ITAT: Addition made solely on the basis of one dummy director not sustainable


Quick Summary
The Income Tax Appellate Tribunal (ITAT) has ruled that tax additions cannot be made solely based on the statement of a 'dummy' director. In this case, the Assessing Officer had made an addition to the company's income based on a director's admission that he was a dummy and his company was a paper entity. However, the ITAT found this insufficient, stating that additions in completed assessments require incriminating material found during a search. The tribunal also noted that the director's statement was not properly presented to the appellant company. Consequently, the addition was deleted, and the appeal was allowed.

Court :
ITAT New Delhi

Brief :
In M/S. Frost Falcon Distilleries v. DCIT, Haryana [ITA No.7713/Del/2018 & ITA No.7946/Del/2018 (Cross Appeals) Assessment Year: 2008-09 dated October 07, 2021], M/S. Frost Falcon Distilleries ("Appellant") filed an appeal against Order dated September 04, 2018 ("Impugned order") passed by the Learned Commissioner of Income Tax (Appeals) ("CIT(A)") for the Assessment Year ("AY") 2008-2009.

Citation :
ITA No.7713/Del/2018 & ITA No.7946/Del/2018 (Cross Appeals) Assessment Year: 2008-09 dated October 07, 2021

In M/S. Frost Falcon Distilleries v. DCIT, Haryana [ITA No.7713/Del/2018 & ITA No.7946/Del/2018 (Cross Appeals) Assessment Year: 2008-09 dated October 07, 2021], M/S. Frost Falcon Distilleries ("Appellant") filed an appeal against Order dated September 04, 2018 ("Impugned order") passed by the Learned Commissioner of Income Tax (Appeals) ("CIT(A)") for the Assessment Year ("AY") 2008-2009.

In this case, the Assessing Officer ("AO"), after a search operation, framed an Assessment under Section 153A of the Income Tax Act, 1961 ("the IT Act") and subsequently an addition of was made on account of unaccounted money introduced into the Appellant company by four parties in the form of share capital. The AO held that the aforesaid Companies were non-existent through which the Appellant introduced his own unaccounted money.

During the survey action, the department recorded a statement from the Director wherein he stated that he was only dummy director of the Appellant company and his company; M/s Aachman Vanijya (P) Ltd. (the Company concerning the Dummy Director which was an investor company to the Appellant) was a paper company and no genuine business activities were carried out by the said company.

The Appellant challenged the Impugned order of the AO wherein the first appellate authority accepted their plea and granted relief.

After taking perusal of all the facts and evidences of the case, the Income Tax Appellate Authority ("ITAT"), New Delhi held that the addition can be made in case of completed assessment only on the basis of incriminating material found during the search action, and therefore, in the Tribunal’s view, the action of the CIT(A) in confirming the addition of on the basis of sole statement of one dummy director, recorded during the survey action in case of the Appellant company, without confronting the same to the Appellant, wasn’t held to be justified.

The impugned addition was, therefore, ordered to be deleted. In view of the above discussion, the appeal of the Appellant was allowed.

FAQ :

The main issue was whether a tax addition made solely on the basis of a statement from a 'dummy' director, admitting his role and the nature of his company, was legally sustainable.

The AO framed an assessment under Section 153A and made an addition to the company's income, relying on the statement of a director who admitted to being a dummy director and whose company was a paper company.

The ITAT held that additions in completed assessments can only be made based on incriminating material found during a search. The tribunal found the sole statement of a dummy director, not properly confronted to the appellant, to be insufficient justification for the addition.

No, the ITAT noted that the statement of the dummy director was not confronted to the appellant company, which was a factor in deeming the addition unsustainable.

The ITAT ordered the deletion of the addition and allowed the appeal of M/S. Frost Falcon Distilleries.

 



Judgement posted by

Service

FCA, FCS LLB with21 Yrs of Experience inTaxation Indirect and Direct: Education Qualification: B.Com (Hons) Chartered Accountants Company Secretary LLB Qualified SAP FI/CO Consultants Professional Membership: Chairmanof Indirect Tax Committee of PHD Chamber of Commerce Member of Indirec ... Read more

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