2025 (6) TMI 1138 - AT - Income Tax

Use statements recorded u/s 132(4) in evidence in assessment proceedings - surrender of undisclosed income by a partner - substantive evidence for making additions - HELD THAT - We find that none of the alleged disclosures on account of alleged outside book purchases construction of building at Veepur Industrial Area or unexplained investments not recorded in the books have been corroborated by the loose papers. The submission of assessee about the loose papers have not been rebutted and contradicted by any independent findings but merely by alledging retraction of statement is at belated stage statement alone has been considered for making additions. As discussed above the law is now settled that in the absence of substantive corroboration of the statement recorded u/s 134(2) of the Act the statement cannot be relied for making the admissions. In fact in Kohinoor Crafts 2021 (9) TMI 1073 - ITAT DELHI the other partnership firm for which to Tariq Ali had made statement was considered and the addition made on account of Rs. 25 lakhs was deleted for the reason that it was the statement alone of Tariq Ali which was considered for making the addition. Here in the case of assessee the statement of Tariq Ali is not corroborated by any material found during search and if loose papers were considered to be incriminating and the said statement was recorded qua same then where assessee firm had not shown the income surrendered by a partner in the return then AO should have relied the said loose papers for material substantive corroboration of the statement which has also not been done. In any case the alleged details were provided after the search by a separate letter for which even if same is considered recorded as admission made in the statement recorded u/s 131(1A) same has no has no evidentiary value under the Act. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal include:

• Whether statements recorded under Section 132(4) of the Income Tax Act, 1961 (the Act), particularly those made post-midnight during a search and seizure operation, can be relied upon as substantive evidence for making additions to the income of the assessee without corroborative material.
• Whether the surrender of alleged undisclosed income by a partner, who lacked knowledge of the firm's accounts and was not authorized to make such disclosures, can be treated as binding on the firm for assessment purposes.
• Whether the alleged undisclosed income purportedly admitted during the search was corroborated by incriminating material or loose papers found during the search, and if not, whether such additions can be sustained.
• Whether a retraction of the statement made during the search, supported by evidence showing proper accounting of the impounded documents, can be accepted and the additions deleted.
• The evidentiary value and legal effect of statements recorded under Section 132(4) versus statements or letters submitted post-search under Section 131(1A) of the Act.
• Whether the assessment order based solely on uncorroborated statements recorded during search and seizure, without substantive evidence, is legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Reliance on Statements Recorded Under Section 132(4) of the Act

Legal Framework and Precedents: Section 132(4) permits examination on oath of any person found in possession or control of books of account or documents during search and seizure, and such statements may be used as evidence in proceedings under the Act. However, it is settled law that statements recorded under this provision cannot be the sole basis for making additions; corroborative material is required. The Tribunal referred to authoritative precedents including the decision of the Hon'ble High Court of Delhi in PCIT vs. Pavitra Realcon Pvt. Ltd. and the Supreme Court ruling in CIT vs. Mantri Share Brokers (P) Ltd., which emphasize the need for corroboration beyond mere admissions.

Court's Interpretation and Reasoning: The Tribunal noted that the statement of Mr. Tariq Ali, recorded post-midnight during the search, was of a general and gross nature, lacking specific details such as year-wise breakup or clear identification of undisclosed income sources. Tariq Ali himself admitted lack of knowledge of the firm's accounts and inability to provide detailed explanations. The statement was recorded in the absence of the managing partner and the firm's accountant, further undermining its reliability.

Key Evidence and Findings: The statement was initiated on 15.12.2016 and resumed post-midnight, where Tariq Ali surrendered income of Rs. 11 crores relating to multiple firms without clear allocation. No incriminating documents directly supporting this surrender were placed before him during the recording. Moreover, the statement was not corroborated by any material found during the search. The loose papers (LPs) impounded were examined, and the firm demonstrated that these were duly recorded in its books with payments made through banking channels.

Application of Law to Facts: Given the absence of corroborative evidence, the Tribunal held that the statement recorded under Section 132(4) could not be relied upon as substantive evidence. The timing of the statement (post-midnight) also violated CBDT Circular No. 286/2/2013, which prohibits obtaining confessions during search operations.

Treatment of Competing Arguments: The Revenue argued that the statement was not retracted and was corroborated by impounded material. The Tribunal rejected this, noting that the statement was subsequently retracted by the firm's managing partner, and the impounded materials were accounted for in the books. The Revenue failed to produce independent evidence contradicting the retraction or demonstrating undisclosed income.

Conclusion: The Tribunal concluded that the statement under Section 132(4) without corroboration is of no evidentiary value and cannot form the basis for additions.

Issue 2: Validity and Effect of Retraction of Statement Recorded During Search

Legal Framework and Precedents: The law recognizes that statements recorded under Section 132(4) can be retracted, especially if made under mistaken belief or without proper knowledge. The Tribunal cited a decision involving the related firm Kohinoor Crafts, where additions based solely on such statements were deleted. The Hon'ble High Court of Bombay and other authorities have held that retractions supported by evidence should be accepted.

Court's Interpretation and Reasoning: The Tribunal accepted the assessee's submission that Mr. Tariq Ali made the initial disclosure without knowledge and under apprehension of error, and that after the managing partner's return, a thorough review showed all impounded documents were properly recorded in the books. The retraction was thus not an afterthought but justified by the circumstances.

Key Evidence and Findings: The firm produced evidence of proper accounting entries, payments through banking channels, and absence of any incriminating documents related to the alleged undisclosed income. The retraction was supported by documentary proof and was made before the conclusion of assessment proceedings.

