2025 (2) TMI 1238 - AT - Income Tax

Procedural defects don't void assessments; s.131 statements retracted, s.68 loan additions deleted; s.153D valid without DIN; s.69A unavailable

ITAT JAIPUR held that procedural defects by the AO do not render the assessments void, but several specific additions were deleted. Additions based on ... Validity of Assessment u/s 153A - evidentiary value of the statements recorded u/s 132(4) - unexplained money as taxable u/s 69A - main contention of appellant is that the AO is quasi judicial authority, he should act honestly considering all the material and documents available before him, he has not made any further inquiry on the evidences and affidavits filed by the assessee, and brushed aside all the material, evidences, documents furnished by the assessee without making inquiry or controverting the same HELD THAT:- CIT(A) has discussed the evidentiary value of the statements recorded u/s 132(4) of Income Tax Act but the fact remains that in the case of the assessee the surrender of income as well as retraction of statement is not of the statements recorded u/s 132(4) but of the statements recorded u/s 131 of I.T. Act, 1961 which too recorded without authority of law. CIT(A) discussed the provisions of section 132(4A) and 292C of Income Tax Act to emphasized the evidentiary value of seized documents but the fact remains the presumption u/s 132(4A) and 292C is rebuttable presumption and the assessee has rebutted the same by filing several affidavits which have not been controverted by AO. CIT(A) mentioned that no evidence has been filed before the AO to show that the loans have become bad and non- recoverable but the fact remains that the AO was in possession of several materials like papers relating of court cases, FIR etc which clearly proves that the loans were not recoverable in normal course of business. All the above said defects and deficiency on the part of AO may have bearing on the additions made in the assessment order which we will consider appropriately while disposing off the separate grounds taken by the assessee on merit but the same cannot make the assessment orders invalid and bad in law. AR contended that the approval granted by JCIT u/s 153D of the Act does not contain the DIN therefore, such approval is invalid - Hon’ble Supreme Court of India in the case of CIT V/s Brandix Maurititus Holdings Ltd [2024 (1) TMI 276 - SC ORDER] has granted stay on this issue, therefore the argument of the assessee regarding the validity of assessment order, without mentioning of DIN on approval by JCIT u/s 153D is not found to be acceptable and hence the same is rejected. Another contention of the assessee regarding the approval of draft assessment order u/s 153D of IT Act mechanically, we find that the fact of giving approval is duly mentioned in the body of assessment order itself, therefore there is nothing on record to presume that the approval was given in mechanical manner. Addition on account of loan given by the assessee - evidentiary value of the statements recorded u/s 132(4) - As fact remains that the ADIT has recorded the statements of the assessee u/s 131 of the Act not u/s 132(4) or 131(1A) of the Act, that too after four months of the search and also after receiving the request from the assessee to release some of the seized security documents which he required to return the borrowers on repayment of outstanding loans or for taking legal action against the defaulter borrowers and in absence of these documents his business would ruined, so he was in pressure. In these facts and circumstances the addition cannot be made on the basis of statements recorded u/s 131 of the Act by ADIT which were also retracted later on by the assessee by filing the sworn affidavit before the AO as soon as he received the copy of the statements. The AO has not made any further inquiry on the contents of the retraction affidavit and its contents were not controverted by the ld AO. Addition made on account of loan to Shri Ramji Lal Sharma is not sustainable and hence the same stands deleted. Addition u/s 68 - AO has relied upon the statement of assessee recorded by ADIT u/s 131 of I.Tax as further retaracted - HELD THAT:- AR filed the copy of statement recorded by ADIT u/s 131 of I.Tax Act. We noted that this notice as well statements are not u/s 131(1A) but u/s 131. Further, the assessee has retracted from the statement recorded by ADIT u/s 131 of the Act by filing an affidavit before the AO as soon as the assessee received the copy of the statement - Thus addition on the basis of statement recorded by ADIT u/s 131 of the Act which also retracted by the assessee addition cannot be made in the hands of the assessee. Addition made on account of loan is not sustainable and hence the same stands deleted. AO taxed the loans as business income by relaying the statement of the assessee u/s 131 recorded by ADIT - CIT(A) relying on several case laws held that these loans should be taxed u/s 69A and provisions of section 115BBE should be applied and no deduction of set off of business loss should be given to the assessee against the Income against loans and advances - HELD THAT:- As in view of the specific definition of assessing officer in section 2(7A) of I.T. Act, ld. CIT(A) is not assessing officer so he cannot invoke the provisions of section 69A for making the addition particularly when the Assessing Officer has satisfied about the ingredients of section 69A of Income Tax Act. In the case of the assessee the AO has not framed