2024 (4) TMI 1273 - AT - Income Tax

Addition made on account of defrauded amount - additions made by AO on account of misappropriation and fraudulent transactions by the assessee who was an employee of a bank - CIT(A) deleted addition - HELD THAT - No addition can be made in the hands of the assessee on the basis of charge sheet filed by the CBI since this is only a preliminary basis of initiating action against the assessee and the initial charge sheet filed by the assessee cannot be made the basis for making additions in the hands of the assessee. No opportunity of cross-examination was provided to the assessee so as to afford any opportunity for challenging the basis of making the additions. Further while as per the initial charge sheet as per CBI assessee had misappropriated a sum of Rs. 5.25 crores but while framing the assessment the addition in the hands of the assessee was restricted to Rs. 1.64 crores for various assessment year from A.Y. 2006-07 to 2009-10. Further as per Ld. CIT(A) the addition has been made on the basis of fraud committed by the assessee in respect of 259 bank accounts held by various depositors. However both the CBI has submitted that many of the account holders out of this aforesaid 259 accounts have confirmed that no money had not been siphoned from their bank accounts. The assessee has relied on various judicial precedents in support of it s contention that no addition can be made on the basis preliminary investigation / charge sheet filed by CBI especially in light of the fact that investigation on this issue is still underway and the assessee has not been implicated by the court of law. Further even the precise quantum of addition cannot be identified since the investigation is still undergoing. Also decided in Shri Ratan Babulal Lath 2018 (6) TMI 838 - ITAT BANGALORE in which the Tribunal held that additions made merely on the basis of treatment recorded by CBI is invalid. Decided against revenue.

Summary

The core legal questions considered by the Tribunal in these appeals concern the validity and sustainability of income tax additions made by the Assessing Officer (AO) on account of alleged misappropriation and fraudulent transactions by the assessee, who was an employee of a bank. The issues revolve around whether additions can be made based on preliminary investigations and charge sheets filed by the CBI, the adequacy and nature of evidence relied upon by the AO, the principles of natural justice with respect to opportunity of cross-examination, and the applicability of settled legal precedents regarding reliance on statements recorded by investigating agencies.

Issue 1: Whether additions to the income of the assessee can be sustained based solely on preliminary investigations, charge sheets, and statements recorded by the CBI without conclusive proof or final adjudication.

Issue 2: Whether the Assessing Officer was justified in making additions without providing the assessee with the basis of such additions, including the year-wise breakup of the alleged defrauded amount and the opportunity to cross-examine the witnesses whose statements formed the basis of the additions.

Issue 3: The applicability of the principles of natural justice and relevant judicial precedents concerning the reliance on statements recorded behind the back of the assessee and the requirement of opportunity for cross-examination before making additions.

Issue 4: The extent to which the Assessing Officer can rely on findings or orders passed under other statutes or by other authorities (such as CBI or Customs authorities) in making additions under the Income Tax Act.

Issue 5: The evidentiary value of statements recorded by investigating agencies and their admissibility as evidence for the purpose of income tax assessment.

For Issue 1, the relevant legal framework includes the basic principle that an accused is presumed innocent until proven guilty, and that additions to income must be based on cogent and reliable evidence. The Tribunal referred to the fact that the investigation by the CBI was still ongoing and that the charge sheet filed was only a preliminary document. The Court emphasized that additions cannot be made merely on the basis of charge sheets or preliminary investigations, especially when the quantum of alleged misappropriation remained unclear and inconsistent. The Tribunal noted that the Assessing Officer had made additions totaling Rs. 1.64 crores, whereas the initial allegations ranged up to Rs. 5.24 crores, indicating an absence of clarity and finality. The Tribunal relied on judicial precedents which held that mere statements or charge sheets are insufficient to sustain additions without corroborative evidence or final adjudication. The Court also cited a precedent where additions based solely on CBI statements were held invalid due to lack of independent evidence and failure to confront the assessee with such statements. The application of law to facts led the Tribunal to conclude that additions based solely on preliminary charge sheets and ongoing investigations were unsustainable.

Regarding Issue 2, the Tribunal analyzed the procedural fairness and adherence to principles of natural justice. The assessee had repeatedly requested the year-wise breakup of the alleged defrauded amount and the basis on which the Assessing Officer made additions, but these were not provided. The Tribunal observed that the Assessing Officer did not furnish the correspondence or information obtained from the bank under Section 133(6) of the Income Tax Act, despite specific requests and RTI applications by the assessee. Furthermore, the assessee was denied the opportunity to cross-examine the witnesses or parties whose statements were relied upon by the AO. The Tribunal referred to the Gujarat High Court's decision which held that additions made based on statements recorded behind the back of the assessee and without furnishing copies or opportunity for cross-examination violate natural justice principles. The Tribunal also relied on the Delhi High Court's ruling emphasizing that even if strict rules of evidence do not apply, basic principles of natural justice must be observed, including the right to cross-examine adverse witnesses. The Tribunal applied these principles to the facts and found the Assessing Officer's reliance on untested statements and refusal to allow cross-examination to be a fatal flaw, warranting deletion of the additions.

