2019 (3) TMI 1347 - AT - Income Tax

Addition based only on statement under s.131(1) unsustainable where audited books not rejected and no corroboration

ITAT held that an addition based solely on a statement recorded under s.131(1) cannot be sustained where the assessee's books (audited u/s 44AB) were not ... Addition based on statement u/s 131(1) of managing partner - GP rate at 15% - No rejection of books of accounts - Account audited u/s 44AB - no independent corroborative evidences - HELD THAT:- In this case, the books of account of the assessee were required to get audited u/s. 44AB. It is an admitted fact that books of account of the assessee had not been rejected by the AO. However, the AO relied on the statement of managing partner of the assessee recorded u/s. 131(1) for the purpose of framing the assessment. CBDT has emphasized on its officers to focus on gathering evidences during search/survey operations and strictly directed to avoid obtaining admission of undisclosed income under coercion/under influence. Keeping in view the guidelines issued by the CBDT from time to time regarding statements obtained during search and survey operations, it is undisputedly clear that the lower authorities have not collected any other evidence to prove that the impugned income was earned by the assessee. Without commenting on the authenticity of the statement by the managing partner of the assessee Shri Tomy C. Vadayil, we are of the opinion that there is no corroborative evidence to support the claim made by the Assessing Officer. Even otherwise, uncorroborative statements collected by the Assessing Officer cannot be an evidence for sustenance of addition made by the Assessing Officer. We are of the view that the statement recorded u/s. 131 cannot be independently used for making any addition in the hands of the assessee and the said statement cannot, in our view, be the sole basis for making any addition and must be independently corroborated by evidences. Thus, we are of the view that the legal position that emerges is that a sworn statement, though binds the assessee, it cannot be the sole basis for making the assessment. It is open to the assessee to show the circumstances in which confessional statements were recorded and once the assessee proves that confessional statements were recorded under threat and coercion and retracts from the same, the confessional statements cannot be the sole basis for making assessments or for making any addition in the hands of the assessee. AO has made the addition only on the basis of sworn statement of the managing partner. Accordingly, we dismiss the ground taken by the Revenue. The appeal of the Revenue is dismissed. Issues Involved:1. Validity and evidentiary value of the statement recorded under Section 131(1) of the Income Tax Act.2. Justification for the addition of income based on the gross profit rate mentioned in the statement.3. The correctness of the books of account and the gross profit declared by the assessee.Issue-wise Detailed Analysis:1. Validity and Evidentiary Value of the Statement Recorded Under Section 131(1):The Assessing Officer (AO) recorded the statement of the managing partner under Section 131(1) during a survey action. The AO relied on this statement to assess the gross profit at 15%, as the managing partner mentioned a planned gross profit of approximately 15%. However, the assessee contended that the statement was not based on actual figures and was merely an approximation. The CIT(A) referred to the Supreme Court's ruling in Produce Co. Ltd. vs State of Kerala (91 ITR 18), which held that an admission is an important piece of evidence but not conclusive, and it can be shown to be incorrect. The CIT(A) concluded that the statement was not an admission of actual gross profit but a general approach towards pricing, and thus, no addition could be made based on such general statements.2. Justification for the Addition of Income Based on the Gross Profit Rate Mentioned in the Statement:The AO made an addition of Rs. 92,47,500/- to the income returned by the assessee, based on the statement that indicated a 15% gross profit, whereas the actual gross profit shown was 10.55%. The assessee explained that the lower gross profit was due to higher discounts offered to sustain in the market during a period of low sales. The CIT(A) observed that the AO did not find any specific defects in the books of account and relied solely on the statement. The CIT(A) referred to the Delhi High Court's judgments in Paradise Holidays (325 ITR 013) and Poonam Rani (326 ITR 0223), which held that low gross profit alone cannot justify rejection of books of account without pointing out specific defects or discrepancies. The CIT(A) concluded that the AO's addition was not justified as it was based on an uncorroborated statement.3. The Correctness of the Books of Account and the Gross Profit Declared by the Assessee:The CIT(A) noted that the assessee's books of account were audited and no defects were pointed out by the AO. The CIT(A) emphasized that the AO must probe further and examine the correctness of the accounts if a low gross profit rate is noted. The CIT(A) held that the AO failed to establish that the books of account did not reflect the correct profit earned by the assessee. The CIT(A) deleted the addition made by the AO, stating that the explanation provided by the assessee regarding the lower gross profit was reasonable and supported by evidence.Conclusion:The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's reliance on the statement recorded under Section 131(1) without corroborative evidence was not justified. The Tribunal referred to various judicial precedents, including the Supreme Court's rulings, which established that admissions in statements are not conclusive and must be corroborated by independent evidence. The Tribunal dismissed the Revenue's appeal, confirming that the addition based on the uncorroborated statement was not sustainable.Order:The appeal of the Revenue was dismissed, and the order pronounced in the open Court on 7th February 2019.