2017 (9) TMI 1668 - HC - Income Tax

Addition u/s 69C - amount candid and voluntary surrender made by the assessee during the course of survey - Held that - It will not be out of place to mention that except the statement in the letter the AO has no other material on record to assess the income of Rs. 1, 82, 00, 000/-. It is settled proposition of law that merely on the statement that too also was taken in view of threat given in question No.36 as narrated by Mr. Gupta and the same sought to have been relied upon there is no other material either in the form of cash bullion jewellery or document in any other form which can come to the conclusion that the statement made was supported by some documentary evidence. We have gone through the record and find that the CIT (A) has rightly observed as stated hereinabove which was confirmed by the Tribunal. - Decided in favour of assessee

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal were:

- Whether the Tribunal was justified in deleting the addition of Rs. 40,28,668/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] ignoring the provisions of Section 69C of the Income Tax Act and the voluntary surrender of income made by the assessee during the course of survey;

- Whether the addition of Rs. 1,82,00,000/- as additional income, purportedly admitted by the assessee's directors during the survey, was supported by sufficient material beyond the statements recorded during the survey;

- Whether the Assessing Officer's reliance on statements recorded under threat and the subsequent acceptance of additional income without corroborative documentary evidence was legally sustainable;

- The applicability and correctness of the "peak credit theory" in determining unexplained cash credits in the context of the seized documents and transactions between the assessee and related parties;

- The legality of the tax authorities' practice of collecting on-the-spot payments or undated cheques during surveys or searches without prior quantification or issuance of show cause notices, as highlighted by reliance on precedents from other High Courts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Deletion of Addition of Rs. 40,28,668/- Ignoring Section 69C and Voluntary Surrender

Legal Framework and Precedents: Section 69C deals with unexplained investments and additions to income based on such unexplained investments. The AO and CIT(A) had made additions based on statements recorded during survey and the voluntary surrender of income by the assessee. The Tribunal deleted the addition, relying on the absence of corroborative evidence.

Court's Interpretation and Reasoning: The Court observed that the addition was primarily based on statements recorded during the survey and the voluntary surrender made by the assessee. However, the AO had no material other than these statements to justify the addition. The Tribunal and CIT(A) rightly noted the lack of documentary evidence supporting the addition and therefore deleted it.

Key Evidence and Findings: The letter dated 30.12.2008 from the assessee admitted additional income but conditioned it on no adverse action against sister concerns and no penalty. The AO accepted this surrender but initiated penalty proceedings separately under Section 271(1)(c) for concealment. The Court found that the surrender was made to "purchase peace" and avoid litigation, not as an admission of concealment.

Application of Law to Facts: Since no independent material supported the addition except the statements and voluntary surrender, the Court held that the addition could not be sustained ignoring the safeguards under Section 69C.

Treatment of Competing Arguments: The Department argued that the surrender was made after confrontation with seized documents and hence indicated concealment. The assessee contended that no concealment was admitted and the surrender was conditional. The Court sided with the assessee, emphasizing the absence of corroborative evidence.

Conclusion: The deletion of the addition by the Tribunal was justified.

Issue 2: Reliance on Statements Recorded Under Threat and Absence of Corroborative Evidence

Legal Framework and Precedents: Statements recorded during surveys or searches are admissible but cannot be the sole basis for addition unless supported by material evidence. The Court referred to the principle that mere statements, especially if recorded under threat or coercion, cannot sustain an addition.

Court's Interpretation and Reasoning: The Court noted that the statements were recorded during a survey and that the figures of additional income were informed by the department to the assessee during survey, not independently established. The CIT(A) and Tribunal found the figure arbitrary and unsupported by seized documents.

Key Evidence and Findings: The seized papers did not support the figure of Rs. 1,82,00,000/-. The AO's order acknowledged that the addition was based on statements and departmental information, not independent evidence. The letter from the assessee indicated acceptance of income "to purchase peace" rather than admission of concealment.

Application of Law to Facts: The Court applied settled legal principles that additions require material evidence beyond statements and voluntary surrenders made under pressure.