an opinion that the explanation given by the assessee was not satisfactory but he framed an opinion after examining the facts, documents and explanation that the additions cannot be made u/s 69A but it should have been made as business income of the assessee. On the contrary, ld CIT(A) has not brought on record any inquiry made by him in the appellant proceedings to justify his findings in this regard. In the appellate proceeding the addition cannot be confirmed by applying altogether different section by invoking a section for which satisfaction is required to be by “Assessing Officer” and the assessing officer after considering the detailed reply and documents was satisfied about the ingredients of section 69A. ISSUES PRESENTED AND CONSIDERED 1. Whether the appellate authority's ex parte disposal violated principles of reasonable opportunity when multiple notices were issued but not complied with. 2. Whether assessments completed under section 153A (with approval under section 153D) are vitiated for procedural defects (including alleged mechanical approval and absence of DIN on approval). 3. Admissibility and evidentiary value of statements recorded under section 131 (post-search) vis-à-vis statements under section 132(4) and section 131(1A); effect of subsequent retraction affidavits. 4. Legality of making additions relying on seized papers and the statutory presumptions under sections 132(4A) and 292C - scope, rebuttability and the extent to which seized material alone supports additions. 5. Whether advances/loans shown in seized records can be assessed as undisclosed business income (taxable as business income) or must be treated as unexplained money under section 69A attracting section 115BBE - and whether an appellate authority can substitute the section under which an item is assessed without compliance with section 251(2). 6. Whether amounts shown as advances/loan balances could properly be denied as deductions (bad debts/business loss) where records, court cases, FIRs and affidavits were produced to show loans were business advances and became irrecoverable. 7. Appropriate remedy where additions are deleted on evidence but recoveries, if later made, are to be taxed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Adequacy of opportunity and ex parte disposal Legal framework: Principles of natural justice and statutory modes of service including section 282; appellate power to decide where appellant not present. Interpretation and reasoning: Tribunal examined service history - notices dated, adjournment requests and later notices not complied with. Held that adequate opportunities were provided by the appellate authority and non-compliance by the assessee justified ex parte disposal; appellate order nevertheless addressed merits. Ratio vs. Obiter: Ratio - ex parte disposal upheld where multiple notices issued and opportunities afforded; not mere procedural irregularity. Conclusion: Ground alleging denial of reasonable opportunity dismissed. Issue 2 - Validity of assessments under section 153A / approval under section 153D Legal framework: Assessments under section 153A require proper approval under section 153D; administrative circulars and requirement to record approvals correctly (e.g., DIN issue raised). Interpretation and reasoning: Tribunal considered contentions of mechanical approval and absence of DIN; noted that assessing officer recorded approval in assessment order and that higher court authority had stayed some challenges relating to DIN. No material established that approval was mechanically given or that assessment was void. Ratio vs. Obiter: Ratio - procedural complaints as raised did not render assessments void in absence of material showing mechanical approval or lack of jurisdiction. Conclusion: Ground seeking annulment of assessments dismissed. Issue 3 - Evidentiary value of statements recorded under section 131 and effect of retraction affidavits Legal framework: Distinction between statements recorded under section 131 (summons) and statutory admissibility/weight of confessional statements under section 132(4); law on retraction of statements and when retractions can nullify evidentiary value. Precedent treatment: Authorities cited support strict use of section 131, caution against coercion, and recognise that retraction may deprive a statement of evidentiary effect where retraction is plausibly shown and not controverted. Interpretation and reasoning: Tribunal found statements were recorded under section 131 by the investigating officer (ADIT/DDIT), not under section 132(4) or section 131(1A). Statements were recorded months after search, after repeated requests to release seized security documents, and were retracted by sworn affidavit once copies were furnished. Assessing Officer did not controvert or inquire into retraction affidavits. Tribunal held statements under section 131, recorded by investigating officer, could not be equated in evidentiary weight with 132(4) search statements; retraction affidavits that were not controverted reduce probative value. Where retraction and supporting documentary evidence existed and were not rebutted, additions based solely on such section 131 statements were not sustainable. Ratio vs. Obiter: Ratio - statements recorded under section 131 (post-search) have lesser evidentiary sanctity than section 132(4) statements; a retraction affidavit accepted unless satisfactorily controverted removes probative value of prior statement. Obiter - remarks on misuse/pressure and board circulars