ASSISTANT COMMISSIONER OF INCOME TAX , CIRCLE-5, NAGPUR V. SHRI MUKESH CHAMPALAL MALVIYA, NAGPUR

ITA 389/NAG/2019

AI Insights

The case involves Shri Mukesh Champalal Malviya, who, along with Shri Shankarrao Bhad, was implicated in a Ponzi scheme operated by the late Shri Deven Malviya. The scheme involved the use of bank accounts in the names of these individuals to facilitate the movement of funds related to the scheme. The Assessing Officer made protective additions to the income of both the assessee and Shri Bhad, considering the deposits in their accounts as undisclosed income. However, the CIT(A) later deleted these additions, recognizing that the assessee and Shri Bhad were victims of the scheme and not the beneficiaries of the illicit funds. The Tribunal's decision to remand the case back to the CIT(A) was based on the need for a comprehensive review of the circumstances surrounding the financial transactions and the roles of all parties involved.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474328 (ITAT-NAGPUR)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2025
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Other Referred Cases: Madhuben Ashokbhai Chhatra v/s ITO, Smt. Kajalben N. Gondaliya v/s ITO, ITO v/s Kalpana Ben Janani, Sanjay Kumar Garg Vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: SANDIPKUMAR SALUNKE
• Keywords: Set aside; Unexplained cash credit; Salary income; Peak credit; Principle of natural justice; Tangible material
• Section: 147

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH, NAGPUR BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI K.M. ROY, ACCOUNTANT, MEMBER ITA no.389/Nag./2019 (Assessment Year : 2011–12) Asstt. Commissioner of Income Tax Circle–5, Nagpur ……………. Appellant v/s Shri Mukesh Champalal Malviya Plot no.101, Laxmi Nagar 302, Karmayogi Apartment Nagpur 440 022 PAN – ABXPM2404Q ……………. Respondent Assessee by : None Revenue by : Shri Sandipkumar Salunke Date of Hearing – 27/01/2025 Date of Order – 10/02/2025 O R D E R PER K.M. ROY, A.M. Assessee’s appeal is emanating from impugned order dated 30/09/2019, passed by the learned Commissioner of Income Tax (Appeals)–1, Nagpur, [“learned CIT(A)”], for the assessment year 2011–12. 2. In its appeal, the assessee has raised following grounds:– “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) is right in deleting the additions made by the AO on account of deposits in the bank and directed to adopt net commission income on such deposits @ 0.2% for the year under consideration and further directing to share of the above net commission in the hands of the assessee. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) is right in ignoring the facts that assessee is a power of attorney holder of the account of Shri Shankarrao Bhad which is employee of his brother and huge cash is deposited by the appellant in the said accounts and the substantial additions are made on account of unexplained credits 2 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 received from parties and 10% of undisclosed income on those unexplained credits. 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) is right in ignoring the facts that the money credited in the account of Shri Shankarrao Bhad belongs to the assessee only. 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeal) is right in deleting the addition made of Rs.3,51,00,000/- holding that none of money belongs to assessee, relying upon order of the Hon'ble ITAT Raipur and Rajkot, stating that the facts of the case are similar and same modus operandi was used in the case of assessee, whereas the case of assessee is not related with the cases covered under the order of the Hon'ble ITAT Raipur and Rajkot. 5. Any other ground that may be raised during the hearing of appeal.” 3. The factual matrix of the case are, the assessee is a school teacher. During the relevant years under consideration, the assessee earned his income from salary and interest income. The case of the assessee was re- opened under section 147 of the Income Tax Act, 1961 (\"the Act\") on the basis of information received from Investigation Wing, Nagpur. The additions mainly pertain to huge cash/cheques deposit in the bank account of one Shri Shankarrao Bhad, and this bank account of Shri Bhad, was operated by the assessee through Power of Attorney(POA) given by Shri Bhad. The Assessing Officer has made protective additions in the hands of the assessee and the same additions are also made in the hands of Shri Bhad, also who is the owner of the stated ICICI bank