Retraction and lack of corroboration defeated export deduction disallowance and unexplained renovation investment addition

Deduction under section 80HHC was upheld because the Revenue relied mainly on a retracted statement recorded in doubtful circumstances, while the assessee supported export claims with contemporaneous documents and the Department brought no effective corroboration; the disallowance was deleted. An addition for unexplained office-renovation investment was also rejected because it rested only on a search surrender, whereas the expenditure was already recorded in audited books and no independent material or valuation supported further unexplained investment; the addition was deleted.

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Issues: (i) Whether the assessee was entitled to deduction under section 80HHC on export profits, and (ii) whether the addition of Rs. 10 lakhs as unexplained investment in office renovation was sustainable.

Issue (i): Whether the assessee was entitled to deduction under section 80HHC on export profits.

Analysis: The Revenue based the disallowance almost entirely on a statement recorded under section 40 of the Foreign Exchange Regulation Act, 1973. The statement was recorded late in the night, without oath, and was promptly retracted. The assessee produced contemporaneous documentary evidence such as purchase bills, shipping bills, bills of lading, bank realisation certificates, bank statements and customs endorsements, and the Department made no effective enquiry to dislodge that material or to corroborate the alleged hawala theory. The circumstances in which the statement was recorded, together with the absence of corroboration, deprived it of evidentiary value for this issue.

Conclusion: The disallowance of deduction under section 80HHC could not be sustained and the issue was decided in favour of the assessee.

Issue (ii): Whether the addition of Rs. 10 lakhs as unexplained investment in office renovation was sustainable.

Analysis: The addition rested only on a surrender made during search proceedings. The record showed that the renovation expenditure had already been booked in the accounts, the books were audited, and the Department did not bring any independent material, valuation or seized document to show that any further unexplained expenditure had actually been incurred. In the absence of supporting evidence, the surrender alone could not justify the addition.

Conclusion: The addition of Rs. 10 lakhs was not justified and the issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on both substantive grounds, and the assessment additions under challenge were deleted.

Ratio Decidendi: A retracted statement recorded in doubtful circumstances, without corroboration, cannot by itself sustain an adverse tax addition, and a surrender made during search has no independent evidentiary force where the Revenue fails to establish unexplained expenditure by objective material.

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