Treatment of Competing Arguments: The Department emphasized the statements and surrender as evidence of concealment. The assessee highlighted the lack of corroborative evidence and conditional nature of the surrender. The Court found the latter more persuasive.

Conclusion: The addition based solely on statements and surrender without corroborative evidence was unsustainable.

Issue 3: Applicability of Peak Credit Theory

Legal Framework and Precedents: The peak credit theory is an accepted accounting principle used to determine unexplained cash credits where multiple debit and credit entries exist. The Court referred to precedents from the jurisdictional High Court and Madras High Court that application of peak credit theory depends on facts of each case.

Court's Interpretation and Reasoning: The CIT(A) directed the AO to apply the peak credit theory to the cash credit account transactions between the assessee and Sh. Ajay Gangwal to avoid multiple counting of the same sums. This was consistent with earlier assessments for other years and maintained consistency.

Key Evidence and Findings: The seized documents showed several cash transactions with both credit and debit entries. The peak credit theory was applied to take the highest unexplained credit as the addition rather than aggregating all entries.

Application of Law to Facts: The Court accepted the CIT(A)'s approach as reasonable and consistent with accounting principles and judicial precedents.

Treatment of Competing Arguments: The Department did not contest the application of peak credit theory but sought to uphold higher additions based on statements. The Court favored the CIT(A)'s direction for applying peak credit theory.

Conclusion: The application of peak credit theory was appropriate and directed to be followed.

Issue 4: Legality of On-the-Spot Collection of Tax and Undated Cheques During Survey

Legal Framework and Precedents: The Court extensively relied on a recent Delhi High Court judgment which condemned the practice of tax authorities collecting alleged tax dues on the spot during surveys or searches without prior quantification or issuance of show cause notices. The judgment emphasized that such collection is not authorized by law and leads to abuse of power, coercion, and violation of principles of natural justice.

Court's Interpretation and Reasoning: The Court observed that the department's practice of demanding and collecting undated cheques or payments during surveys without proper assessment procedures was illegal and prejudicial to taxpayers and the revenue. The judgment highlighted the need for departmental officers to act within the four corners of law and follow due process.

Key Evidence and Findings: The affidavit and orders in the referenced Delhi High Court case revealed systemic misuse of powers by officers collecting undated cheques and payments without authorization, quantification, or show cause notices, resulting in serious procedural improprieties.

Application of Law to Facts: Although the present case involved voluntary surrender of income during survey, the Court drew attention to the illegality of such on-the-spot collections and the necessity of proper legal procedures, reinforcing the need for caution in accepting such surrenders as admissions of concealment.

Treatment of Competing Arguments: The Department sought to distinguish the Delhi High Court judgment on the basis of authorization of survey in the present case. The Court rejected this distinction, emphasizing that no legal provision permits collection of tax or acceptance of undated cheques during survey without assessment and show cause notice.

Conclusion: The Court underscored that on-the-spot collection of tax or acceptance of undated cheques during surveys is illegal and unacceptable, reinforcing procedural safeguards for taxpayers.

3. SIGNIFICANT HOLDINGS

- "It is settled proposition of law that merely on the statement that too also was taken in view of threat given in question No.36... there is no other material either in the form of cash, bullion, jewellery or document in any other form which can come to the conclusion that the statement made was supported by some documentary evidence."

- "The addition of Rs. 1,82,00,000/- is not based on any material found but the figure taken by the AO is an arbitrary figure."

- The Court upheld the application of the peak credit theory as an accepted accounting principle to avoid multiple counting of cash credits in assessing unexplained income.

- The Court relied on the Delhi High Court's observations condemning the practice of collecting undated cheques or tax on the spot during surveys without prior quantification or show cause notice, describing it as "wholly impermissible in law" and amounting to "abuse of law."

- The Court concluded that the Tribunal was justified in deleting the addition of Rs. 40,28,668/- and that the addition of Rs. 1,82,00,000/- was unsustainable due to lack of corroborative evidence.

- The appeal was dismissed, affirming the Tribunal's order in favor of the assessee.