account, substantively. These cases directly emanate out of the report of the Investigation Wing, Nagpur, which revealed a scam of sorts. Pursuant to the various enquiries, the statements of all concerned, i.e., the bank account holder Shri Bhad, and the bank account operator/POA holder, being the assessee was recorded. As per the statements given by these two persons before the Investigation Wing and the various 3 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 submissions before the Assessing Officer, it becomes evident that the said bank account was opened in the name of Shri Bhad, and operated by the assessee at the instructions of Late Shri Deven Malviya. The whole case is focused and part of the Ponzi Scheme floated and operated by Late Shri Deven Malviya. lt is also a stated fact that all the deposits and withdrawals were made at the instruction of Late Deven Malviya. Shri Deven Malviya (now deceased), a person known to the assessee, was working as a stock broker at Pune. Shri Deven Malviya, had developed a huge network of sub brokers and agents working for him in entire India by assuring them of commission income, for use of their bank accounts through which he has received investments and rotated funds that were invested in the stock market. He used the bank accounts of his agent for to make investments as a broker. He had several agents across India mainly in Maharashtra, Madhya Pradesh and Gujrat. Shri Deven Malviya, a person known to the assessee approached and developed a close relation with assessee. Later after gaining his confidence, Shri Deven Malviya, asked him to open an account in the assessee’s name. Being a teacher in a Government Schools and as a Government employee he was unable to do so. But since Deven Malviya had shown a very rosy picture to the assessee, he fell under his influence and, therefore, on his suggestion, the appellant along with another person Shri Shankarrao Bhad, opened an account in the name of Shri Shankarrao Bhad, which was operated by the assessee through a Power of Attorney. Being convinced by the assessee, Shri. Shankarrao Bhad, opened the account in the name of his newly formed proprietary concern \"M/s. Pioneer Investments\" in the ICICI Bank, Civil Lines and Ramdaspeth Branches. The bank branches were also suggested by Shri 4 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 Deven Malviya, so that it would be convenient to transfer funds to and from his the accounts as Shri Deven Malviya, also maintained his accounts in the same branches with ICICI Bank. As Shri Bhad, was unknown to Shri Deven Malviya, the assessee was instructed to obtain power of attorney from Shri Bhad, to operate the bank accounts. Accordingly, the assessee with the power of attorney from Shri Bhad, operated the bank accounts at the instruction of Shri Deven Malviya. These facts are stated in the statements recorded of Shri Bhad, and assessee on 15/10/2015 by the Investigation Wing, Nagpur. Meanwhile, in response to the assessee’s application under section 144A of the Act, submitted before the learned JCIT, Range–5, Nagpur, requesting for issuance of certain directions to the Assessing Officer, the learned JCIT issued certain directions to the Assessing Officer which are contained in the assessment order vide Para–26 and 27 are relevant. The Assessing Officer, in view of the said directions of the learned JCIT, Nagpur, the credits in the aforesaid bank account amounting to ` 3,51,00,000, which has been considered as undisclosed income of the assessee from undisclosed sources, as discussed in detail by the Assessing Officer in its assessment order vide Para–16, 17, 18, 19 and 25, was added to the returned income of the assessee under section 56(1) of the Act on protective basis. The total cash deposited by the assessee during the year under consideration in the aforesaid bank accounts in ICICI Bank, Nagpur, works out to be ` 7,15,000, and the total of money deposited by way of cheques and transfers works out to be ` 3,58,15,000 i.e., ` 7,15,000 + ` 3,51,00,000. In view of the directions of the learned JCIT, Nagpur, vide his directions dated 21/12/2017, to Assessing Officer considered 10% of the aforesaid receipts in cash as well as 5 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 in chequest and transfer was considered as the undisclosed income of the assessee on substantive basis, which was treated as income of the assessee and was added to the total income. 