2025 (9) TMI 693 - AT - Income Tax

Statements under u/s 133A lack standalone evidentiary value; stock addition limited to Rs.42,67,534 with 15% GP resulting addition Rs.6,40,130

ITAT CHENNAI - AT held that statements recorded u/s 133A lack requisite evidentiary value, so undisclosed income cannot rest on such admissions alone. The ... Survey proceedings - Estimation of 15% GP of unaccounted sales - unaccounted income attributable to suppression of sales and unexplained cash found during the survey - admissibility of sworn statement recorded by the revenue authorities during the course of survey proceedings - HELD THAT:- As noted in Khader Khan Sons [2013 (6) TMI 305 - SC ORDER] statement recorded u/s 133A does not has requisite evidentiary value. Also see Paul Mathews & Sons [2003 (2) TMI 25 - KERALA HIGH COURT]. Thus we find sufficient force in the arguments of the assessee that the determination of undisclosed income of the assessee cannot be based upon admissions made by the managing partner of the assessee firm. We have however noted that the reliance of the assessee upon the circular issued by CBDT is not based upon proper understanding of the facts. The assessee has urged that CBDT circular also prohibits taking of any surrender during survey proceedings. It is seen that the circular of the CBDT primarily attempts to prevent forced surrenders or disclosure by the authorized officer during the survey. Thus in the impugned circular CBDT primarily postulates that the authorized officer should concentrate upon collecting substantive material, during survey proceedings, so as to establish any undisclosed income, rather than merely obtaining surrenders. The hypothesis behind the circular appears to be that demonstrative evidences collected during survey to allude undisclosed income are far better than mere statements. AO has stated that the statement was recorded “during the course of Survey u/s 133A conducted on 05.02.2019 in response to summons u/s 131 served on 07.02.2019”. Now whereas statement u/s 131 can be recorded independently by an Income Tax Authority, there cannot be any inter-dependence between matter u/s 131 and u/s 133A as has been indicated here. When the basis for determination of undisclosed income arising from survey proceedings, comprising a statement u/s 133A has become redundant, then whether an assessee would be liable for any delinquency or not- In the event of the disclosure of the assessee becoming inadmissible we have to examine the other evidences collected by the Ld. AO to make the impugned addition of variations in stock. Value adopted by the CIT(A) of confirming addition to the extent of Rs. 45,54,017/- becomes unsatisfactory. Considering assessee’s own calculations as above, the value of unaccounted stock ought to have been Rs. 42,67,534/-. The assessee is however liable for taxation of profit element on the excess stock found. In the present case Ld. AO had applied GP of 30% whereas according to assessee the same should be at 14%. We are of the view that GP @ 15% would be reasonable in this line of business and also considering past history of the case. Accordingly, we confirm the addition on account of unaccounted stock to the extent of 15% of. Rs. 42,67,534/- ie. Rs. 6,40,130/- and direct the Ld. AO to delete the balance addition made by him. All the grounds of appeal raised by the revenue on the issue of stock are therefore partly allowed. Unaccounted cash found during survey and the telescoping benefit given to assessee as making it part of his confirmation of addition - As considering the arguments of the assessee he proceeded to apply the telescoping benefit to the said cash and treated it as part of the overall addition which was confirmed by him. We have noted that the excess stock, at costs, which is relatable to survey is, as per assessee’s own admission works out to Rs. 42,67,534/- and the same has been confirmed as against the addition of Rs. 5,53,29,831/- done by the Ld. AO as unaccounted income in the hands of the assessee. We therefore find that the telescoping done by the Ld. CIT(A) is not in order. The argument raised by the revenue contesting the action of CIT(A) to the extent of, telescoping being incorrect, has therefore been found to be correct. We are however inclined to accept the source of the cash in assessees favour so far as it is alluded to be relatable to the family concern namely M/s. Ahmed Fab. The balance sheet of the party as on 31.03.2018 shows that there was cash in hand of Rs. 16.85 lakhs app. We find force in the arguments that even though the firm was closed, its past debtors continue to repay their debts and that therefore the cash found belonged to the said M/s. Ahmed Fab. The order of the Ld. CIT(A) is therefore set aside and the Ld. AO is directed to delete the impugned addition of Rs. 12,14,508/- made by him in his assessment order. As we have found the source of cash to be validly explained and directed the Ld. AO to delete the impugned addition of Rs. 12,14,508/-, the ground of appeal raised by the revenue is dismissed. Whether the appellant has satisfactorily explained before the Ld.AO the variation in the sales amount? - As noted that grant of discounts for expansion as well as retention of customer base is an accepted business