Circular Transactions could be added Substantively Only Once: ITAT quashes Income Tax Demand [Read Order]

The Income Tax Appellate Tribunal (ITAT), ITAT Chennai Bench, has delivered a significant verdict in the case of Shri Tharanipathy Rajkumar relating to Assessment Year 2017-18, ruling that circular transactions involving multiple entities can be subjected to substantive addition under Income Tax Act only once.

The assessee disputed an assessment framed by the Assistant Commissioner of Income Tax, Coimbatore, following a search and seizure operation linked to deposits made during the demonetization period.

The assessing officer had invoked Section 69A of the Income Tax Act to make substantial additions totaling over Rs. 10 crore on the grounds that unaccounted cash deposits were routed through various entities, including M/s Sri Sakthi Sai Enterprises, Infant Jesus Foundation (IJF), and Chennai Raj Chits Private Limited (CRCPL).

The Assessing Officer held Shri Rajkumar responsible for orchestrating cash deposits through these group companies, alleging that he controlled and managed the flow of demonetized specified bank notes (SBNs). Significant additions were made both substantively and protectively across the accounts of the assessee and related entities.

However, upon appeal, the ITAT bench scrutinized the facts and legal provisions. The tribunal noted that the amounts in question had already been declared under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) scheme by the entities involved, including M/s Arumuga Holdings Pvt. Ltd., which had admitted to Rs. 15.84 crores under the scheme. The ITAT held that once an amount has been declared under PMGKY, it cannot be subjected to repeated taxation in the hands of connected parties.

Critically, the tribunal observed that since the additions related to circular transactions had already been confirmed substantively in the hands of these entities, imposing a second substantive addition on the assessee for the same amounts was impermissible. The ruling highlighted that circular transactions — where funds move between related entities — can only be taxed substantively once to prevent double taxation.

Accordingly, the tribunal deleted substantive additions totaling Rs. 4.65 crores relating to M/s Sri Sakthi Sai Enterprises, Rs. 0.83 crores for Infant Jesus Foundation, and Rs. 0.78 crores for Chennai Raj Chits Private Limited, among others.

The tribunal bench of Mahavir Singh, Vice President And Manoj Kumar Aggarwal, Accountant Member also observed that commissions retained by these entities constituted their income alone and could not be added again in the hands of the asses