4. On appeal, the learned CIT(A) partly allowed the assessee’s appeal while observing as under:– “5.5 I have perused the bank accounts as submitted by the appellant during the appellate proceedings, wherein it is observed that the transfer of the funds were predominantly transferred to and from certain firms namely M/s. Vibrant Projects, M/s. Vibrant Equities, M/s. Velocity Capital Market, M/s. Dynamic Commodities etc. It is also found that all these accounts pertain to either Shri Deven Malviya or his wife Smt Disha Malviya. The AO has stressed the issue of confirmation from Mr. Deven Malviya, which was unavailable as Shri Deven Malviya had committed suicide in 2010. Therefore, the AO opted to add the amounts credited in the bank accounts, in the hands of appellant. 5.6 In support of the aforesaid facts, the appellant has submitted the newspaper pieces published in various national and regional dailies, that had reported the news that Late Shri Deven Malviya has committed monetary fraud of Rs.2,000 Crores and duped investors. The names of companies owned by Mr. Deven Malviya were also highlighted in the news items. The same companies were found mentioned in the bank statements submitted by the appellant. All these information were before the AO as well. Therefore, it was not difficult for the AO to obtain further information of Mr. Deven Malviya and his concerns as he was already in possession of information and bank details. However, the AO has not enquired any further and has chosen to simply added all the credits- rather than arrive at the correct income- or even the correct nature of income. Since the appellant has proved that the transactions were routed through the accounts actually belonging to Mr. Deven Malviya and monies belonged to him, the AO without assigning any reason, rejected the plea taken by the appellant and made the additions in his hand. When the appellant had narrated the whole fact before the AO and AO was confronted with tangible material on record about the source of transaction and money, he should have made independent enquiry of the firms owned by Deven Malviya as well as the persons who had invested the money with Mr. Deven Malviya through the appellant. However, the AO refrained himself from arriving at the real and correct position that could have led to a proper assessment. 5.7 The other crucial fact which is available in the public domain is that Shri. Deven Malviya, committed suicide on 30/12/2010 by jumping off from 22nd floor of Marriott Hotel & Convention Centre at Pune. Thereafter, during the investigations made made by police, it was revealed that he had made similar arrangements with several persons at different places, where he lured them by promising handsome returns on the amounts invested. In order to route the money of other persons in the stock market, he had followed a similar and 6 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 identical modus operandi. The cases of other such victims, have been decided by ITAT, Rajkot and Raipur and these decisions have been relied upon by the appellant since having similar question of fact as of the appellant. These assessees were also victims of the scheme floated by the same person, Late Shri Deven Malviya. These cases are decided in the favour of assessees as under: Name of Case Decided by Date of Pronouncement Madhuben Ashokbhai Chhatra v/s ITO ITAT, Rajkot 17/04/2018 Smt. Kajalben N. Gondaliya v/s ITO ITAT, Rajkot 13/02/2019 ITO v/s Kalpana Ben Janani ITAT, Rajpur 05/05/2017 5.8 I have perused the aforesaid cases cited by the appellant. The Hon'ble ITAT of Rajkot and Raipur have duly established the facts about the Ponzi scheme floated by the Shri Deven Malviya. The same modus operandi was used in the appellant's case. In view of the aforesaid decisions, the news pieces and rotation of amounts through concerns owned by Late Shri Deven Malviya, the fact is well established that the money belonged to Shri. Deven Malviya. As observed by Hon'ble ITAT of Rajkot and Raipur, Shri Deven Malviya was financial fraudster who floated a dubious / Ponzi scheme wherein monies were procured from various investors. In order to lure the small investor, he had appointed several agents to open their bank accounts and to operate them at his instruction. The Ponzi scheme was more or less in manner of timing and ladding wherein money obtained from one person was used to discharge liability towards other person and such rotation of money was made by him for some time. When the rotation was paused due to stock market crash, he was unable to discharge the liability towards the investments made by various people. When the