Addition of unexplained credit in the case of money launderer/ hawala operator upheld. SC dismisses SLP

Addition as unexplained credit/Investment in case of money launderer / hawala operator. Supreme Court dismisses SLP against High Court order

ABCAUS Case Law Citation:
ABCAUS 3089 (2019) (07) SC

The Income Tax Department had received information from the Enforcement Directorate (ED) that the appellant assessee had opened various bank accounts in the name of partnership firms constituted of the relatives and employees of the assessee. There were substantial deposits in such Bank accounts followed by withdrawals made immediately after the deposits.

The ED had unearthed a huge hawala operation of money sourced from the middle east, deposited in the city and then transferred to different persons all over the country who were said to have acted as agents for distribution of the amounts to various people.

The assessee refused to own up the accounts and also refused to file a return in pursuance of the notice issued under Section 148.

The Department took up the enquiry on the basis of the statements recorded from the various persons who appeared in accordance with the summons issued and the materials collected, of the details of the Bank accounts and completed proceedings against the assessee.

The Department assessed peak credit in the accounts recovered under Section 68, 69 and 69A of the Income Tax Act, 1961 (the Act) as unexplained cash credits and investments. Considering the fact that the entire transactions were hawala transactions, commission at the rate 2% was also assessed as income of the assessee.

The First Appellate Authority and the Tribunal confirmed the assessment. The assessee approached the High Court.

Before the Hon’ble High Court, the appellant primarily denied any connection to the said bank accounts. His further submission was that admittedly when the Department accepted the position that the assessee was carrying on hawala proceedings, there could be no assessment of the amounts which came into the accounts, and withdrawn immediately, as an unexplained cash credit or unexplained investment.

It was his case that the very allegation of hawala transaction would indicate that the money which came into the accounts did not belong to the assessee; but to those persons to whom it was distributed. Thus, there could not have been any addition made on the basis of the peak credit and even the incremental peak credit as directed by the Tribunal was flawed.

The Hon’ble High Court observed that there was absolutely no books of accounts maintained by the assessee. In fact that when notice was issued to the assessee, he refused to file a return. Despite the overwhelming evidence unearthed regarding the inextricable link the assessee had with the various accounts maintained in the name of bogus partnership firms, the assessee refused to acknowledge the same. The assessee maintained a stoic silence insofar as the source of the amounts deposited in the accounts as also the destination of the said amounts. It was in such circumstances, the Tribunal accepted the addition made on the basis of the peak credit in the subject years.

The Hon’ble High Court further noted that the Tribunal found that the assessee had failed to discharge the initial burden of proof as required under Section 68, 69 and 69A and hence the addition made in the name of the assessee under the above provision was justified.

It was again observed that the peak credit as determined in the subject years represented the funds available with the assessee.

The Hon’ble High Court opined that since there was no explanation offered as to the source or destination of the amounts which came into the bank account there was no illegality in making addition of the peak credit. The destination of the amounts which were deposited and later withdrawn having not been disclosed or substantiated; it was not reasonable to assume that the entire amounts would have been disbursed, with only the commission appropriated.

The Hon’ble High Court opined that money laundering can also be for oneself and there can be no presumption that it is for others, especially when the assessee refuses to divulge the details of the persons to whom the money was distributed.

According to the High Court the adoption of incremental peak credit as income was a quite plausible view, presuming at least that, to be the income of the assessee.

In view of the circumstances of the case, the Hon’ble High Court opined that despite the fact that the ED had found the assessee to be a hawala operator or money launderer, the assessment under Section 68, 69 and 69A of the incremental peak credit was perfectly in order as there could be a reasonable assumption that the incremental credit would be the income of the assessee, the remittances being found in favour of the assessee and the disbursal not having been proved or even admitted.

Accordingly, the High Court rejected the appeal finding the questions of law in favour of the revenue and against the assessee. However, the Hon’ble High Court directed that when incremental peak credits were taken as the income of the assessee for a particular year the said quantum shall not be treated for the purpose of 2% commission and no addition shall be made on that count.

Not satisfied with the decision of the High Court, the assessee filed a special leave petition before the Hon’ble Supreme Court. However, their Lordships declined to interfere with the order of the High Court and dismissed the SLP.

Download Full Judgment Click Here >>

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