2025 (6) TMI 1124 - AT - Income Tax

Revenue's appeal dismissed over unexplained cash investment addition under sections 69 and 115BBE without corroboration

The Dy. Commissioner of Income Tax, Central Circle, Hubballi. Versus Shri Gopal Krishnanatsa Katigar

ITAT Bangalore dismissed Revenue's appeal regarding unexplained cash investment addition under section 69 read with section 115BBE. The assessee ... Unexplained cash investment and interest thereon - addition u/s 69 read with section 115BBE - primary contention was that the AO relied on documents seized from the residence of third party/Shri Giridhar Laddha, rather than from the assessee’s own premises - HELD THAT:- It is well settled by the Hon’ble Supreme Court in case of P. M Aboobacker [2017 (5) TMI 311 - SUPREME COURT] that a statement made under pressure or coercion cannot be used as sole evidence unless independently corroborated. In the present case, the AO did not produce any additional material evidence apart from the initial statement, which was later retracted. The reliance placed by the AO on a statement that was subsequently withdrawn was misplaced, and therefore, the ld. CIT(A) rightly held that no addition could be made based solely on an uncorroborated and retracted statement. A fundamental principle of natural justice is that an assessee must be allowed to cross-examine any witness whose statements are relied upon for making an addition. In the present case, the AO denied the assessee’s request to cross-examine Shri Giridhar Ladhha, citing reasons such as the COVID-19 pandemic and time limitations for completing the assessment. The Hon’ble Supreme Court, in the case of Andaman Timber Industries vs. [2015 (10) TMI 442 - SUPREME COURT] has categorically held that any assessment made without allowing cross-examination of key witnesses relied upon by the tax authorities is invalid. We find that the assessee’s right to cross-examine Shri Ladhha was unjustifiably denied. Since the AO relied on Shri Ladhha’s statement as primary evidence, denying the assessee an opportunity to challenge it vitiates the entire assessment proceedings. The ld. CIT(A) rightly held that the principles of natural justice were violated, and any addition based on an unverified statement without cross-examination is legally unsustainable. Another crucial fact noted by the ld. CIT(A) is that a search was conducted at the assessee’s premises on 17.01.2019, yet no evidence was found indicating that he had made cash investments in the Mishra Group. If the assessee had indeed invested ₹ 9,59,00,000/- in cash, some form of physical or documentary evidence—such as notes, agreements, or cash receipts—should have been found at his premises. The absence of such evidence casts serious doubt on the correctness of the AO’s conclusion. A prudent businessman would extend such a substantial amount in cash without any supporting documentation. The lack of legally enforceable documents such as loan agreements, notes, or confirmations further weakens the Revenue’s case. The ld. CIT(A) correctly held that an addition of such magnitude cannot be made in the absence of concrete evidence. Since the primary addition as unexplained investment u/s 69 was found to be unsustainable, the consequential addition as interest income on such alleged investment also fails. AO had calculated interest at a rate of 2% per month on the alleged cash loan. However, as the very basis of the principal addition is discredited, the related interest income addition automatically collapses. No reason to interfere with the well-reasoned order of the ld. CIT(A). The AO’s additions is legally unsustainable. Revenue’s appeal is hereby dismissed. Issues Presented and ConsideredThe core legal questions considered by the Tribunal in these appeals include:Whether the addition of Rs. 9,59,00,000/- as unexplained cash investment under Section 69 read with Section 115BBE of the Income Tax Act was justified based on documents seized from a third party's premises rather than the assessee's own premises.Whether the interest income of Rs. 1,63,16,719/- computed on the alleged unexplained cash investment could be added as income from other sources.Whether the presumption under Section 132(4A) of the Income Tax Act applies to the assessee when the incriminating documents were found in possession of a third party (the Manager - Accounts & Finance of Mishra Group) and not the assessee.The evidentiary value and reliability of statements recorded under Section 132(4) of the Act, especially when such statements were later retracted.Whether denial of the assessee's request for cross-examination of key witnesses (notably the Manager of Mishra Group) violated principles of natural justice and vitiated the assessment proceedings.Whether the absence of any incriminating documents or evidence at the assessee's premises negates the addition made by the Assessing Officer (AO).The applicability of judicial precedents concerning admissions, evidentiary value of retracted statements, and the right to cross-examination in tax proceedings.Issue-wise Detailed Analysis1. Validity of Addition of Rs. 9,59,00,000/- as Unexplained Cash Investment under Section 69Legal Framework and Precedents: Section 69 of the Income Tax Act deals with unexplained investments, allowing the AO to add such amounts to the income of the assessee if the source is not satisfactorily explained. Section 132(4A) creates a presumption that documents found during search belong to the person in whose possession they are found, unless rebutted. The burden lies on the person in possession to explain the documents.Court's Interpretation and Reasoning: The AO based the addition on documents seized from the residential premises of Shri Giridhar Ladhha, Manager - Accounts & Finance of Mishra Group, which contained entries showing cash loans allegedly provided by the assessee. The AO presumed that the initials 'GK' in the documents referred to the assessee and treated the entries as unexplained cash investments by the assessee.The Tribunal noted that the documents were not found at the assessee's premises and no direct evidence linked the assessee to the seized documents. The presumption under Section 132(4A) applies only to the person from whose possession the documents were seized-in this case, Shri Giridhar Ladhha. The AO failed to prove that the documents belonged to the assessee or