Unexplained Credits Must Be Taxed in the Hands of Ultimate Beneficiaries, Not Conduit Companies: Delhi HC [Read Order]

The Delhi High Court held that unexplained credits routed through conduit companies cannot be taxed in their hands, but must be assessed in the hands of the actual beneficiaries.

Justices Vibhu Bakhru and Tejas Karia  dismissed a batch of appeals filed by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT), which had upheld the deletion of protective additions made under Section 68 of the Income Tax Act, 1961, in the hands of Third Generation Traders Pvt. Ltd. for multiple assessment years ranging from 2012-13 to 2017-18.

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A search and seizure operation conducted at the residence of an individual connected to the so-called “Jain Brothers,” alleged entry operators. Documents seized during the search were linked to the assessee company, leading the Assessing Officer to issue notices under Section 153C of the Act.

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It was concluded that the assessee functioned merely as a conduit, facilitating accommodation entries for the ultimate beneficiaries through banking transactions. Substantial funds were credited and then debited in nearly matching amounts, pointing to circular layering of funds with no independent income or cash deposits by the assessee itself.

The AO proceeded to make additions of unexplained credits on a protective basis and presumed commission income on a substantive basis. However, both the CIT(A) and ITAT concluded that since the assessee was a shell entity and the actual recipients of the funds were identified and assessed substantively, no valid case existed for taxing the same amounts again in the hands of the intermediary company.

The Tribunal specifically relied on previous rulings involving entities similarly operated by the Jain Brothers, holding that once real beneficiaries are identified and taxed, protective additions on shell conduits must fall.

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The High Court upheld this approach, ruling that it would be double taxation to tax both the intermediary and the final recipient. It further noted that there was no proof that the assessee had actually generated any commission money, supporting the claim that it had no self-sufficient business activities and merely followed the entry operators' directions.

Therefore, the Court upheld the legal precept that Section 68 taxation must be based on actual revenue and legitimate recipients rather than just pass-through entity paper transactions. It rejected the Revenue's appeals after concluding that there was not an important legal issue to be addressed.

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To Read the full text of the Order CLICK HERE

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