2022 (7) TMI 1044 - AT - Income Tax

Tribunal upholds CIT(A) decision on Section 69C; Revenue's appeals dismissed for assessment years 2012-13 to 2018-19.

The Tribunal upheld the CIT(A)'s decision to delete additions under Section 69C for unaccounted cash payments, citing lack of corroborative evidence and ... Admissibility and probative value of statements recorded under section 132(4) - Retraction of confessional statements and burden to prove voluntariness - Requirement of independent corroborative evidence for additions based on retracted admissions - Extrapolation of estimated income across assessment years - Disallowance under section 14A read with Rule 8D in absence of exempt income - Prospectivity of statutory explanations and test for retrospective operationAdmissibility and probative value of statements recorded under section 132(4) - Retraction of confessional statements and burden to prove voluntariness - Requirement of independent corroborative evidence for additions based on retracted admissions - Addition under section 69C based on statements recorded under section 132(4) that were subsequently retracted was unsustainable and deleted. - HELD THAT: - The Tribunal held that statements recorded under section 132(4) are relevant evidence but not conclusive; their weight depends on voluntariness and surrounding circumstances. Where a maker of the statement raises reasonable doubt that the admission was obtained by inducement, threat or coercion, the onus shifts to the Revenue to prove voluntariness. If a retraction is supported by circumstances and the persons retracted withstand cross-examination, the Assessing Officer cannot rest an addition solely on the original retracted statements without independent corroboration. On the facts, the four employees' statements were prolonged, inconsistent, vague and not supported by any incriminating material recovered in search; the key persons named denied the allegations; the retractions were sworn and the employees withstood cross-examination. In these circumstances the original testimonies lacked probative value and the AO's addition under section 69C was rightly deleted by the CIT(A). [Paras 17, 20, 23, 24, 25]Grounds 1-3 (addition under section 69C) dismissed; addition deleted for AYs 2012-13 to 2018-19.Extrapolation of estimated income across assessment years - The AO's extrapolation of an estimated monthly unaccounted cash outflow across earlier assessment years was unjustified and unsustainable. - HELD THAT: - The Tribunal reiterated that extrapolation requires a proper basis and corroborative material; arbitrary extrapolation on mere assumption or on uncorroborated statements cannot sustain additions for prior years. Absent seized documents, unrecorded sales, or other corroboration showing recurring unaccounted cashflows, the AO could not validly apply the estimated figure across the block of years. Reliance on authority rejecting extrapolation on mere assumption was endorsed. [Paras 21, 33, 34]Extrapolation disallowed; estimation across AYs 2012-13 to 2017-18 not sustained.Disallowance under section 14A read with Rule 8D in absence of exempt income - Prospectivity of statutory explanations and test for retrospective operation - Disallowance under section 14A read with Rule 8D, when no exempt income was earned in the year, was not permissible; the Explanation inserted by Finance Act, 2022 is prospective and does not apply to the assessment years under consideration. - HELD THAT: - The Tribunal followed the view that Rule 8D and CBDT Circular cannot override the parent provision, and that section 14A operates in relation to actual exempt income; where exempt income is nil, disallowance under section 14A is impermissible. The Tribunal further applied the legislative-intent test for retrospectivity: the Finance Act, 2022's Explanation expressly takes effect from 1 April 2022 and the Notes on Clauses confirm prospectivity. Relying on Supreme Court authorities, the amendment was held not to be retrospective so it does not apply to AYs before 2022-23. [Paras 45, 50, 51, 52, 53]Ground No.4 dismissed; disallowance under section 14A/Rule 8D deleted for AYs 2012-13 to 2018-19 and the 2022 Explanation held prospective.Final Conclusion: The appeals filed by the Revenue are dismissed. The Tribunal upheld the CIT(A)'s deletion of the additions made under section 69C (grounds 1-3) for AYs 2012-13 to 2018-19, held the AO's extrapolation across years unsustainable, and confirmed deletion of the section 14A/Rule 8D disallowance (ground 4) because no exempt income was earned and the 2022 Explanation is prospective. Issues Involved:1. Addition on account of unaccounted cash payments under Section 69C of the Income-tax Act, 1961.2. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D.Detailed Analysis:1. Addition on Account of Unaccounted Cash Payments under Section 69C:The Revenue appealed against the deletion of the addition made by the AO under Section 69C of the Act, based on statements recorded during a search operation under Section 132(4). The AO had added Rs. 4,80,00,000/- as unexplained expenditure for each assessment year from 2012-13 to 2018-19, relying on the statements of four senior employees of the assessee company, who initially admitted to cash payments for liaison work but later retracted their statements, claiming they were made under duress.The Tribunal noted that the statements were recorded over several days, and the employees later retracted their statements, which were supported by affidavits sworn before a Notary Public. The AO cross-examined these employees, who stood by their retraction. The Tribunal observed that the initial statements lacked specific details and were inconsistent, and there was no corroborative evidence found during the search to support the AO's addition. The Tribunal emphasized that a statement under Section 132(4) is an important piece of evidence but not conclusive, especially when retracted and unsupported by corroborative evidence. The Tribunal also referred to CBDT Instructions advising against making additions solely based on confessions obtained during search operations without credible evidence.In the absence of corroborative evidence and considering the retraction, the Tribunal upheld the CIT(A)'s decision to delete the addition under Section 69C, finding the original statements unreliable and insufficient to justify the addition.2. Disallowance under Section 14A read with Rule 8D:The Revenue also appealed against the deletion of disallowance made under Section 14A read with Rule 8D, arguing that the disallowance should be made even if no exempt income was earned during the year, based on CBDT Circular No. 5/2014. The Tribunal, however, noted that judicial precedents, including decisions from the Delhi, Madras, and Bombay High Courts, have consistently held that in the absence of exempt income, no disallowance under Section 14A is warranted.The Tribunal also addressed the Explanation inserted in Section 14A by the Finance Act, 2022, clarifying that the provisions apply even if no exempt income is earned. However, the Tribunal held that this amendment is prospective, effective from 01.04.2022, and does not apply to the assessment years under consideration (2016-17 to 2018-19). The Tribunal relied on the Supreme Court's decisions in M.M. Aqua Technologies Ltd. and Vatika Township Pvt. Ltd., which emphasized that amendments imposing new obligations should be treated as prospective unless explicitly stated otherwise.In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 14A, as no exempt income was earned during the relevant assessment years, and the amendment brought by the Finance Act, 2022, does not apply retrospectively.Conclusion:The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s orders deleting the additions under Section 69C and the disallowance under Section 14A for the assessment years 2012-13 to 2018-19.