Revenue's appeal dismissed as disclosed income under section 132(4) lacked correlation with seized materials

The ITAT Mumbai dismissed the Revenue's appeal regarding undisclosed income assessment. The case involved discrepancies between amounts disclosed in the assessee's statement under section 132(4) and actual income disclosed. While the assessee did not claim the statement was recorded under coercion, the basis for initial disclosure was unsubstantiated. After receiving seized documents, the assessee recalibrated and disclosed Rs. 3.75 crores, closely matching the AO's additions. The AO failed to correlate the disclosed amount with any seized materials despite making additions based on the section 132(4) statement. The ITAT upheld the CIT(A)'s order granting partial relief to the assessee.

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1. ISSUES PRESENTED and CONSIDERED

The primary legal issue considered by the Tribunal was whether the Assessing Officer (AO) was justified in making an addition of Rs. 8,18,19,881/- to the income of the assessee based solely on the statement recorded under section 132(4) of the Income Tax Act, 1961 (the Act), despite the assessee's subsequent retraction of the disclosure. The core questions included:

• Whether a disclosure made during search proceedings under section 132(4) of the Act, which was later retracted by the assessee, can be relied upon by the AO to make additions in the absence of corroborative evidence.
• The evidentiary value and reliability of statements recorded under section 132(4), especially when retracted after a substantial period.
• The applicability of CBDT instructions and judicial precedents regarding the reliance on confessions or disclosures made during search and seizure operations.
• Whether the AO's addition based on the difference between the initial disclosure and the income declared by the assessee was sustainable when the AO had separately made additions based on seized material and other evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Reliance on Statement Recorded under Section 132(4) and Retraction Thereof

Relevant Legal Framework and Precedents: Section 132(4) of the Act permits recording of statements during search operations, which are admissible as evidence. However, the CBDT Circular No. 286/2/2003 dated 10/03/2003 and reiterated on 18/12/2014 instruct that confessions or disclosures made during search operations should not be the sole basis for additions unless supported by credible evidence. Judicial precedents emphasize that mere statements, especially if retracted, cannot be the sole foundation for tax additions. Notable decisions include:

• CIT v. Ashok Kumar Jain - The court held that if an assessee retracts from a statement made during survey, the AO must bring cogent material to support additions rather than rely on statements simpliciter.
• Shree Ganesh Trading Co. v. CIT - The court emphasized that statements under section 132(4) are evidence whose reliability depends on the facts and surrounding circumstances, and additions cannot be made solely on the basis of such statements without corroboration.
• ACIT v. Ghatge Patil Industries Ltd. and Avishkar Infrastructure Pvt. Ltd. v. DCIT - These decisions reinforce that additions based solely on statements recorded during search, especially when retracted and unsupported by independent material, are unsustainable.

Court's Interpretation and Reasoning: The Tribunal acknowledged that statements recorded under section 132(4) are on oath and admissible as evidence. However, it emphasized that mere statements, particularly retracted ones, cannot be the sole basis for addition unless corroborated by independent and credible evidence. The Tribunal noted that the AO had made detailed additions amounting to Rs. 3,81,80,119/- based on seized material and discrepancies found in books of account, which were supported by evidence. The retraction by the assessee, limiting the disclosure to Rs. 3.75 crores, was made after the assessee received copies of seized documents, providing a plausible basis for recalibration of the disclosure amount.

Key Evidence and Findings: The AO was unable to point to any seized document or material that corroborated the balance amount of Rs. 8,18,19,881/- added solely on the basis of the initial disclosure statement. The retraction was filed after a delay of approximately six months, but the Tribunal found the delay reasonable given the time taken to provide seized documents to the assessee. The AO's additions on various heads such as unaccounted stock, investments, commission, and unexplained cash were supported by seized material and examination of books, and these additions closely matched the retracted disclosure amount.

Application of Law to Facts: Applying the CBDT instructions and judicial precedents, the Tribunal held that additions cannot be sustained solely on the basis of a statement recorded under section 132(4) when the statement has been retracted and is not supported by independent evidence. The Tribunal found that the AO's attempt to add the difference between the initial disclosure and the retracted amount without corroboration was contrary to legal principles and CBDT guidelines. The Tribunal accepted the assessee's contention that the retraction was a bona fide revision based on examination of seized documents.

Treatment of Competing Arguments: The Revenue argued that the initial disclosure was made after consultation with other directors and was reiterated, and hence the retraction was an afterthought. The Revenue relied on a decision where statements under section 132(4) were held to be relevant and admissible evidence constituting a good piece of evidence when made voluntarily. However, the Tribunal distinguished that case on facts, noting the assessee's plausible reason for retraction and the absence of coercion or threat. The Revenue's failure to produce corroborating evidence for the balance addition was a critical weakness.

Conclusions: The Tribunal concluded that the CIT(A) was justified in deleting the addition of Rs. 8,18,19,881/- made solely on the basis of the initial disclosure statement under section 132(4). The addition was not supported by any independent or corroborative evidence and was rightly disallowed. The retraction by the assessee was accepted as a valid revision after examination of seized documents, and the AO's detailed additions based on seized material were sustained.

3. SIGNIFICANT HOLDINGS

The Tribunal succinctly stated the legal position regarding reliance on statements under section 132(4) and retractions:

"It is not denying the fact that statement recorded u/s 132(4) of the Act, is on oath and can be used as evidence. However, mere statement cannot be the basis of addition. The Board vide instruction F.N. 286/2/2003 dated 10/03/2003 has clearly instructed that the confessions if not based upon credible evidence are later retracted by the concerned assessees in the return of income. Therefore, focus and concentration should be on collection of evidence of income which leads to information about the income which has not been disclosed."

The Tribunal further held:

"Considering the above, we are of the opinion that factually the assessee offered the income to the extent the seized material was available and not otherwise. AO's attempt to make the differential amounts of undisclosed strictly relying on the sworn statement of Mr. Kiran Patil, MD of the company is unsustainable considering the written submission of the assessee and the order of the Tribunal in the case of M/s. Avishkar Infrastructure Pvt. Ltd. (supra). Therefore, we hold that the relief granted by the CIT(A) in his order is fair and reasonable and it does not call for any interference."

The core principles established include:

• Statements recorded under section 132(4) are admissible evidence but their reliability depends on corroboration and surrounding circumstances.
• Retraction of disclosures made under section 132(4) after receipt of seized documents can be a valid revision and must be considered in light of evidence.
• Additions cannot be sustained solely on the basis of statements without independent material corroborating the undisclosed income.
• CBDT instructions prohibit reliance on confessions during search and seizure without supporting evidence.

Final determinations on the issue were that the addition of Rs. 8,18,19,881/- based solely on the initial disclosure statement under section 132(4), which was retracted and unsupported by corroborative evidence, was rightly deleted by the CIT(A). The appeal by the Revenue was dismissed, affirming that the AO's addition was unsustainable in law and on facts.

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