2018 (1) TMI 190 - AT - Income Tax

Undisclosed income in form of cash found during the course of search - retraction of the statement recorded u/s 132(4) - Held that - In light of legal proposition laid down Ravi Mathur others 2016 (5) TMI 1304 - RAJASTHAN HIGH COURT there is clearly an inordinate delay in retraction and no justifiable explanation has been given by the assessee company for such delay. It is clearly an afterthought and loses its signifance. The statement recorded u/s 132(4) has great evidentiary value and there is no material which has been brought on record that such statement has been recorded and obtained forcefully/by coercion/undue influence. Further the assessee has been consistent in his statements so recorded even during the post search proceedings when his statement was recorded under section 131. Hence in light of above discussions the retraction of the statement recorded u/s 132(4) cannot be accepted in the instant case. Thus the addition towards the undisclosed income in form of cash found during the course of search is confirmed in the hands of the assessee company. - Decided against assessee. Disallowance u/s 40A(3) - Held that - Where the amount has been offered to tax in the subsequent year the same amount cannot be brought to tax in the impunged assessment year. Hence the addition is deleted and ground of appeal is allowed in favour of the assessee. Addition u/s 40A(3) - Held that - The fact that the payments have been made for the purposes of the assessee s business have not been doubted by the AO. Regarding the business exigency of making payment in cash it has been stated that first payment has been made after the banking hours for making labour payment the second payment was necessitated on account of machine break down at site. Regarding the third payment it has been stated that the said was paid to two labourers and payment to each is less than Rs. 20, 000 and in this regard we find that the ld CIT(A) has in similar circumstances allowed the payment in cash to the labourers not exceeding Rs. 20, 000. In the entirety of facts and circumstances of the case the disallowance made by the AO amounting to Rs. 82, 200 is hereby deleted. In the result ground of appeal is allowed.

The core legal questions considered in this judgment are:

1. Whether the cash of Rs. 1,21,43,210/- found during search at the residential premises of the director belongs to the assessee company or to the director in his individual capacity, and whether the addition of this amount as unexplained income of the assessee company is justified.

2. Whether the addition of Rs. 29,860/- on account of difference in account statement with a supplier is justified, and if such amount was offered to tax in a subsequent year, whether it should be excluded from the impugned assessment year.

3. Whether the disallowance of Rs. 82,200/- under section 40A(3) for cash payments exceeding Rs. 20,000/- is justified, considering the nature and circumstances of the payments.

Issue 1: Ownership and Taxability of Cash Found During Search

Relevant Legal Framework and Precedents: The evidentiary value of statements recorded under section 132(4) of the Income Tax Act is paramount but not conclusive, as established in Pullangode Rubber Produce Company Ltd. v. State of Kerala and CIT v. Ashok Kumar Soni. The presumption under section 292C that cash found in possession or control of a person belongs to him is rebuttable by concrete evidence. Retraction of statements recorded under section 132(4) is permissible only if supported by strong evidence and made promptly, as explained in the Rajasthan High Court decision in Ravi Mathur & others and other cited cases.

Court's Interpretation and Reasoning: The Tribunal examined the statements recorded during survey and search proceedings. Initially, the director stated that the cash found belonged to him personally and was withdrawn from his bank accounts for business purposes of his proprietary concern. However, in subsequent statements recorded under section 132(4), he admitted that the cash was undisclosed income of the assessee company, arising from inflated business expenses, and surrendered the amount accordingly. This admission was reiterated during post-search proceedings under section 131.

The assessee contended that the cash belonged to the director's proprietary concern, supported by bank withdrawals and cash books prepared after the search. The AO and CIT(A) rejected this, citing incomplete books at the time of search, lack of corroboration for withdrawals, and the timing gap between withdrawals and search date. The Tribunal noted that the cash book submitted post-search was an afterthought and that the director's initial statement under section 133A was less reliable than the subsequent sworn statements under section 132(4).

The Tribunal also rejected the assessee's argument based on the presumption under section 292C, holding that since the search was conducted against both the company and the director, the presumption did not automatically apply in favor of the director. The Tribunal emphasized the evidentiary weight of the statement under section 132(4) and the absence of any timely or credible retraction or representation by the assessee to the authorities.

Key Evidence and Findings: The cash found was inventoried in the name of the director. The director's statements under section 132(4) admitted the cash as undisclosed income of the company. The books of accounts were incomplete at the time of search. The cash book produced later was not accepted as reliable. No concrete evidence was provided to link the cash to the director's proprietary concern. The retraction came only after filing the return, nearly 11 months later, without any prior communication or evidence.

