Estimated circular trading commission is sustained, demonetization

Estimated circular trading commission is sustained, demonetization deposits are deleted, and standard business tax rates apply.

Issue

Whether estimated commission additions on circular trading are sustainable without adjustments, whether demonetization cash deposits backed by documented prior withdrawals can be taxed under section 69A, and whether standard business income can be subjected to an arbitrary enhanced tax rate.

Facts

The assessee-company, engaged in trading IT products, filed a “nil” return for Assessment Year 2017-18.
The Assessing Officer (AO) found that the company engaged in repetitive, pre-arranged intra-group circular trading to artificially inflate its turnover, subsequently adding an estimated commission of 1% of the total turnover.
The assessee requested the exclusion of intra-group sales from this turnover and sought to telescope its gross profits against the estimated commission.
The AO treated cash deposits of Rs. 34.66 lakhs made during the demonetization period as unexplained money under section 69A, despite available bank records showing sufficient preceding cash withdrawals.
The tax authorities applied the enhanced tax rate of section 115BBE to the cash deposits and taxed the circular trading commission income at an arbitrary, elevated rate of 40% under business income.
The AO denied a set-off for a brought-forward business loss of Rs. 14.54 lakhs because it was disallowed in Assessment Year 2015-16, ignoring that the appeal for that year was still pending.

Decision

Circular Trading Sustained: The 1% estimated commission addition is upheld as the transactions lacked independent commercial rationale, and the claims for turnover exclusion and telescoping are rejected.
Cash Deposits Deleted: The section 69A addition of Rs. 34.66 lakhs is deleted because the department failed to examine or disprove the direct nexus with the documented prior cash withdrawals.
Section 115BBE Inapplicable: The application of the enhanced tax rate under section 115BBE is quashed since the primary section 69A cash deposit addition was deleted.
Normal Business Rates Apply: The arbitrary 40% tax rate on commission income is set aside, and the department is directed to apply standard corporate tax slabs applicable to business income.
Brought-Forward Losses Remanded: The AO is directed to allow the set-off of the brought-forward business loss subject to and in accordance with the final outcome of the pending appellate proceedings for Assessment Year 2015-16.

Key Takeaways

No Adjustments Against Estimated Income: When an addition is made on a purely estimated basis to capture circular trading margins, the taxpayer cannot claim standard structural adjustments like telescoping gross profits.
Prior Withdrawals Disprove Unexplained Cash: The revenue cannot tax demonetization-era cash deposits based on mere suspicion or surmises when a clear paper trail of preceding cash withdrawals exists in the bank records.
Classification Dictates Tax Rate: The revenue department does not have the authority to invent arbitrary tax rates for income assessed under “Profits and Gains of Business or Profession”; standard statutory business slabs must apply.

IN THE ITAT MUMBAI BENCH ‘G’

Wipro Industries Ltd.

ACIT

Smt. Beena Pillai, Judicial Member
and Jagdish, Accountant Member

IT Appeal No. 5475 (MUM) of 2025
[Assessment year 2017-18]

MAY 29, 2026

Neeraj Mangla and Mohan Chaudhary, Advs. for the Appellant. Mahesh Parwani, Sr. AR for the Respondent.

ORDER

Smt. Beena Pillai, Judicial Member. – Present appeal arises out of the Order dated 08.08.2025 passed by the Ld.CIT(A), 48, Mumbai for A.Y. 2017-18 on following grounds:-

“Ground No. 1 – That the orders passed by Ld. AO u/s 143(3) of the Act as well as appellate order passed by Ld. CIT(A) are bad in law and are passed in contravention of prevailing law as well as facts of the case, therefore liable to be annulled.

Ground No. 2 – That the notice issued u/s 143(2) of the Act on 09/08/2018 being issued without complying to the CBDT Instruction. F. No. 225/157/2017/ITA-II dated 23.06.2017 and without mentioning type of scrutiny under which the case of the assessee has bee been selected is not valid as per Provisions of Act.

Ground No. 3 – That the Ld. AO grossly erred in law and in facts of the case in making estimated additions for commission of Rs. 46.97,839/- on sales made by assessee company to group companies.

Ground No. 4 – That the Ld. AO grossly erred in law and in facts of the case in making estimated additions for commission of Rs. 43,90,057/-sales made by assessee company to non-group entities without allowing telescoping of gross profit derived from sales.

