i) the identity of the creditor/investor; (ii) the capacity or creditworthiness of such investor; and (iii) the genuineness of the transaction. If any one of these elements is not proved, the AO is justified in invoking Section 68 to treat the sum credited as unexplained cash credit.

The Hon’ble High Court further observed that it is equally well settled that the initial burden of proof is always upon the assessee. This burden does not stand discharged by mere production of incorporation certificates, PAN numbers, income tax returns, or by showing that the transactions were routed through banking channels. These documents, though relevant, are not conclusive when the surrounding circumstances indicate otherwise.

The Hon’ble High Court noted that Supreme Court has categorically held that when investor Companies have negligible income, no genuine business, and no real financial capacity, then mere production of documents or banking records cannot establish genuineness of the transactions. The apparent is not real, and the AO is entitled to lift the corporate veil to unearth the true character of such transactions.

The Hon’ble High Court noted that the ITAT, however, while reversing the well-reasoned orders of the AO and CIT(A), had placed undue reliance on formal compliance documents such as incorporation certificates, PAN details, ITRs, and particularly on the fact that the investor had settled tax disputes under the “Vivad Se Vishwas Scheme” (VSVS).

The Hon’ble High Court opined that the approach of the ITAT was wholly unsustainable. It failed to consider that accommodation entry operators also routinely obtain PAN, file ITRs, and maintain bank accounts, which are used precisely to give a facade of legitimacy to sham transactions. Such superficial compliance cannot, by itself, prove creditworthiness or genuineness.

Accordingly, the Hon’ble High Court decided the substantial question of law in favour of the Revenue and against the assessee, holding that the ITAT was not justified in setting aside the order of the CIT(A).

As a result, the impugned order passed by the ITAT was set aside, and the order of the CIT(A) affirming the addition made by the AO was restored.

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