The Delhi Bench of the Income Tax Appellate Tribunal has clarified that when a taxpayer is deemed to provide accommodation entries, only commission income is taxable and it must be estimated at a reasonable percentage of total credit entries, not at an arbitrary 3% rate. The Tribunal also held that a notice under Section 148 of the Income Tax Act is invalid unless prior approval under Section 151(ii) is obtained.
Background & Facts
The Dispute
The appellant, the proprietor of Shree Shyam Enterprises engaged in scrap-iron trading, filed his return of income for Assessment Year 2018-19 declaring total income of Rs 12,23,890. The Assessing Officer (AO) issued a notice under Section 148A(b) dated 21.03.2022 alleging unexplained credit of Rs 24,73,00,000 based on a STR report that was not provided to the appellant. The AO treated the appellant as an accommodation-entry provider and proceeded to levy a commission addition of Rs 1,48,38,000 calculated at 3% of the debit and credit entries.
Key Facts
- Assessee: Proprietor of Shree Shyam Enterprises, engaged in scrap-iron trading.
- Return filed: AY 2018-19, total income Rs 12,23,890.
- Notice under Section 148A(b): Dated 21.03.2022, alleging unexplained credit of Rs 24,73,00,000.
- Assessee’s objection: Requested time to collate data and explain sale ledger and invoices.
- AO’s action: Disregarded the request and, with prior approval of PCIT-12, issued a notice under Section 148A(d) on 03.04.2022, followed by a notice under Section 148 on the same date.
- Subsequent notices: Statutory notice under Section 143(2) and notices under Section 142(1) were issued; the appellant responded and supplied the required details.
- Show-cause notice: Dated 29.02.2024, giving a final opportunity to contest the addition of Rs 1,48,38,000 as commission income.
- Assessment order: Under Section 147 dated 20.03.2024, the AO added Rs 1,48,38,000 to the appellant’s income.
- Grounds of appeal: (i) Notice under Section 148 issued without approval under Section 151(ii); (ii) Excessive commission rate of 3%; (iii) Lack of reasonable opportunity of being heard.
- Precedents relied upon by appellant: Shri Ram Prakash Bhatia v. DCIT (ITA Nos. 1477-1481/Del/2024, order dated 24.12.2025) - commission income to be taxed at 0.15%; Odyssey Securities Pvt. Ltd. v. DCIT (ITA No. 1099/Kol/2025, order dated 26.08.2025) - commission income to be taxed at 0.10%.
Procedural History
- 12.03.2026: Order of the learned CIT(A) NFAC, Delhi, upheld the addition of Rs 1,48,38,000.
- 25.06.2026: Hearing of the appeal before the Income Tax Appellate Tribunal, Delhi Bench.
- 06.08.2026: Pronouncement of the Tribunal’s order (present judgment).
Relief Sought
The appellant sought (i) setting aside of the addition of Rs 1,48,38,000; (ii) direction to the AO to estimate commission income at a reasonable percentage (between 0.10% and 0.15%) of the total credit entries; and (iii) a declaration that the notice under Section 148 was invalid for lack of prior approval under Section 151(ii).
The Legal Issue
The central questions were: (1) Whether the notice issued under Section 148 of the Income Tax Act is valid without prior approval under Section 151(ii); (2) Whether the addition of Rs 1,48,38,000 as commission income, calculated at 3% of the total debit and credit entries, is legally sustainable; and (3) What percentage of the total credit entries may be treated as taxable commission income when the assessee is deemed to be providing accommodation entries.
Arguments Presented
For the Appellant
- The appellant contended that the notice under Section 148 was issued without the statutory approval mandated by Section 151(ii), rendering it ultra vires.
- He argued that the 3% commission rate is arbitrary and unsupported by any judicial precedent; the appropriate rate, as affirmed by Shri Ram Prakash Bhatia and Odyssey Securities, lies between 0.10% and 0.15%.
- The appellant emphasized that the AO denied a reasonable opportunity of being heard, violating the principles of natural justice.
For the Respondent
- The respondent maintained that the AO had obtained the requisite approval from PCIT-12, thereby satisfying the requirement of Section 151(ii).
- It argued that the 3% rate was a reasonable estimate given the nature of accommodation entries and the volume of transactions.
- The respondent asserted that the appellant had been afforded sufficient opportunity to present his case through the series of statutory notices.
The Court's Analysis
The Tribunal began by examining the statutory framework governing notices under Section 148. Section 148 empowers the Assessing Officer to issue a notice when income appears to have escaped assessment, but Section 151(ii) expressly requires prior approval of the Commissioner of Income Tax before such a notice can be issued. The Tribunal held that the AO’s reliance on PCIT-12 approval was insufficient because the approval must be in the form prescribed by the Act, and no documentary evidence of such approval was placed on record. Consequently, the notice under Section 148 was deemed invalid.
"We do not hesitate to hold that the assessee was found to be providing accommodation entries, that being the case, the assessee was involved only to earn commission income in these transactions."
The Tribunal then turned to the quantum of commission income. It noted that the Income Tax Act does not prescribe a fixed percentage for commission on accommodation entries; instead, the rate must be reasonable and commensurate with the facts. The Tribunal cited Shri Ram Prakash Bhatia where a 0.15% rate was upheld, and Odyssey Securities where a 0.10% rate was deemed appropriate. Both decisions emphasized that the rate should reflect the actual nature of the transaction and not be a blanket percentage.
Applying these precedents, the Tribunal observed that the appellant’s total credit entries amounted to Rs 24,73,00,000. A 0.15% rate would yield a commission income of Rs 3,709,500, which is substantially lower than the 3% figure (Rs 74,19,000) but higher than the amount actually added by the AO (Rs 1,48,38,000). The Tribunal concluded that the AO’s addition was not supported by any authority and that the only defensible approach was to adopt the 0.15% rate endorsed by the Delhi Bench in Shri Ram Prakash Bhatia.
Finally, the Tribunal addressed the procedural grievance of the appellant. It reiterated that the right to be heard is a cornerstone of natural justice and that the AO’s refusal to grant additional time after the show-cause notice violated this principle. Accordingly, the Tribunal ordered a fresh assessment based on the corrected commission income.
The Verdict
The appeal was partly allowed. The Tribunal set aside the notice under Section 148 for lack of approval under Section 151(ii) and directed the Assessing Officer to recompute commission income at 0.15% of the total credit entries of Rs 24.73 crore, i.e., Rs 3,709,500. The earlier addition of Rs 1,48,38,000 was discarded. The AO was instructed to issue a fresh assessment reflecting this revised figure within eight weeks and to bear the costs of the proceedings.
What This Means For Similar Cases
Validity of Section 148 Notices
- Practitioners must ensure that any notice under Section 148 is accompanied by documented approval under Section 151(ii). Absence of such approval renders the notice void and any subsequent addition unsustainable.
- A copy of the approval order should be annexed to the notice file to pre-empt challenges.
Reasonable Commission Estimates
- When a taxpayer is classified as an accommodation-entry provider, only commission income is taxable. The rate must be anchored in precedent, typically between 0.10% and 0.15% of total credit entries.
- Arbitrary percentages such as 3% are likely to be struck down unless the taxpayer can substantiate the higher rate with concrete industry data.
Procedural Fairness
- The right to be heard cannot be curtailed by a rushed show-cause notice. Counsel should advise clients to seek adequate time for document production and argument before the AO finalises an assessment.
- Failure to provide a reasonable opportunity may lead to the entire assessment being set aside.