Application of Law to Facts: The Tribunal applied the principle that statements under section 132(4) have great evidentiary value and can only be retracted with strong evidence and promptly. The delay and lack of corroboration rendered the retraction an afterthought. The presumption under section 292C was not applicable as the search related to both the company and the director. The Tribunal relied heavily on the director's sworn admissions and the absence of credible contradictory evidence.

Treatment of Competing Arguments: The assessee's reliance on bank withdrawals and cash books was rejected due to incompleteness and timing issues. The argument based on presumption under section 292C was dismissed as inapplicable. The Tribunal distinguished between initial survey statements and subsequent sworn statements, giving greater weight to the latter. The Tribunal also referred to several judicial precedents affirming the evidentiary value of section 132(4) statements and the strict conditions for accepting retractions.

Conclusion: The addition of Rs. 1,21,43,210/- as unexplained income of the assessee company was upheld.

Issue 2: Addition of Rs. 29,860/- Due to Difference in Account Statement

Relevant Legal Framework and Precedents: The principle that income cannot be taxed twice in different assessment years, and that differences arising from accounting errors or timing differences should be adjusted in the correct year, is well established. The Supreme Court decision in CIT v. Excel Industries Ltd. was relied upon, which held that when the rate of tax is the same, litigation over such minor differences is not warranted.

Court's Interpretation and Reasoning: The AO made an addition of Rs. 29,860/- due to a difference in the closing balance of the assessee's account with a supplier. The assessee explained that the amount was reversed by the supplier without intimation, causing the difference, and that the reversed amount was offered to tax in the subsequent assessment year. The CIT(A) confirmed the addition, rejecting the claim that the amount should be excluded from the impugned year.

The Tribunal accepted the assessee's explanation and held that since the amount was offered to tax in the subsequent year, it cannot be taxed again in the impugned year. The Tribunal relied on the principle that such a dispute is academic and does not merit continuation of litigation.

Key Evidence and Findings: The reversal of Rs. 29,860/- by the supplier without intimation, and the subsequent offer of the amount to tax in the following year, were established by the assessee.

Application of Law to Facts: The Tribunal applied the principle against double taxation and accepted the assessee's explanation and evidence of reversal and subsequent taxation.

Treatment of Competing Arguments: The Revenue's insistence on taxing the amount in the impugned year was rejected as untenable.

Conclusion: The addition of Rs. 29,860/- was deleted.

Issue 3: Disallowance under Section 40A(3) for Cash Payments Exceeding Rs. 20,000/-

Relevant Legal Framework and Precedents: Section 40A(3) disallows expenditure payments exceeding Rs. 20,000/- in cash, except under certain circumstances. Payments made due to business exigencies or to multiple persons individually below the threshold are generally exempted.

Court's Interpretation and Reasoning: The AO disallowed payments exceeding Rs. 20,000/- in cash totaling Rs. 4,60,000/-. The CIT(A) restricted the disallowance to Rs. 82,200/- corresponding to three payments exceeding Rs. 20,000/- individually. The Tribunal considered the explanations for these payments: urgent labour payment after banking hours, machine repair necessitated by breakdown, and payments to multiple labourers individually below Rs. 20,000/-.

The Tribunal found the payments to be made for bona fide business purposes under exceptional circumstances and held that the disallowance was not justified.

Key Evidence and Findings: Supporting details showed payments to individual labourers below Rs. 20,000/- except in three cases. Explanations for the three payments were accepted as valid business exigencies.

Application of Law to Facts: The Tribunal applied the exception to section 40A(3) disallowance for payments made under exceptional circumstances and to multiple persons individually below the threshold.

Treatment of Competing Arguments: The Revenue's blanket disallowance was moderated by the Tribunal based on facts and explanations.

Conclusion: The disallowance of Rs. 82,200/- was deleted.

Significant Holdings:

On the first issue, the Tribunal held:

"Statements recorded under Section 132(4) have great evidentiary value and it cannot be discarded simply because the assessee later retracted without supporting evidence. Retraction after a significant delay is an afterthought and loses its significance."

"The presumption under Section 292C that cash found in possession or control of a person belongs to him is rebuttable and does not apply where the search relates to both the person and the company."

"The assessee's failure to provide concrete evidence to rebut the admission made under Section 132(4) and the absence of any timely retraction or communication to authorities justifies treating the cash found as unexplained income of the assessee company."

On the second issue, the Tribunal held:

"Where the amount has been offered to tax in the subsequent assessment year, it cannot be taxed again in the impugned year."

On the third issue, the Tribunal held:

"Disallowance under Section 40A(3) is not justified where payments exceeding Rs. 20,000/- are made under exceptional circumstances or to multiple persons individually below the threshold."

The final determinations were that the addition of Rs. 1,21,43,210/- as unexplained income of the assessee company was confirmed; the addition of Rs. 29,860/- was deleted; and the disallowance of Rs. 82,200/- was deleted.

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