Ground No. 5 – That the Ld. AO grossly erred in law and in facts of the case in assessing cash deposits of Rs. 34,66,250/- during demonetization period as unexplained money u/s 69A of the Act despite the fact that said cash was deposited out of cash in hand as per books of account.

Ground No. 6 – That the Ld. CIT(A) grossly erred in law and in facts of the case in rejecting the alternate plea of assessee that in case commission of Rs. 90,87,895/- is deemed to be earned in cash, telescoping of the same against the additions of Rs. 34,66,250/- being cash deposited during demonetization period shall be allowed.

Ground No. 7 – That the Ld. AO grossly erred in law and in facts of the case in levying taxes as per enhanced rates of taxes specified u/s 115BBE of the Act by Taxation Laws (Second Amendment) Act, 2016.

Ground No. 8 – That the Ld. AO grossly erred in law and in facts of the case in computing tax liability on business income applying tax rates of 40%.

Ground No. 9 – That the Ld. AO grossly erred in law in disallowing set-off of brought forward losses from A.Y. 2015-16 and the Ld. CIT(A) grossly erred in confirming the same.

Ground No. 10 – That Ld. AO grossly erred in law and in facts of the case in arbitrarily holding the sales made by assessee company to be fictitious and circular transactions and assessing commission of said sales without rejecting books of account of assessee company.

Ground No. 11 – That the appellant craves leave to add, alter or delete the above grounds of appeal at the time of hearing.

2. Brief facts of the case are as under:-

2.1 The assessee is a company stated to beengaged in the business of trading of IT products. It filed its return of income for the year under consideration on 30.10.2017 declaring total income at NIL. The case was selected for scrutiny and the Notice u/s. 133(2) and 141(1) was issued to the assessee during the assessment proceedings.

2.2. The Ld.AO noted that, search u/s. 132 was conducted in the year 2013 in the case of Shri Shirish C Shah (SCS) who was engaged in providing accommodation entries. The Ld.AO noted that the, assessee is one of the group Companies of Shri Shirish C Shah, who was the main persons engaged in providing bogus accommodation entries.

2.3. The Ld.AO observed from the documents filed by the assessee that it had shown turnover of Rs. 90,87,895/- from sale of IT products. After analyzing the sales and purchase of the assessee and their group companies, the Ld.AO came to the conclusion that this were circular transactions for window dressing of the books of accounts and were not genuine business transactions. The Ld.AO thus held that turnover to be bogus and estimated commission of Rs.90,87,895/- being 1% turnover and add it to the total income of the assessee.

2.4. The Ld.AO further noted that the assessee deposited cash of Rs.34,66,250/- during the demonetization period. On seeking explanation in receipt of the cash deposited, the assessee submitted that the cash was deposited out of the cash withdrawn from the bank to safeguard from liabilities. The Ld.AO rejected the explanation furnished by the assessee and considered the entire cash deposited as unexplained money u/s. 69A of the Act. The Ld.AO further noted that, it is alleged set of brought forward loss, business loss of Rs. 14,53,722/- as the said loss had already been disallowed in the A.Y. 2015-16.

Aggrieved by the Order of the Ld.AO, the assessee preferred the appeal before the Ld.CIT(A).

3. Before the Ld.CIT(A), the assessee contended that the commission was been wrongly assessed on the sales made by the assessee. It was submitted that the benefit of telescoping of the gross profit of Rs.63,37,583/- was not granted against the commissioned income.

3.1. TheLd.CIT(A) after verifying the submissions of the assessee observed as under:-

“The Assessing Officer has made an addition of Rs. 90,87,895/- as commission income, alleging that the turnover of Rs. 90,87,89,588/- shown by the appellant is bogus and represents accommodation entries. The appellant has contended that the Assessing Officer has erred in making the addition without appreciating the facts of the case. The appellant has also argued that the Assessing Officer has wrongly assessed commission income on sales made to a group company, M/s Empower India Limited. Further, the appellant has contended that the benefit of telescoping of the gross profit of Rs. 63,37,583/- should have been allowed against the commission income.

I have considered the submissions of the appellant. The Assessing Officer has brought on record that the appellant is a group company of Shri Shirish C. Shah, who is an accommodation entry provider. The Assessing Officer has also demonstrated that the transactions of sales and purchases are circular in nature and are not genuine business transactions. The appellant has not been able to produce any evidence to substantiate its claim that the transactions are genuine. The argument of the appellant that no commission should be charged on transactions with group companies is not acceptable, as the entire turnover has been held to be bogus. The claim of the appellant for telescoping of gross profit is also not tenable, as the turnover itself is bogus, and any profit or loss arising from such bogus turnover cannot be considered for telescoping. Therefore, I do not find any infirmity in the order of the Assessing Officer in making the addition of commission income of Rs. 90,87,895/-. The grounds of appeal No. 1 to 5 are accordingly dismissed.”

