Om Prakash Jakhotia Vs ACIT (ITAT Delhi)
Income Tax Appellate Tribunal (ITAT), Delhi Bench, in the case of Om Prakash Jakhotia Vs Assistant Commissioner of Income Tax (ACIT), has emphasised the fundamental principle under the Income Tax Act, 1961, that income must be assessed in the hands of the correct person who has earned it. The Tribunal deleted significant additions made by the lower tax authorities, finding that the seized documents and the income assessed did not belong to the individual assessee but rather to the companies in which he was involved.
The case originated from a search action conducted at the premises where Om Prakash Jakhotia resided and where the registered offices of several companies promoted or directed by him were also located. During the search, certain diaries were seized. Initially, based on these seized diaries, Mr. Jakhotia furnished a statement under Section 132(4) of the Act, offering to pay tax on an undisclosed income of Rs. 21.50 crores. This disclosure was reiterated in a post-search statement.
Subsequently, the assessee approached the Settlement Commission, which assessed his income at a reduced amount. However, the Income Tax Department challenged this order before the Delhi High Court, which quashed the Settlement Commission’s order and directed the Assessing Officer (AO) to assess the income afresh.
Before the Commissioner of Income Tax (Appeals) [CIT(A)], and subsequently before the ITAT, Mr. Jakhotia contended that the income assessed in his hands by the AO did not belong to him. This marked a departure from his initial stand during the search.
The ITAT, after considering the submissions and the material on record, including the seized diaries, held that the issue of whether the income belongs to the assessee is a fundamental jurisdictional question that can be examined at any stage. The Tribunal cited the Supreme Court judgment in the case of Ch. Atchaiah [1996] 218 ITR 239, which held that the Income Tax Officer (now AO) has no discretion to tax income in the hands of a wrong person merely because it might be more beneficial to the revenue. The Supreme Court had underscored that the tax must be levied on the person lawfully liable to pay tax according to the law.
Applying this principle, the ITAT examined the nature of the seized diaries. The Tribunal noted that the search was conducted at a premise housing multiple companies where the assessee was a director or partner. The assessee’s individual income was primarily from salary, rent, and other sources, and he was not engaged in business in his individual capacity. The seized diaries, particularly diary A/OPJ/03, contained entries related to cash credits, business transactions, sales, expenses, loans, and investments that, based on the description of the entries and the names mentioned (such as Jakhotia Plastics, Jakhotia Polymers, Raghuram Synthetics, etc.), appeared to pertain to the business activities of these companies.
The ITAT also referred to the settled legal position, affirmed by the Delhi High Court in Kabul Chawla [2016] 380 ITR 573, that additions in search assessments should ordinarily be based on incriminating documents found during the search that belong to the assessee and indicate escaped income.
Based on its analysis of the seized diary entries, the ITAT found overwhelming evidence suggesting that the transactions recorded in diary A/OPJ/03 related to the business operations of the companies and not the individual assessee. The Tribunal noted that the assessee had even given a loan to one of the companies, which was recorded in the diary, further indicating that the diary did not exclusively belong to him.
Consequently, the ITAT concluded that the income assessed by the lower authorities based on the seized diary A/OPJ/03 could not be upheld in the hands of Om Prakash Jakhotia in his individual capacity, as the documents and the income did not pertain to him. The Tribunal rejected the Revenue’s contention to lift the corporate veil, stating that the seized diary did not belong to the assessee and a director acts in a fiduciary capacity for a company, which is a separate legal entity. The Tribunal also referenced the Supreme Court decision in Union of India and Anr Vs. Azadi Bachao Andolan (2003) 263 ITR 706, which recognised even a single shareholder company as independent from its shareholder.
Following this finding, the ITAT proceeded to delete various additions made by the AO and confirmed by the CIT(A) that were based on the entries in the seized diaries or other information not directly linked to the assessee in his individual capacity. These included additions for unexplained income from undisclosed sources, kick-backs, unexplained investment in immovable property based on an AIR report not confronted to the assessee, cash deposits based on unverified AIR details, and unexplained investment of share capital received by one of the companies.
The Tribunal specifically noted that the share capital was received by Jakhotia Plastics Private Limited from another entity through account payee cheques, and there was no evidence to suggest this was the assessee’s unaccounted money routed through these entities. The ITAT found no justification for taxing this amount in the hands of the individual assessee, a separate legal entity from the company that received the funds.
In summary, the ITAT allowed the assessee’s appeals, reinforcing that the tax authorities must establish that the income sought to be taxed belongs to the person being assessed, a principle fundamental to the scheme of the Income Tax Act. The decision underscores the importance of linking incriminating material found during a search to the specific assessee whose income is being assessed.
FULL TEXT OF THE ORDER OF ITAT DELHI
