Undisclosed income of Co. admitted by Director during search operation not taxable in hands of Director: ITAT

Case details: JCIT v. Narayana Reddy Vakati - [2021] 128 taxmann.com 377 (Hyderabad - Trib.)

Judiciary and Counsel Details

• • S.S. Godara, Judicial Member and Laxmi Prasad Sahu, Accountant Member.
  • Smt. Nivedita Biswas (D.R.) for the Appellant.

Facts of the Case

Assessee was a managing director of a company. Search and seizure operations were conducted in the case of company and its directors. During the search, certain incriminating material pertaining to the company was found. Statement of assessee and other directors were recorded. Assessee admitted certain sum in his hands during the statement. However, the seized material on which the additions were made belonged to the company. Therefore, while filing the return of income assessee reconciled the material and submitted a letter before the Assessing Officer (AO), clarifying the issues along with nature of seized material and its description, etc. AO was pleaded to assess the declared income in the hands of company after analysing the seized material. AO has not accepted the pleading of assessee.

Assessee submitted that AO had not taken any pain to verify whether the seized material belongs to the company or assessee. The additions were made only on the basis of statement of assessee ignoring the fact that the seized material belongs to company. Therefore, it was submitted that in the absence of any seized material found during the course of search belonging to assessee no addition can be made. The CBDT vide circular in letter F.No.286/98/20l3-lT (Inv-II), dated 18-12-2014, instructed AO not to obtain disclosures, rather focus on gathering evidences during the search. The company was a separate entity and assessee was a separate entity. Therefore, any discrepancies found during the course of search in respect of material seized, the company was answerable. The company had to pay the taxes on its income, determined as per the books of account with reference to seized material. The income couldn’t be assessed in the hands of assessee which belonged to the company on the discrepancies if any.

ITAT Held

On appeal, Hyderabad ITAT held that assessee made detailed submissions before AO claiming that the Income/entries in the seized material related to the company and offered the same amounts as income as per admission in the hands of the company. The claim of assessee had not been contradicted by AO. AO had made an addition on account of statements given during the course of search by different persons and admission under Section 132(4) made by assessee. The Income had to be taxed in the right hands i.e. in whose hand it was taxable irrespective of the admission made during search. The income had to be assessed on the basis of evidences found or gathered during the assessment proceedings. On consideration of the submissions of assessee and the facts of the case, it was seen that the income was chargeable to tax in the hands of the company and not in the hands of individual as made by AO. AO assessed the income on substantive basis in individual hands and on the protective basis in the hands of the company. As the material and the entries thereon relate to the business of the company, the income was not taxable in individual hands. Accordingly, the addition made by AO was to be deleted.

Case Review

• • Salomon v. Salomon and Co. Ltd. [1897] AC 22 (HC) (para 5) followed.

List of Cases Referred to

• • ITO v. CH. Atchaiah [1996] 84 Taxman 630/218 ITR 239 (SC) (para 5)
  • Salomon v. Salomon and Co. Ltd. [1897] AC 22 (HC) (para 5)