Director remuneration disallowance under section 40A(2)(b) rejected where search statements lacked corroboration and payments declared

Addition under 40A(2)(b) challenged on basis of a purported statement made during search; the reproduced statement was misattributed and therefore could not form a valid basis for disallowance, and the principle that admissions in search statements require independent corroboration before supporting an assessment was reiterated, rendering such statements alone insufficient to compute undisclosed income. Further, inclusion of the directors remuneration in the recipients return and comparative tax analysis undermined the allegation of fictitious payments, resulting in the disallowance being not sustained and the appeal being allowed.

---

---

Issues: Whether the disallowance of Rs. 17,50,000/- under section 40A(2)(b) of the Income-tax Act, 1961 can be sustained where the only basis for the addition was a statement recorded under section 132(4) of the Income-tax Act, 1961.

Analysis: The Tribunal examined whether a statement recorded under section 132(4) alone, without corroborative material discovered in search or other independent evidence, can justify upholding an addition under section 40A(2)(b) / section 68. The Tribunal noted that the Assessing Officer relied on a statement which on record was incorrectly reproduced and in any event consisted only of an admission in search proceedings. The Tribunal followed co-ordinate authority and High Court precedents holding that statements recorded during search constitute information but, in the absence of corroborative material or incriminating material found during the search, cannot by themselves sustain an addition. The Tribunal also considered subsequent retraction and other available evidence showing inclusion of the remuneration in the director's returns and the revenue-neutral character of the transactions, treating these matters under the principle of requiring cogent corroboration before relying on search statements to make additions.

Conclusion: The disallowance of Rs. 17,50,000/- cannot be sustained on the basis of the statement recorded under section 132(4) alone; the appeal is allowed and the disallowance deleted in favour of the assessee.

---