principle and cannot be faulted. Similarly payment of due government taxes is a bounden duty of every businessman. In the instant case also the assessee was liable to pay taxes on its taxable sales. As noted from the order of the Ld. CIT(A) and also the paper book filed by the assessee that it has been giving discounts to its customers making cash or credit purchases as well as paying due taxes regularly. Thus, we have noted that the order passed by the CIT(A) is based upon on correct understanding and appreciation of the facts of the case. We therefore hold the view that there is no case for any interference to the same at this stage. Accordingly, all the grounds of appeal raised by the revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether statements recorded during a survey under section 133A have evidentiary value for making additions to income and the extent to which such statements may be relied upon by the Assessing Officer. 2. Whether the Assessing Officer correctly determined undisclosed income by valuing physical stock at selling price and applying a 30% gross profit (markup) to compute deficit stock, or whether the Tribunal/First Appellate Authority's adjustments (including a 15% GP and alternative stock reconciliation) should be preferred. 3. Whether the Assessing Officer properly telescoped a short-period discrepancy in floor-wise sales to determine suppression for the entire year, producing an addition of undisclosed sales for the whole year. 4. Whether cash found during survey is taxable as unexplained cash (section 69A) or may be explained by third-party/source documentation and, if explained, whether telescoping with other additions is appropriate. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility and evidentiary value of statements recorded under section 133A Legal framework: Section 133A empowers survey operations and recording of materials; section 132(4) expressly empowers taking statements on oath during search. Administrative guidance advises that confessions or surrenders during survey are of limited value unless supported by credible evidence. Precedent treatment: The Tribunal applied the binding view of the jurisdictional High Court and other High Court precedents that statements recorded under section 133A do not carry the same evidentiary value as sworn statements taken under section 132(4), and that survey-recorded statements cannot automatically constitute conclusive admissions for assessment purposes. Administrative circulars caution against reliance on confessions during survey without corroborative material. Interpretation and reasoning: The Tribunal found that the Assessing Officer had heavily relied on 'sworn statements' recorded during the survey to justify additions. Given the judicial authorities and the CBDT circular, such reliance is impermissible unless corroborated by independent, credible material. The Tribunal also noted a mischaracterisation by the Assessing Officer in labelling statements as 'sworn' when recorded under section 133A, and an improper intermixing of references to section 131 and section 133A. Ratio vs. Obiter: Ratio - statements under section 133A lack independent evidentiary value to found additions absent corroborative material; administrative circulars reinforce the requirement for corroboration. Obiter - observations on the impropriety of referring to s.131 and s.133A interchangeably and the concept that admissions can be retracted but remain relevant for inquiry. Conclusion: The Assessing Officer could not, on the basis of the section 133A statements alone, sustain additions. Any addition founded primarily on such statements must be supported by independent documentary or circumstantial evidence. Issue 2 - Valuation of stock, appropriate GP/markup rate and quantum of addition Legal framework: Valuation of stock for taxation follows accepted commercial principles (cost or market price whichever is lower) and additions based on stock variances require proper methodology and substantiation; where books are accepted, rejection under section 145 is the concomitant step to displace accounts. Precedent treatment: No new precedent was overruled; the Tribunal applied principles that estimated markups must be credible, based on records, and that if books are not rejected, AO must justify departures from book values with cogent evidence. Interpretation and reasoning: The Assessing Officer adopted selling-price valuation and a 30% GP based on selective survey sampling and employee statements, producing a large addition. The Appellate Authority recalculated deficit stock and adopted 15% GP. The Tribunal examined a detailed reconciliation presented by the assessee (floor stock, godown at cost, goods in transit, job work, purchases) and found a much smaller book-to-physical variance (Rs. 42,67,534). The Tribunal held that: (a) valuation had to be at cost or lower market price, which AO did not apply; (b) AO failed to reject books under section 145 despite treating them as unreliable; (c) AO's 30% GP was unsupported by contemporaneous records whereas the historical GP and business data supported a lower rate; and (d) the assessee's reconciliation was more methodical and credible than the AO's estimation by extrapolation from survey samples. Ratio