that the initials 'GK' unequivocally referred to him.Key Evidence and Findings: The seized documents lacked the assessee's signature, handwriting, or any authentication. No forensic or handwriting analysis was conducted to establish a link. The AO's reliance on the initials was speculative and unsupported by corroborative evidence.Application of Law to Facts: Without direct evidence linking the assessee to the documents, the addition under Section 69 was unsustainable. The Tribunal upheld the learned CIT(A)'s finding that the burden to explain the documents lay with Shri Giridhar Ladhha or the key personnel of Mishra Group, not the assessee.Treatment of Competing Arguments: The Revenue argued that other parties named in the seized documents admitted cash loans and paid tax, supporting the documents' genuineness. However, the Tribunal held that each case must be decided on its own evidence. The actions of third parties do not create a presumption against the assessee without specific proof.Conclusion: The addition of Rs. 9,59,00,000/- as unexplained cash investment was not justified and was rightly deleted by the CIT(A).2. Addition of Interest Income of Rs. 1,63,16,719/- on Alleged Cash InvestmentLegal Framework and Precedents: Interest income arising from unexplained investments can be added as income from other sources under the Act.Court's Interpretation and Reasoning: Since the principal addition of unexplained cash investment was disallowed, the consequential addition of interest income computed at 2% per month on that amount also failed.Conclusion: The interest income addition was rightly deleted as it was contingent on the principal addition.3. Evidentiary Value of Statements Recorded under Section 132(4) and Retraction ThereofLegal Framework and Precedents: Statements recorded under Section 132(4) are considered admissions under Section 17 of the Indian Evidence Act, 1872, and can be used as evidence. However, retracted statements have limited evidentiary value unless corroborated by independent evidence. The Supreme Court has held that statements made under coercion or pressure cannot be sole basis for conviction or addition.Court's Interpretation and Reasoning: The AO relied heavily on the initial statement of Shri Giridhar Ladhha admitting cash loans from the assessee. However, Shri Ladhha later retracted his statements, claiming he signed without reading and under pressure. The Tribunal agreed with the CIT(A) that retracted statements without corroboration cannot sustain additions.Conclusion: The AO's reliance on uncorroborated and retracted statements was misplaced, rendering the addition unsustainable.4. Denial of Cross-examination and Principles of Natural JusticeLegal Framework and Precedents: The right to cross-examine witnesses is a fundamental principle of natural justice. The Supreme Court has held that assessments without allowing cross-examination of key witnesses relied upon by tax authorities are invalid.Court's Interpretation and Reasoning: The assessee requested cross-examination of Shri Giridhar Ladhha, whose statements formed the basis of the addition. The AO denied the request citing COVID-19 and time constraints. The Tribunal upheld the CIT(A)'s finding that denial of cross-examination vitiated the assessment proceedings and violated natural justice.Conclusion: The denial of cross-examination rendered the addition legally unsustainable.5. Absence of Evidence at Assessee's PremisesCourt's Interpretation and Reasoning: A search at the assessee's premises found no documents or evidence indicating cash investments. The Tribunal agreed with the CIT(A) that if such a large cash investment was made, some physical or documentary evidence should have been found at the assessee's premises. The absence of such evidence undermines the AO's case.Conclusion: The lack of incriminating material at the assessee's premises negates the presumption of cash investment.6. Burden of Proof and Application of Section 132(4A)Court's Interpretation and Reasoning: The presumption under Section 132(4A) applies only to the person in possession of the documents. Since the documents were found with Shri Giridhar Ladhha, the burden to explain them was on him or the key personnel of Mishra Group, not the assessee. The AO failed to discharge this burden against the assessee.Conclusion: The presumption cannot be shifted to the assessee without proof of possession or ownership of the documents.Significant Holdings'As per the provisions of Section 132(4A) of the Act, the burden of explaining the seized material lies with the person from whose custody it is recovered. Since the documents were recovered from Shri Giridhar Ladhha's premises, the responsibility of explaining those entries rested on him or on Shri Sanjay Ganesh Mishra who confirmed his statement and not on the assessee.''Statements recorded under Section 132(4) of the Act during search proceedings are considered valid admissions under Section 17 of the Indian Evidence Act, 1872, but retracted statements carry no evidentiary value unless supported by independent evidence.''Denial of cross-examination of witnesses relied upon by the tax authorities renders the assessment invalid and violates principles of natural justice.''The mere presence of entries in a third-party document without corroborative proof cannot be considered conclusive proof against the assessee.''The absence of any incriminating documents or evidence at the assessee's premises strongly indicates that the AO's assumption of cash investment was incorrect.''An addition of such magnitude cannot be made in the absence of concrete evidence including legally enforceable documents such as loan agreements or promissory notes.''The actions of third parties who admitted cash loans and settled their cases do not create an irrefutable presumption against the assessee.''Since the principal addition was disallowed, the consequential addition of interest income on such alleged investment also fails.'p>The Tribunal affirmed the learned CIT(A)'s order deleting the additions under Section 69 read with Section 115BBE and the related interest income for the assessment year 2014-15. The Tribunal further held that the same findings apply mutatis mutandis to the subsequent assessment years 2015-16 to 2019-20. Accordingly, all appeals filed by the Revenue for the assessment years 2014-15 to 2019-20 were dismissed.