cautioning obtaining confessional statements. Conclusion: Additions founded solely on section 131 statements (which were retracted and not rebutted) were not sustainable and were deleted in specific contested items. Issue 4 - Reliance on seized records and presumptions under sections 132(4A) / 292C Legal framework: Statutory presumptions attach to seized material under sections 132(4A) and 292C; those presumptions are rebuttable and do not dispense with appraisal of contrary documentary evidence. Interpretation and reasoning: Tribunal emphasised rebuttable nature of presumptions. Where taxpayer produced contemporaneous documentary evidence, affidavits, FIRs, court records and the Assessing Officer did not adequately confront or displace that material, mere notings in seized records and the presumptions could not sustain additions. Tribunal relied on accepted practice that seized material creates prima facie inference, but probative value must yield to credible rebuttal if AO fails to disprove. Ratio vs. Obiter: Ratio - presumptions from seized material are rebuttable; assessing authority must consider and controvert contrary evidence to sustain additions. Obiter - list of authorities warning against mechanical reliance on seized notings. Conclusion: Additions cannot rest solely on seized notings where taxpayer produces unrebutted evidence rebutting seized-record inference; corresponding additions were deleted. Issue 5 - Characterisation: business income vs unexplained money under section 69A and limits on appellate substitution (section 251(2)) Legal framework: Section 69A deems unexplained money as income when owner cannot satisfactorily explain acquisition; section 115BBE prescribes tax treatment of income assessed u/s 69/69A; appellate powers under section 251(2) require opportunity before enhancement or change of basis of assessment. Interpretation and reasoning: Tribunal found Assessing Officer originally characterized additions as undisclosed business income (business income used to make loans). The CIT(A) had alternatively characterised amounts as unexplained money taxable under section 69A and applied section 115BBE. Tribunal held that (i) CIT(A) is not the Assessing Officer empowered to form the primary satisfaction required under section 69A; (ii) appellate authority cannot change the legal basis of assessment in a manner that enhances tax liability without giving the appellant opportunity as required by section 251(2). Consequently, CIT(A)'s invocation of section 69A/115BBE in appellate order (amounting to enhancement/change of chargeability) without required procedure was set aside. Ratio vs. Obiter: Ratio - appellate authority cannot substitute or recast the legal basis of addition (e.g., move item from business income to unexplained money under section 69A attracting section 115BBE) in appeal without complying with statutory safeguards (section 251(2)); only Assessing Officer's satisfaction under section 69A is competent to make such addition unless proper procedure followed. Obiter - illustration of administrative limits on appellate power. Conclusion: CIT(A)'s treatment of amounts as unexplained money under section 69A/section 115BBE (without statutory preconditions and opportunity) was set aside; AO's characterization as business income was retained for the purposes considered by Tribunal, and where contrary evidence proved, deletions ordered. Issue 6 - Deductibility as bad debts/business loss where loans/advances were business assets Legal framework: Business loss/bad debt deduction principles under sections computing business income; conditions for allowing trading loss/bad debt - reality of loss, revenue account, nexus to business, actual incurrence. Interpretation and reasoning: Tribunal accepted that lending was part of regular business and that documents showing court suits, FIRs, non-recoverability and affidavits sufficed to demonstrate loans were business advances which had become unrecoverable in several instances. Where AO did not controvert affidavits or pursue independent inquiry to disprove the evidences, loans could be treated as business loss for appropriate years; simultaneous treatment (income if recovered later) acknowledged. Ratio vs. Obiter: Ratio - where loan/advance is an integral business asset and taxpayer produces credible unrebutted evidence of non-recoverability (court cases, FIRs, affidavits) AO must undertake inquiries to displace that position before denying business-loss treatment; absent such controversion, claimed bad-debt/business-loss may be accepted. Obiter - guidance that recoveries, if made, are assessable in year of recovery. Conclusion: Specific additions representing advances/loans across the years in dispute were deleted where evidentiary rebuttal existed and AO/CIT(A) failed to satisfactorily displace it; AO directed to tax any subsequent recovery as business income in year of recovery. Issue 7 - Remedies and directions Interpretation and reasoning: Tribunal allowed deletion of specific additions where legal and evidentiary deficiencies existed but directed that any amount subsequently recovered from the concerned parties be taxed as business income in the year of recovery - preserving revenue interest while protecting taxpayer rights where additions were unsustainable on record before AO. Conclusion: Appeals partly allowed - specified additions deleted for relevant years; procedural challenges to general validity of assessments dismissed; direction to tax recoveries in year of realization.