Cash deposits in company account cannot be added as director's income under section 179 when company should be assessed instead

ITAT Jodhpur held that cash deposits in company's bank account cannot be added as income in director's hands under section 179, as action should be taken against the company even if struck off from Register. Revenue can pursue appropriate action against company per law. Separately, gift received from NRI grandson was wrongly treated as unexplained income under section 69A instead of section 56. Since amount was already assessed as grandson's income, adding it again would constitute double taxation. Addition deleted in assessee's favor.

---

---

Issues Involved:
1. Sustaining the addition of Rs. 12,02,630/- as income of the appellant.
2. Addition of Rs. 25,00,000/- as unexplained income under Section 69A of the Income Tax Act.

Detailed Analysis:

Issue 1: Sustaining the Addition of Rs. 12,02,630/- as Income of the Appellant

The assessee, a director of M/s AKCL Exports Limited, challenged the addition of Rs. 12,02,630/- made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)]. The addition was based on the deposits found in the bank account of AKCL Exports Limited, a company dissolved on 27.10.2010, during a search conducted on 10.08.2017. The AO attributed these deposits as undisclosed income of the directors, including the assessee, and proportionately added 1/3 of the total deposits to each director's income.

The assessee contended that the deposits were related to the realization of debtors and payments to creditors post-dissolution, not income. The AO, however, considered these deposits as the assessee's undisclosed income, adding Rs. 12,02,630/- for A.Y. 2012-13, Rs. 66,667/- for A.Y. 2016-17, and Rs. 7,99,772/- for A.Y. 2013-14.

The CIT(A) upheld the AO's decision, stating that directors managing the accounts of a dissolved company must explain the deposits' nature and source. The assessee then appealed to the Tribunal, citing a similar case where the Tribunal had ruled in favor of the assessee's husband, also a director of AKCL Exports Limited.

The Tribunal, referencing its earlier decision in the husband's case, emphasized that the action against directors under Section 179 of the Income Tax Act requires prior exhaustion of recovery measures against the company. The Tribunal noted that the Revenue had not taken action against the company and directly proceeded against the directors, which was not in accordance with the law. Therefore, the Tribunal set aside the addition, allowing the appeal in favor of the assessee.

Issue 2: Addition of Rs. 25,00,000/- as Unexplained Income under Section 69A

The second issue concerned the addition of Rs. 25,00,000/- received as a gift from the assessee's grandson, Mr. Manan Lodha, an NRI. The AO added this amount as unexplained income under Section 69A, questioning the grandson's creditworthiness due to his low declared income of Rs. 41,505/- and lack of evidence of earnings abroad.

The CIT(A) directed the AO to delete the addition, subject to verification that the amount was already added in Mr. Manan Lodha's hands to avoid double taxation. The assessee argued that the identity, creditworthiness, and genuineness of the transaction were established, and thus, no addition should be made under Section 69A or Section 68.

The Tribunal agreed with the assessee, noting that the amount was already taxed in Mr. Manan Lodha's hands, leading to double taxation. The Tribunal found that the AO's application of Section 69A was inappropriate, as the transaction was either a loan or gift, not income. The Tribunal directed the deletion of the Rs. 25,00,000/- addition, allowing the appeal.

Conclusion:

The Tribunal allowed the assessee's appeals for all assessment years involved, setting aside the additions made by the AO and sustained by the CIT(A). The Tribunal emphasized the need for the Revenue to follow due process under Section 179 before proceeding against directors and the inadmissibility of double taxation for the same income. The judgment was pronounced in the open court on 25.01.2024.

---