Routing unaccounted money using listed paper companies, amounts to ‘colorable device’ & fraud on I-T Dept

While upholding the addition made on account of deploying unaccounted money as share capital of listed paper companies through a series of transactions and attempting to give it a legitimate color, The Panaji Bench of Income Tax Appellate Tribunal held Assessee’s trade Void-ab-initio by relying on the settled legal principle ‘fraud vitiates everything’.

A Division Bench of Justice Partha Sarathi Chaudhury and Accountant Member Inturi Rama Rao observed that “the modus operandi of the Assessee and undisputedly from the facts on record it was precise that the transactions entered into by the Assessee were nothing but the conversion of unaccounted money by the way of shell companies and giving them a legitimate color”.

“In the realm of financial legislations or for that matter, whenever the Assessee or the Petitioner has approached the Court, it is necessary that they are coming before the Court of law with clean hands”, added the Bench. 

The Petitioner was represented by none and Advocate Prabhakar Anand DJ appeared for the Respondent. 

The brief facts of the case were that Assessee was subjected to reassessment pursuant to a search operation wherein total income of Rs.3.20 Cr was assessed on the basis that Assessee designed a structure of tax evasion by employing paper companies which were listed on the recognized stock exchange to evade tax leading to misreporting of income. An Assessee approached a Commissioner of Income Tax (CIT) for relief but the same had been dismissed by the CIT. Now, the Assessee approached the Bench to get relief.

After considering the submission, the Bench noted that the Assessee converted unaccounted money by way of a shell company and put it into a series of transactions to give a legitimate color of unaccounted cash available to the individuals.

The Bench by referring to the case Mc Dowell & Company Ltd. v. CTO [1985] 154 ITR 148 (SC), reiterated that “Tax planning may be legitimate provided it is within the framework of law, Colourable devices cannot be part of tax planning….”.

The bench stated that the addition of the difference between the sale and purchase transaction as undisclosed income by referring to the case DCIT v. Pawan Kumar Malhotra [2010] 2 ITR 250 (Del – Trib.).

The bench also stated that the ratio of the said ruling squarely applies to the conduct of the present Assessee as he had fraudulently conducted himself with the Revenue by misreporting his income in return filed for evading tax.

Referring to the case Badami (deceased) by her LRs v. Bhali in Civil Appeal No. 1723/2008, wherein the application of the principle of fraud was discussed, the Bench reiterated that “fraud and collusion vitiate even the most solemn proceedings in any civilized system of jurisprudence and it has to defined as an act of trickery”.

The Bench also referred to case S.P Chengalvaraya Naidu vs Jagannath AIR 1994 (SC) 853, and expressed that “the moment any fraud is detected in the conduct of the Assessee, all judicial acts or temporal will vitiate and the persons whose case is based on falsehood has no right to approach the Court.”

Accordingly, on finding no infirmity with the findings of the CIT the Bench dismissed the Assessee’s appeal. 

Cause Title: Manoj Anand Vs. ACIT, Panaji [ITA No.09/PAN/2022 / 2023-Enterslice-46-ITAT-Panaji]

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