Issue 3 involved the treatment of competing arguments concerning the evidentiary value of statements recorded by investigating agencies. The Tribunal reviewed several judicial precedents, including those of the Supreme Court and various High Courts, which consistently held that statements recorded by police, CBI, or enforcement agencies cannot be the sole basis for additions unless corroborated by independent evidence. The Tribunal highlighted judgments where additions based on confessional statements or statements recorded during investigations were deleted due to retractions by witnesses, lack of corroboration, or failure to afford the assessee an opportunity to test such evidence. The Tribunal also noted that statements recorded under other statutes such as FERA or Customs Acts are not automatically admissible in income tax proceedings and that the Assessing Officer must independently apply his mind and not blindly adopt findings from other authorities. The Tribunal applied these legal principles to the case facts, noting that the AO had not conducted any independent inquiry or investigation into the alleged transactions and had merely relied on the CBI charge sheet and statements, which were disputed by the assessee.

In relation to Issue 4, the Tribunal emphasized the quasi-judicial nature of the Assessing Officer's role under the Income Tax Act. It held that the AO cannot base his decision solely on findings or orders passed under other statutes or by other authorities, such as the Customs Collector or the CBI. The AO must independently examine the evidence and apply judicial mind before making additions. The Tribunal cited a precedent where the AO's reliance on Customs authorities' findings without independent inquiry was held to be misplaced. The Tribunal found that in the instant case, the AO failed to discharge this duty and did not conduct any enquiry to verify the allegations or the source of funds, thereby rendering the additions unsustainable.

For Issue 5, the Tribunal examined the evidentiary value and admissibility of statements recorded by investigating agencies. It noted that such statements are not admissible as evidence under the Indian Evidence Act and cannot form the sole basis for additions unless corroborated by other evidence. The Tribunal referred to the settled legal position that statements recorded by the police or CBI are not evidence in income tax proceedings and that the AO must produce such statements before the assessee and allow cross-examination. The Tribunal found that the AO had not complied with these requirements, and that the statements relied upon were contradictory, unreliable, and recorded without the assessee's knowledge or opportunity to challenge them. This failure was held to violate principles of natural justice and render the additions invalid.

The Tribunal's conclusions on the issues were as follows:

On Issue 1, the Tribunal concluded that additions based solely on preliminary investigations and charge sheets filed by the CBI, without conclusive proof or final adjudication, cannot be sustained. The presumption of innocence and ongoing investigation preclude taxing the alleged income at this stage.

On Issue 2, the Tribunal held that the Assessing Officer's failure to provide the assessee with the basis of additions, including year-wise breakup and opportunity to cross-examine witnesses, violated principles of natural justice, rendering the additions unsustainable.

On Issue 3, the Tribunal affirmed that statements recorded by investigating agencies cannot be the sole basis for additions and must be corroborated by independent evidence. The AO's reliance solely on such statements without further inquiry was improper.

On Issue 4, the Tribunal emphasized the AO's duty to independently apply judicial mind and not blindly adopt findings from other authorities. The AO's failure to do so invalidated the additions.

On Issue 5, the Tribunal reiterated that statements recorded by investigating agencies are not admissible evidence under the Income Tax Act unless the assessee is given an opportunity to confront and cross-examine the witnesses. The absence of such opportunity violated natural justice.

Significant holdings of the Tribunal include the following verbatim excerpts of crucial legal reasoning:

"Under the Indian Law, the accused are presumed to be innocent till their guilt is finally established after a fair trial."

"It is settled law that addition cannot be made on the basis of statement recorded and information collected, without giving an opportunity to cross-examine being given to the assessee."

"The legal effect of statement recorded behind the back of the assessee and without furnishing copy thereof to the assessee or without giving an opportunity of cross-examination, if the addition is made, the same is required to be deleted on the ground of principles of natural justice."

"An Assessing Officer, being a quasi-judicial authority, has to, while framing assessment, discharge his duty/function judicially and in that process, has to apply his own mind independently to the facts of the case... The Assessing Officer cannot base his conclusion/decision on the finding of any authority under any other Act/law and, thus, adopt the finding/conclusion of that authority."

"Statements recorded by the police authorities are not admissible under evidence as per provisions of Section 25 of Indian Evidence Act, 1982... The information or the evidence collected from the CBI can be used by the AO for forming a belief that income chargeable to tax has escaped assessment... but for making addition, some more efforts are to be required on the part of the AO."

"Not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice."

In final determinations, the Tribunal dismissed the Revenue's appeals for all assessment years and upheld the deletion of the additions made by the CIT(A), thereby ruling that the additions made by the Assessing Officer were unsustainable in law and facts due to lack of conclusive evidence, ongoing investigation, failure to provide basis of additions, and violation of natural justice principles.