pressure to refund the money was mounted and various complaints were lodged against him, he took his own life. 5.9 The appellant was also lured by the promise of commission offered by him and has opened an account in the name of Shri. Shankarrao Bhad who was an employee at the shop of his brother. The cash and bank credits were supplied by Mr. Deven Malviya and further, on his instructions, the said payments or cash were paid by the appellant to parties as instructed by him. The same modus operandi was used by Shri Deven Malviya as described in the aforementioned judicial pronouncements. Hence these are accepted facts which are available in the public domain. Once, it is established that the funds did not belong to the appellant and appellant being a victim of a Ponzi scheme floated by another person, no addition can be made in the hands of the appellant as he was neither the owner nor the beneficiary of the transactions found in the impugned bank accounts. 5.10 In view of the above discussions, the peak balance of cash deposited in the account that was added as income of the appellant deserves to be deleted. As none of the money belongs to the appellant, no addition of entire deposit or cash peak shall be made in the hands of the appellant. Accordingly, the cash peak balance of Rs.3,60,000 in AY 2009-10 and Rs.12,65,000 in AY 2010-11 which is added to the income of the appellant is hereby deleted. 7 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 5.11 Further, the AO has added Rs.12,40,692 in AY 2010-11 and Rs.35,81,500 in AY 2011-12 being 10% deemed profit on total credits reflected in the bank account. As already discussed, it is well established that the appellant has neither executed any turnover nor did the money belong to him, and therefore, the addition of deemed profit is not sustainable and hence addition of deemed profit of Rs.12,40,692 in AY 2010-11 and Rs.35,81,500 in AY 2011-12 is hereby directed to be deleted. 5.12 In AY 2010-11 and AY 2011-12, the AO has added whole amount of credits in bank account as the income of the appellant. As discussed above, none of the money belongs to the appellant, and hence no addition of entire deposit can be made in the hands of the appellant. In view of this, the cheque deposits of Rs. 82,91,924 in AY 2010-11 and Rs. 3,51,00,000 in AY 2011-12 added to the income of the appellant is hereby deleted. 5.13 In AY 2011-12, cash withdrawn by appellant at the instruction of legal heir of Late Shri Deven Malviya, after his death, of Rs. 1,27,000 is also added by the AO. The AO erred in considering the said withdrawals as income, as he had already added the credit thereof in the bank account on protective basis. This also implies that the AO has not applied his mind in order to ascertain the actual income of the appellant, rather made the addition with prejudiced mind. The the said addition of Rs.1,27,000 for AY 2011-12 cannot be sustained for the said reason, and is deleted. 5.14 These additions made by the AO are found to be without basis and are deleted on the consideration of evidences placed on records as well as the facts established by the Hon'ble ITAT of Raipur and Rajkot. A summary of year wise deletion of additions is provided hereunder for the sake of ease: Nature of Addition Assessment year wise Amount (`) Discussed in Para 6.10 Cash Peak Balance 3,60,000 12,65,000 – 6.10 Deemed Profit @10% of Total Deposits – 12,40,692 35,81,500 6.11 Cheque Deposits in Bank Account – 82,91,924 3,51,00,000 6.12 Cash withdrawal at the instruction of Legal Heir of Deven Malviya – – 1,27,000 6.13 Total Additions Deleted 3,60,000 1,07,97,616 3,88,08,500 5.15 However, although the gross additions have been deleted, it cannot be denied that the appellant and Mr Bhad (the owner of the impugned ban account)may well have received commission income from the transactions carried out in the bank accounts. Hence, in the identical case of Smt. Deven Malviya and the Late Deven Malviya, which have also been decided recently, it has been held that the owner/operator of bank accounts associated with the Ponzi scheme would have earned commission income as that was the whole purpose driving the said scheme. It would be in the fitness of natural justice and equity to apply the same principle to the case of the appellant as well. In the case of Shri Deven Malviya, the AO himself has graciously accepted at para 3.3 of the assessment order for AY 2011-12 that - 8 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 \"3.3 In this case, since there is nothing on record except the