ITAT limits Disallowance in Circular Trading Case to 0.30% [Read Order]

The Income Tax Appellate Tribunal (ITAT) Ahmedabad bench has dismissed the revenue's appeal and limited the disallowance in a circular trading case to 0.30% of the total transactions.

In this case, the assessee, Omshiv Fabricshub Pvt. Ltd., was a company engaged in the trading of raw cotton.

The Assessing Officer (AO) received information from the ADIT (Inv.) Unit-1(2) Ahmedabad, indicating that the assessee had taken accommodation entries totalling Rs. 88.83 crore from entities controlled by Sanjay Tibrewal, an alleged entry operator. The AO concluded that these transactions were non-genuine and added the entire amount as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The AO's decision was based on the findings that the entities involved were paper concerns engaged in providing accommodation entries without any underlying business activity.

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The assessee, who was aggrieved by the above decision, appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal. The CIT(A) restricted the disallowance to Rs. 16.67 lakh, which is 0.30% of the total circular trading transactions of Rs. 55.57 crore. The CIT(A) held that circular trading was not a case of estimating net profit but rather involved expenses incurred for intermediary charges, which were not for business. The CIT(A) also noted that the AO had failed to provide sufficient evidence to substantiate the claim that the purchases were bogus.

Dissatisfied with the CIT(A)'s decision, the revenue appealed to the ITAT, arguing that the CIT(A) had erred in restricting the disallowance to 0.30%. The revenue contended that the circular trading transactions were bogus and that the assessee had not provided adequate documentation to explain the transactions.

The assessee’s counsel contended that the transactions were part of circular trading conducted by Pradip Overseas Ltd. (POL), another concern in the same group, to show better turnover. The assessee vehemently argued before the bench that these transactions were not accommodation entries but were recorded in the books against paper sales and purchases.

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The ITAT upheld the CIT(A)'s decision. The bench noted that the AO had failed to provide sufficient evidence to support the claim that the transactions were bogus. The ITAT also observed that the CIT(A) had independently assessed the case and rightly restricted the disallowance to 0.30% of the circular trading transactions, in line with previous rulings in similar cases.

The ITAT, comprising Makrand Mahadeokar (Accountant Member) and Suchitra Kamble (Judicial Member), dismissed the revenue’s appeal.

To Read the full text of the Order CLICK HERE

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