Application of Law to Facts: The Tribunal applied settled principles that retractions, when supported by evidence and in the absence of contradictory proof from the Revenue, must be accepted. The statement made by Tariq Ali was void ab initio due to lack of authority and knowledge.

Treatment of Competing Arguments: The Revenue contended that no retraction was filed and the statement was corroborated. The Tribunal found no independent corroboration and noted that the retraction was filed in the course of proceedings, supported by evidence, and hence credible.

Conclusion: The retraction was held to be valid and the additions based on the initial statement were not sustainable.

Issue 3: Corroboration of Alleged Undisclosed Income by Incriminating Material

Legal Framework and Precedents: Additions based on search and seizure must be supported by incriminating material found during the search or other substantive evidence. The Hon'ble High Court of Delhi in PCIT vs. Pavitra Realcon Pvt. Ltd. emphasized that additions cannot rest on presumptions or uncorroborated statements.

Court's Interpretation and Reasoning: The Tribunal analyzed the loose papers impounded (LP-2, LP-44, LP-6, LP-7, LP-16) and found that all bills and vouchers were duly recorded in the books of account. Payments were made through account payee cheques and banking channels, leaving no room for undisclosed income.

Key Evidence and Findings: The firm's books showed expenditure on construction amounting to Rs. 2.99 crores, consistent with the rough estimate given by Tariq Ali. No incriminating documents related to building construction or other alleged undisclosed income were found. The amount of Rs. 35 lakhs was based on mere surmise without documentary basis.

Application of Law to Facts: The Tribunal held that in the absence of incriminating material, the Revenue could not sustain additions. The loose papers were not "incriminating" but rather accounted for properly in the books.

Treatment of Competing Arguments: The Revenue relied on the statement and alleged incriminating material. The Tribunal rejected this, noting the absence of any independent corroboration and the firm's explanation supported by documentary evidence.

Conclusion: The alleged undisclosed income was not corroborated by any incriminating material and hence the additions were unsustainable.

Issue 4: Evidentiary Value of Statements Recorded Post-Search Under Section 131(1A)

Legal Framework and Precedents: Statements or letters submitted post-search under Section 131(1A) do not have the evidentiary value of statements recorded under Section 132(4). The Tribunal referred to the Hon'ble High Court of Bombay's decision holding that statements recorded after the date of search cannot be relied upon as evidence under Section 132(4).

Court's Interpretation and Reasoning: The details of surrendered income provided post-search were not part of the statement recorded during search and thus lacked evidentiary value. The Tribunal observed that the Assessing Officer failed to rely on the loose papers for corroboration and instead relied on post-search submissions which are not admissible evidence.

Key Evidence and Findings: The post-search letter providing breakup of surrendered income was not supported by any independent material found during search. It was also not part of the statement recorded under Section 132(4).

Application of Law to Facts: The Tribunal held that such post-search disclosures cannot be the basis for additions in the absence of corroboration.

Treatment of Competing Arguments: The Revenue treated the post-search letter as admission. The Tribunal rejected this, emphasizing the distinction in evidentiary value between statements under Sections 132(4) and 131(1A).

Conclusion: Post-search disclosures under Section 131(1A) lack evidentiary value to sustain additions without corroboration.

Issue 5: Legality of Assessment Based Solely on Uncorroborated Statements

Legal Framework and Precedents: The principle that additions cannot be made solely on the basis of statements recorded during search without corroborative material is well established. The Tribunal cited multiple precedents including the Hon'ble Supreme Court and High Court decisions emphasizing the requirement of substantive evidence beyond statements.

Court's Interpretation and Reasoning: The Tribunal found that the Assessing Officer failed to bring any independent evidence to corroborate the alleged undisclosed income. The additions were based solely on the statement of Tariq Ali, which was subsequently retracted and unsupported by any incriminating documents.

Key Evidence and Findings: No incriminating cash, bullion, jewellery, or unexplained investments were found during search to justify additions. The firm's books and bank payments negated the claim of undisclosed income.

Application of Law to Facts: In the absence of corroboration, the assessment order was held to be unsustainable and contrary to settled legal principles.

Treatment of Competing Arguments: The Revenue's reliance on the statement alone was rejected. The Tribunal emphasized that retraction and documentary evidence must be given due weight.

Conclusion: The assessment order based solely on uncorroborated statements recorded during search was quashed.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following principles and made key determinations:

"Section 132(4) of the Act merely states that such statement recorded u/s 132(4) of the Act, 'may' be used in evidence in any proceeding under the Act only if examined on oath during the course of search and the deponent is found to be in possession or control of incriminating material."

"It is now settled law that in order to use statements recorded u/s 132(4) of the Act in evidence in assessment proceedings, the same must be corroborated with some cogent material."

"Recording such statement of general and gross nature post midnight itself appears to be volatile of the CBDT issued Circular No. 286/2/2013, which prevents the search party from getting any confessions in the search."

"If during assessment it is retracted, same cannot be said to be after thought but is quite justified in the surrounding circumstances."

"Merely on the basis of admission the assessee could not have been subjected to such additions unless and until, some corroborative evidence is found in support of such admission."

"Statements recorded under Section 131(1A) post-search have no evidentiary value under the Act to sustain additions."

"In the absence of substantive corroboration of the statement recorded u/s 132(4) of the Act, the statement cannot be relied for making the admissions."

"The appeal of the assessee is allowed. Impugned additions are deleted."