vs. Obiter: Ratio - where AO relies on stock variances noted at survey, he must apply accepted valuation principles, justify any substitution of book figures by rejecting books under section 145, and adopt a GP/margin based on credible evidence (not solely survey statements); the Tribunal may accept a reasoned reconciliation tendered by the assessee and apply a reasonable GP considering past performance. Obiter - comments on methodology deficiencies of the survey party and the impropriety of valuing at selling price without applying cost/market test. Conclusion: The Tribunal reduced the quantum of undisclosed stock to Rs. 42,67,534 and, applying a 15% GP (considered reasonable on facts and past history), confirmed an addition of Rs. 6,40,130. The balance addition made by the AO was deleted. Issue 3 - Telescoping a short-period discrepancy to the whole year (extrapolation of floor-wise variation) Legal framework: Assessing Officer may make additions where credible evidence establishes suppression; however, extrapolation of a limited-period discrepancy to an entire accounting period requires cogent justification and credible corroborative material. Precedent treatment: The Tribunal followed the position that an isolated short-period discrepancy may support an addition limited to the period unless AO produces credible evidence to justify application of the discrepancy rate to the entire year; reliance on survey statements alone is insufficient. Interpretation and reasoning: The AO noted a March discrepancy of Rs. 23,00,409 (9.16% of March sales) and applied that percentage to annual sales to arrive at Rs. 3,04,34,845. The Tribunal held such telescoping impermissible in absence of corroborative material demonstrating that the March anomaly was representative of the whole year. The Tribunal confined the inquiry to the actual discrepancy and required the AO to examine documentary justification for the March variance (discounts, taxes, rounding) rather than compound an offence by averaging. Ratio vs. Obiter: Ratio - extrapolation of a short-period variance to annual figures is not permissible without cogent evidence; telescoping must be supported by credible material. Obiter - rhetorical condemnation of compounding offences by averaging without evidentiary support. Conclusion: The AO's year-long extrapolation was unsustainable; only the specific short-period discrepancy could be examined, and the Tribunal accepted the assessee's explanation supported by documentary details (discounts and tax adjustments) and dismissed the AO's addition for the full year. Issue 4 - Treatment of cash found during survey and telescoping with other additions Legal framework: Cash found during survey can be added as unexplained money under section 69A unless the assessee satisfactorily explains its source with reliable documents; telescoping (setting-off) of unexplained cash against other additions is permissible where amounts are referable to the same undisclosed source and supported by evidence. Precedent treatment: The Tribunal applied established principles permitting deletion of unexplained cash where a credible source is shown and rejecting telescoping where inconsistent with the quantification established on facts. Interpretation and reasoning: The assessee produced a contemporaneous balance sheet of a related/earlier family concern showing closing cash sufficient to explain the cash found. The First Appellate Authority had telescoped that cash into its confirmed addition for stock. The Tribunal accepted the source explanation (cash traceable to sister concern receivables), deleted the AO's unexplained cash addition, but held that telescoping into an otherwise unsupportable larger stock addition was incorrect. Since the Tribunal reduced the stock-related addition drastically, telescoping into a larger, unsustained figure could not stand. Ratio vs. Obiter: Ratio - where credible books or third-party/source documents explain cash found at survey, section 69A addition must be deleted; telescoping is permissible only where amounts are demonstrably co-terminous and supported by the record. Obiter - endorsement of administrative practice that past business closures and subsequent collections can explain cash on hand if documented. Conclusion: The cash of Rs. 12,14,508 was satisfactorily explained as funds relating to a related/earlier concern and the addition under section 69A was deleted. The First Appellate Authority's telescoping of that cash into a larger unsubstantiated addition was set aside. Overall Conclusions / Disposition The Tribunal held that statements under section 133A cannot, by themselves, found additions; the AO's methodology of valuing stock at selling price and applying a 30% GP without rejecting books or adducing corroborative evidence was unsound; extrapolation of a short-period discrepancy to the entire year was impermissible without credible evidence; and cash found was satisfactorily explained. Resultantly, the Tribunal confirmed a reduced addition of Rs. 6,40,130 (15% of reconciled variance), deleted the balance stock-related addition and the section 69A cash addition, dismissed the revenue's appeal for AY 2018-19, and partly allowed/reduced the revenue's appeal and the assessee's cross-objection for AY 2019-20.