No Profit in Intra-Group Sales, Not Liable for Commission Income: ITAT Rules in Avance Technologies Appeal [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that commission income cannot be assessed on circular intra-group transactions, upholding that no entity can earn profit from dealings within its own controlled group, and partly allowed the appeal by deleting additions arising from such sales.

Avance Technologies Limited, the appellant, filed an appeal against the order passed by the Commissioner of Income Tax (Appeals) [ CIT(A) ] for the assessment year 2017-2018. The case arose from scrutiny assessment proceedings initiated after the Assessing Officer (AO) alleged that the appellant was part of a group engaged in providing accommodation entries through circular sales and investments.

The AO treated certain sales and investments as non-genuine and estimated commission income at the rate of 1% on sales made to ‘Mobile Telecommunication Limited’ and on fresh investments, while also making additions for cash deposits during the demonetisation period. The CIT(A) upheld most of these additions, leading to the present appeal before the Tribunal.

The appellant represented by Chartered Accountant, Neeraj Mangla contended that the AO erred in treating sales made to ‘Mobile Telecommunication Limited’ as transactions with a non-group entity and in estimating commission income on such sales, as Mobile Telecommunication Limited was part of the same group, and therefore, commission income could not arise from circular intra-group transactions.

Further, it was pointed out that in earlier assessment years, similar additions had been restricted only to transactions with outside parties and that no commission was assessed on intra-group dealings. Additionally, it was argued that the addition on account of cash deposits during the demonetisation period was unjustified as the deposits were made out of recorded cash withdrawals.

The bench of Pawan Singh, Judicial Member, and Renu Jauhri, Accountant Member, allowed the appeal, ruling that the AO was incorrect in treating Mobile Telecommunication Limited as a non-group entity, when the same entity had been accepted as a group company in related cases. Relying on earlier decisions in the appellant’s own case and in connected group matters, the Tribunal reiterated that no commission income can arise from circular transactions within a group, as no one can earn profit from transactions with oneself.

Accordingly, the addition of commission income on intra-group sales was deleted. However, the Tribunal upheld the addition of commission income on fresh investments made during the year, holding that such estimation was consistent with past orders.

On the issue of telescoping, the Tribunal directed that the benefit be allowed in line with earlier years where commission income had been set off against returned income. With respect to cash deposits during the demonetisation period, the Tribunal granted partial relief by deleting a substantial portion of the addition while sustaining a small part to safeguard revenue interests. The Tribunal also directed that the enhanced tax rate under Section 115BBE ofthe Income Tax Act, 1961 could not be applied retrospectively and that normal tax rates would apply.

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