CA’s Fraudulent Income Tax Refunds treated as Income: ITAT Upholds Additions despite later Recovery [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT )  upheld the tax additions in the case of a Chartered Accountant ( CA ) who fraudulently encashed income tax refunds using forged challans, ruling that such gains remained taxable despite their later recovery.

Mukesh Rasiklal Shah, appellant-assessee,a CA, was subjected to a search and seizure operation at his home and office, where incriminating documents were found. The search followed suspicions raised by the Income-tax Officer regarding fake income tax challans attached to refund claims. It was found that the appellant, acting as the Authorized Representative for others, had committed fraud.

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The investigation revealed that the assessee fraudulently earned Rs. 2,47,943 in 1992-93 and Rs. 19,36,095 in 1993-94. These amounts were added to his income by the Assessing Officer (AO), who stated the appellant had fraudulently encashed refunds based on fake challans.

The assessee’s original returns for 1992-93 and 1993-94 were Rs. 44,319 and Rs. 22,440, respectively, but the assessments were finalized at Rs. 2,92,260 and Rs. 19,58,540. The appellant appealed these assessments, but the Commissioner of Income Tax(Appeals)[CIT(A)] upheld the AO's decisions.

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The assessee then appealed to the Tribunal, which in 2005 directed the AO to provide copies of the materials used against him. In 2006, the AO repeated the original assessments. The assessee filed another appeal, arguing that the assessments were based on incorrect facts and that his rights to a fair hearing were violated. The case was sent back for further consideration.

The assessee argued that the misappropriated income tax refunds of Rs. 21.98 lakhs had been fully recovered by the government and should not be treated as taxable income. It was claimed that the funds belonged to the government and could not be assessed as personal income. The appellant also pointed out that similar additions for AY 1991-92 had been deleted, and the department had not challenged that decision.

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The Departmental Representative countered that the assessee had admitted to fraudulently encashing refunds and had held the money for years, investing it in shares and fixed deposits. It was argued that under the Act, unlawfully retained funds could be treated as income. Since recoveries were made in later years, any deduction should apply to those years, not AY 1992-93 or 1993-94. The department maintained that the AO’s addition was justified.

The tribunal noted that the Additional Chief Metropolitan Magistrate (ACMM), Ahmedabad, discharged the accused from prosecution under Section 277 of the Act due to a lack of evidence. The case stemmed from a 1993 search over alleged fraudulent refund claims using forged challans. Assessments for AYs 1991-92 to 1993-94 included the disputed refunds.

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Read More:ITAT Rules in favor of Assessee, Citing benefit of Doubt in Fraudulent Activity Case

Despite multiple litigations, the Revenue failed to submit evidence, leading to the dismissal of the prosecution in 2023. The misappropriated refunds had already been recovered through share disposals. Given the prolonged delay and absence of proof, the ACMM discharged the accused under Section 245 of the Criminal Procedure Code.

The appellate tribunal examined whether the recovered fraudulent refunds remained taxable and if taxing only a portion allowed the taxpayer to retain the rest.

The assessee admitted to fraudulently earning income and depositing it into family accounts for financial gains. Citing Supreme Court rulings, the ITAT held that all income, including fraudulent gains, was taxable upon accrual. Recovery of funds later did not change its taxability, as restitution was not a deductible expense.

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The bench noted that the Income-tax Department initiated prosecution under Section 277, but the case was dismissed due to a lack of evidence. However, no further criminal action was taken for defrauding a government department. It stressed that tax authorities should not only enforce tax laws but also act against fraud affecting public funds.

The two member bench comprising Dr.BRR Kumar(Vice President) and  T.R.Senthil Kumar(Judicial Member) tribunal upheld the tax additions and dismissed the appeal.

To Read the full text of the Order CLICK HERE

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