figures of deposit and withdrawal and also the assessee is no more to explain his case, there is no other option than to complete the case of the estimate basis. However, from the information available on record and also from the plain reading of the submission of the assessee it is clear that the assessee was engaged in the business of collecting money from the public at large and to give them returns after getting some commission income from it. Therefore, it is clear that the assessee was engaged in the business of getting commission on investment in securities. The money collected at large was the gross turnover of the assessee. In this case, the assessee from the present AY i.e AY 2011-12 had received a total amount of Rs. 54,92,25,000/- which is estimated as the total turnover of the assessee. Since, while doing assessment in cases of such similar facts, have seen that usually there is 3 to 5% happens the receipt of such broker. Further, I have also seen that there is 15 to 20% of the total receipts is the net profit of the assessee. Since, there is nothing on record to explain or clarify anything further in this case; I estimate that 5% of the total turnover is the gross receipts of the assessee and further 20% of total such gross receipt is the total profit of the assessee. Thus, the total profit of the assessee for the relevant AY, ie AY 2011-12 is estimated at Rs. 54,92,250/- (20% of 5% of Rs. 54,92.25,000/-). Since, the assessee has not offered this amount in return of income the amount of Rs. 54,92,250/- is added back to the total income of the assessee.\" 5.16 The fact that the owner/ operator of the bank account would be entitled to commission income only has been accepted by the AO for AY 2011-12 in the case of Late Shri Deven Malviya. This observation was upheld and accepted in that case. Based on the same principle, I am of the opinion that certainly some additions in the nature of commission income is warranted. It is a matter of record that the appellant was not the beneficiary of all the credits in the stated bank accounts, but had accepted money from others/ investors based on which he was entitled to commission income. I therefore find that the interest of justice would be served by estimating the commission income at 0.20% of the turnover which is considered to be the total deposits in the bank accounts, including cash and cheques. This 0.2% commission income is already decided by me in the case of Late Shri Deven Malviya, the prime promoter of the scheme, and the same principal is applied also in the case of the appellant. 5.17 For the sake of clarity, this rate of commission is applied on the basis of decision in Sanjay Kumar Garg Vs. ACIT (2012) 144 TTJ 77 (ITAT Delhi) which is relied upon by the AR, wherein the Hon'ble ITAT has estimated the commission income by applying 0.2% net commission on turnover as against 1% applied by the AO in that case. The estimation of income hereinabove thus finds support from the order of the Hon'ble ITAT and is in accordance to the percentage of income estimated therein. 5.18 Therefore, the amount of commission, net of expenses, shall be 0.20% of the turnover transacted in the impugned bank account. Further, as the account is owned by Mr. Shankarrao Bhad and operated by the appellant, the net commission shall be equally divided amongst them and shall be taxed in respective hands accordingly……” The assessee being aggrieved is in appeal before the Tribunal. 9 Shri Mukesh Champalal Malviya ITA no.389/Nag./2019 5. During the course of hearing before us, the learned Departmental Representative informed the Bench that the appeal of Shri Shankarrao Bhad, is still undecided at the level of the learned CIT(A). Hence, we are of the opinion that the learned CIT(A) had fallen in a grave error in deciding the appeal singly without considering the fate of the other person where addition is made on substantive basis. It is a trite law that both adjudications regarding protective and substantive must be done simultaneously. Accordingly, the appeal of the Revenue is allowed and we set aside the entire matter back to the file of the learned CIT(A) for denovo adjudication in the lines enumerated above. 6. In the result, assessee’s appeal is allowed for statistical purposes. Order pronounced in the open Court on 10/02/2025 Sd/- V. DURGA RAO JUDICIAL MEMBER Sd/- K.M. ROY ACCOUNTANT MEMBER NAGPUR, DATED: 10/02/2025 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Nagpur; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Sr. Private Secretary ITAT, Nagpur "