2025 (11) TMI 1417 - HC - Income Tax

Addition under Section 69 cannot rest solely on unverified notarized agreement; prior coercion complaints support assessee

The Principal Commissioner of Income Tax, Central Surat Versus Shri Dharmesh Bharatbhai Thakkar

HC upheld the deletion of addition under s.69 made solely on the basis of a notarized agreement found during survey. AO/DDIT relied only on the agreement ... Addition u/s 69 - addition was made on the basis of incriminating details/document i.e notarized agreement recovered during the survey proceedings - CIT(Appeals) deleted the addition made by the AO on the count that no investigation was made by the DDIT / Assessing Officer to corroborate the details mentioned in the notarized agreement. HELD THAT:- AO / DDIT has only considered and analyzed the agreement and based upon the agreement has made the impugned addition without issuing any summon to the third party to ascertain whether the contents of the agreement were true or not. The Tribunal also considered the fact that the respondent – assessee had filed complaint against the third party to the agreement before the PMO and the Home Ministry before the date of survey alleging that the assessee was made to sign the agreement under coercion which proves that the assessee was really coerced into signing the agreement. The CIT (Appeal) and the Tribunal, therefore, has rightly deleted the addition made on the basis of such notarized agreement without any corroboration of the bank transactions showing flow of funds from the assessee to the other parties. No substantial question of law. ISSUES PRESENTED AND CONSIDERED 1. Whether the deletion by the Tribunal of an addition under Section 69 (unexplained investments) was perverse when it was founded on a notarized agreement seized during a Section 133A survey. 2. Whether the Tribunal erred in accepting the assessee's claim of signing the notarized agreement under coercion (supported by complaints to government/police authorities) notwithstanding that those complaints had not reached finality. 3. Whether the Assessing Officer / DDIT was obliged to make further inquiries (including summons to parties and bank-trace investigation) under Section 250(4) or otherwise before making an addition based on the agreement, and whether remand for such inquiries was required. 4. Whether the Tribunal could treat the notarized agreement as null and void for income-tax assessment purposes despite no civil adjudication declaring the contract void under the Indian Contract Act. 5. Whether the Tribunal ignored the applicability of the 'human probability' or preponderance of probabilities test appropriate in income-tax proceedings when deleting the addition. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of deletion of addition under Section 69 where a notarized agreement was seized in survey Legal framework: Section 69 permits taxation of unexplained investments where an assessee is unable to account for funds; proof requires establishment of investment and source/flow of funds. Evidence seized in a Section 133A survey can be material for reopening under Section 147 if it discloses escapement of income. Precedent treatment: The judgment records no reliance on or overruling of precedents; the authorities below evaluated evidentiary sufficiency on facts. Interpretation and reasoning: The Tribunal (agreeing with CIT(A)) found the addition rested solely on the notarized agreement recovered from the assessee's mobile; the assessee admitted only a portion (Rs. 28,00,000) and disputed the balance. The authorities below emphasized that an uncorroborated agreement-particularly where bank transfers and third-party confirmations are alleged-does not by itself prove that the disputed amount was actually invested by the assessee. The AO/ DDIT did not summon the other parties or trace bank transfers to corroborate the asserted flow of funds; absent such corroboration, the alleged investment was not proved. Ratio vs. Obiter: Ratio - where material facts alleged in an agreement (bank transfers, recipient accounts) are not independently established by bank records or third-party statements, an addition under Section 69 cannot be sustained merely on the basis of the agreement found in survey. Obiter - descriptive remarks about the agreement being a 'dump document' in the specific factual matrix. Conclusions: The deletion of the addition on the ground of inadequate corroboration of the alleged transactions was upheld as a conclusion of fact; the Tribunal and CIT(A) findings are concurrent and permissible. Issue 2 - Acceptance of coercion plea absent finality of complaints Legal framework: Allegations of coercion affecting the validity or probative weight of a document are matters of fact and may be supported by contemporaneous complaints or other evidence; criminal or administrative complaints need not reach final adjudication to be relevant to credibility, though corroboration strengthens the claim. Precedent treatment: No precedents cited; appellate bodies assessed probative value of the complaints and surrounding circumstances. Interpretation and reasoning: The assessee had filed complaints with PMO, Home Ministry and police prior to the survey, alleging coercion in signing the agreement. The Tribunal considered these complaints and the absence of contrary material as corroborative of the assessee's contention that the agreement was not voluntarily acted upon. Given the absence of bank evidence or third-party confirmations, the complaints contributed to reasonable doubt about the veracity and operability of the agreement's disputed part. Ratio vs. Obiter: Ratio - contemporaneous complaints and the lack of contrary documentary proof can be material to discredit the unilateral probative value of a seized agreement; acceptance of coercion as a factual inference is within the appellate authorities' domain. Obiter - commentary on the administrative channels pursued by the assessee. Conclusions: The Tribunal did not err in treating the complaints as relevant to