3.2. In respect of the cash deposited, it is allowed by the Ld.AO, the Ld.CIT(A) came to the conclusion that as the assessee do not establish nexus between the gross cash withdrawal and the cash deposited. Hence, the addition made by the Ld.AO was thus justified.

3.3. In respect of the disallowance of the brought forward losses, the assessee has contended that the appeal for A.Y. 2015-16 is pending and therefore the disallowance of brought forward losses is consequential and was rejected.

Aggrieved by the Order of the Ld.CIT(A), the assessee is an appeal before this Tribunal.

4. In respect of the Ground No.3 -4, the assessee submitted that, the issue of commission income on turnover within the group entities has been subject matter of adjudication before this Tribunal. In other group cases, he placed reliance on the following decisions. In case of group cases, wherein the addition was restricted only to the extent of sales, purchases were from bogus parties outside the group concern.

DCIT v. Empower India Limited [ITA No. 3205/Mum/2019, dated 23-10-2019].

Empower India Limited v. DCIT [ITA No. 3646/Mum/2019, dated 18-12-2020].

M/s Empower India Limited

M/s Avance Technologies Limited

4.1 In view of the above facts, the turn over to the extent of Rs. 46,97,838/- was with the group companies and based on the decisions relied in the case of the group companies, the commission could not have been earned by the assessee. The Ld.AR thus submitted that, the commission may be restricted only to Rs.43,90,057/- which was from the sales with non-group companies.

4.2. On the contrary, the Ld. DR vehemently supported the Orders passed by the authorities below.

We have perused the submissions advanced by the both sides in the light of record placed before us.

5. Admittedly, the transactions in question constitute circular trading transactions entered into between the assessee and its group concerns forming part of the Shri Shirish C. Shah Group of Companies. It is also an admitted position that the decision relied upon by the assessee in the preceding paragraph pertains to another concern belonging to the very same group.

5.1. Circular trading and accommodation entry transactions are essentially transactions lacking genuine underlying commercial substance or real movement of goods. Such arrangements deserve to be strongly discouraged, as they distort the true state of affairs and defeat the objective of fair tax administration. These transactions artificially inflate turnover and may be structured to derive undue tax benefits through manipulation of financial results. Therefore, where the material on record indicates repetitive routing of transactions through related concerns without any demonstrable economic substance, the same warrants appropriate corrective action in accordance with law.

5.2. Ordinarily, circular trading takes place amongst group concerns or related entities where transactions are merely routed through multiple entities without any corresponding transfer of goods, value addition, or commercial rationale. Such transactions do not represent genuine business activity. Mere movement of consideration between group entities, by itself, cannot establish the genuineness of the transactions, particularly in the absence of any independent commercial justification.

5.3. It is further observed that, in the present case, the genuineness of the transactions has not been satisfactorily established. What is required to be examined in such circumstances is whether the transactions possess real commercial substance, such as actual movement of goods or services, a legitimate business purpose, and economic justification. The transactions routed through the group concerns appear repetitive, pre-arranged, and lacking independent commercial rationale. Consequently, notwithstanding the inter se relationship between the entities, the transactions partake the character of circular trading.

5.4. In these circumstances, we are unable to derive any assistance from the decisions relied upon by the Ld. AR in the cases of other group concerns, since in those decisions the aspect relating to the existence of real commercial substance in the impugned transactions was not examined. We, therefore, do not find any infirmity in the view taken by the Ld. CIT(A) in sustaining the addition made by the Ld. AO on this account.

Accordingly, Ground No. 3 -4 raised by the assessee stands dismissed.

6. Ground No.5 -6, are respect of the cash deposit during the demonetization period.

6.1. The Ld. AR submitted that the assessee had made cash withdrawals from its bank accounts during the year under consideration and the cash so withdrawn was subsequently redeposited during the demonetization period. It was, therefore, contended that the source of the cash deposits stood duly explained.