the credibility of the agreement; lack of finality of those complaints did not preclude reliance upon them as part of the factual matrix. Issue 3 - Duty to investigate bank transactions / remit to AO under Section 250(4) Legal framework: The AO/DDIT has powers to investigate and corroborate alleged transactions (e.g., bank records, summons to third parties); Section 250(4) permits the first appellate authority to direct further enquiries or remit matters to the AO for report where necessary. Precedent treatment: The judgment records the parties' contentions on remand but does not cite authority altering the usual exercise of appellate/assessment powers. Interpretation and reasoning: The Tribunal held that the AO had already considered and reproduced the agreement in the assessment order; a second opportunity for the AO to re-examine the same material was unwarranted. The core investigative steps (summoning other parties, tracing bank transfers) were not undertaken prior to making the addition; however, the Tribunal concluded that remand was unnecessary because the AO had already scrutinized the agreement and failed to produce corroborative evidence. The Tribunal therefore preferred adjudication on the existing record rather than remitting for further inquiry. Ratio vs. Obiter: Ratio - where the AO has already examined the instrument and made an addition on its basis, mere potential for further inquiries does not automatically require remand; appellate authority may uphold deletion where the record lacks necessary corroboration and AO has had opportunity to investigate. Obiter - remarks on what the AO 'should have' done as investigative steps. Conclusions: No remand was required in the circumstances; the Tribunal properly exercised its appellate function in declining to give the AO a 'second inning' and in deciding the matter on the record that lacked corroborative bank and third-party evidence. Issue 4 - Treating a notarized agreement as null and void absent civil adjudication Legal framework: Voidness of contracts under the Indian Contract Act is ordinarily a question for civil adjudication; however, for income-tax purposes, the material efficacy of an agreement (whether it had practical operation or resulted in transfers) is a factual inquiry distinct from formal declaration of nullity by a civil court. Precedent treatment: No specific precedents cited; appellate authorities distinguished legal nullity from practical non-materialization of transactions. Interpretation and reasoning: The Tribunal characterized the notarized agreement as having 'become null and void' in the sense that the alleged transactions were not executed and the amounts did not reflect in the parties' balance sheets; the agreement remained on paper and was not materialized. The Tribunal's finding addresses substantive non-performance and lack of factual foundation for taxing the alleged investments rather than pronouncing a formal legal nullity under contract law. Ratio vs. Obiter: Ratio - for taxation, an agreement that has not resulted in actual transfers or reflected in accounts may be treated as inoperative for the purposes of establishing unexplained investment; formal civil pronouncement of voidness is not a precondition for denying taxability where the facts show non-materialization. Obiter - language suggesting the Tribunal 'declared' the agreement null and void must be read as factual finding about non-materialization, not as a legal adjudication under the Contract Act. Conclusions: The Tribunal's treatment of the agreement as ineffectual for tax assessment purposes is a factual finding supported by absence of corroboration; it does not require a prior civil declaration of contractual nullity. Issue 5 - Application of human probability / preponderance of probabilities test Legal framework: Income-tax proceedings apply standards of probability and assessment of evidentiary weight; the preponderance test (human probabilities) is relevant in evaluating competing factual narratives where direct proof is lacking. Precedent treatment: The judgment references the Revenue's contention regarding the human probability test but resolves the matter on concurrent factual findings without engaging in novel precedent analysis. Interpretation and reasoning: The Tribunal applied probative evaluation of the totality of evidence: admitted portion of investment supported by books (Rs. 28,00,000) versus large disputed portion unsupported by banking evidence or third-party statements. Given the absence of corroboration and the presence of complaints alleging coercion, the preponderance of probabilities did not favour sustaining the large addition. The Tribunal found the Revenue's reliance on human probability insufficient to overcome the lack of documentary and testimonial corroboration. Ratio vs. Obiter: Ratio - in income-tax assessment, where documentary corroboration of alleged transfers is absent and the competing narrative (non-materialization/coercion) is reasonably supported, the preponderance test does not mandate an addition. Obiter - observations on investigative diligence that could have been employed. Conclusions: The Tribunal's factual determination, applying preponderance of probabilities to the available evidence, was permissible; the human probability test did not require sustaining the addition in the circumstances. OVERALL CONCLUSION The concurrent factual findings of the CIT(A) and the Tribunal that the disputed portion of the notarized agreement was not substantiated by bank evidence or third-party confirmations, and that the assessee's complaints and admissions cast doubt on the agreement's operation, are sustainable. No substantial question of law arises from the impugned orders; the appeal is devoid of merit and is rejected. (The Court's reasoning distinguishes factual non-materialization of an agreement for tax purposes from legal nullity requiring civil adjudication and upholds the Tribunal's refusal to remit the matter for further enquiry where the AO had already examined the instrument.)