6.2. In support of the aforesaid contention, the Ld. AR placed reliance upon the cash flow statement for the financial year relevant to the assessment year under consideration, which is reproduced hereinbelow:

Date	Bank	Amount
11/04/2016	Sai Industries	95,000
13/04/2016	Sai Industries	1,00,000
15/04/2016	Sai Industries	1,05,000
19/04/2016	Sai Industries	1,00,000
23/04/2016	Sai Industries	85,000
28/04/2016	Sai Industries	90,000
30/04/2016	Sai Industries	67,294
23/05/2016	IDBI Bank	2,000
27/05/2016	HDFC Bank	1,50,000
31/05/2016	HDFC Bank	2,50,000
08/07/2016	IDBI Bank	5,30,000
16/07/2016	IDBI Bank	2,50,000
06/09/2016	IDBI Bank	2,00,000
09/09/2016	IDBI Bank	4,00,000
13/10/2016	IDBI Bank	45,000
24/10/2016	IDBI Bank	5,00,000
04/11/2016	IDBI Bank	35,000
08/11/2016	IDBI Bank	5,00,000
		35,04,294

6.3. On the strength of the aforesaid withdrawals, the Ld. AR contended that the cash deposits made during the demonetization period stood sufficiently explained and, therefore, no addition under section 69A of the Income-tax Act, 1961 could be sustained.

On the contrary, the Ld.DR relied on the Orders passed by the Authorities below.

We have perused the submissions advance on both the sides in the light of the record placed before us.

7. It is observed from the cash flow statement reproduced hereinabove that the assessee had made cash deposits during the demonetization period and that there existed sufficient cash withdrawals preceding the impugned deposits. However, neither the Ld.AO nor the Ld.CIT(A) examined or correlated such earlier withdrawals while treating the deposits made during the demonetization period as unexplained money under section 69A of the Act.

7.1. In our considered opinion, once the availability of cash from prior withdrawals stands demonstrated from the bank records, the cash deposits made during the demonetization period cannot be brought to tax merely on surmises without disproving the nexus between the withdrawals and redeposits. Accordingly, the addition made under section 69A of the Act is unsustainable and deserves to be deleted.

Accordingly, the Ground No.5 – 6 raised by the assessee stands allowed.

7. 2 Ground No. 07 is in respect of applying enhance rate of tax as per Section 115BBE of the Act.

7.3. The Ld. AR submitted that the enhanced rate of tax prescribed under section 115BBE of the Act became applicable only from A.Y. 2018-19 onwards. It was contended that, since the year under consideration is A.Y. 2017-18, the amended provisions providing for taxation at the higher rate would have no application to the assessee’s case.

7.4 On the contrary, the Ld. DR supported the Orders passed by the Authorities below.

We have perused the submissions advanced by both the sides in the light of the record placed before us.

8. It is observed that the Assessing Officer had subjected the impugned addition to tax at the enhanced rate prescribed under section 115BBE of the Act, which became applicable from A.Y. 2018-19 onwards. Be that as it may, the provisions of section 115BBE can be invoked only in respect of additions made under sections 68 to 69D of the Act.

8.1. In the present case, since the addition made under section 69A of the Act has already been deleted by us in the preceding paragraphs, the question of applicability of section 115BBE does not survive. Accordingly, there remains no justification for applying the provisions of section 115BBE to the assessee’s case.

Accordingly this Ground No. 07 raised by the assessee stands allowed.

9. It is noted that the commission income assessed in the hands of the assessee has been treated by the authorities below as income chargeable under the head “Profits and Gains of Business or Profession”. The Ld.AO, instead of making addition of the entire gross trade receipts arising out of the circular trading transactions, restricted the addition only to the extent of 1% of the turnover, treating the same as commission income earned by the assessee.

9.1. In such circumstances, once the income is assessed as business income, the same has necessarily to be subjected to tax at the rates applicable to the assessee in respect of income chargeable under the head “Profits and Gains of Business or Profession”, and not at any special or higher rate otherwise not applicable in law. We thus direct the Ld.AO to apply the rate of tax applicable to the relevant head under which the commission income has been assessed.

Accordingly, Ground No. 8 raised by the assessee is, therefore, partly allowed for statistical purposes.

10. Ground No.9 raised by the assessee is on disallowance of brought forward losses.

The Ld. AR submitted that the losswere disallowed on the pretext that they were incurred y the assessee during the F.Y. 2015-16.It is submitted that the proceedings are pending.

We have perused the submissions advanced by the assessee on this regard. We are of the opinion that the Ld.AO may consider such losses as per outcome of the appellate proceedings for the A.Y. 2015-16 in accordance with the Law.

Accordingly, this Ground raised by the assessee is partly allowed for statistical purposes.

In the result, the appeal filed by the assessee stands to be partly allowed.