2026 (1) TMI 870 - AT - Income Tax

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 ... Addition u/s 40A(2)(b ) - salary paid by the Assessee company to its Director -addition has been made on the basis of the statement given by Smt. Sonia Singla u/s 132(4) who has admitted that the salary received was without necessary qualification and experience and any active involvement in the functioning of concerned entity of which she claimed to be an employee, therefore, sought for dismissal of the Appeal of the Assessee - HELD THAT:- The only basis for making the addition by the A.O. is the statement of the Director, the A.O. reproduced the statement at Page No. 3 of the assessment order claiming to be the statement of ‘Smt. Sonia Singla’, however, it is found that the said statement reproduced by the A.O. is the statement of ‘Smt. Priti Singla’, which is nothing to do with the Assessee. The said action of the A.O. cannot justify the disallowance so made. Apart from the same, in an identical case in the case of L. S. Tool Pvt. Ltd [2025 (11) TMI 155 - ITAT DELHI] held merely because an admission has been made by the assessee during the search operation, the same could not be used to make additions in the absence of any evidence to corroborate the same -Act does not contemplate computing of undisclosed income solely on the basis of statements made during a search. However, these statements do constitute information, and if they relate to the evidence or material found during the search, they can be used in proceedings under the Act, as specified under Section 132(4) of the Act. Nonetheless, such statements alone, without any other material discovered during the search which would corroborate said statements, do not grant the AO the authority to make an assessment. Also once Smt. Priti Singla has included the director’s remuneration in her return of income for year under consideration and it is evident from comparative chart placed that in situation when remuneration is paid to her, tax burden is higher in comparison to tax saving in the hands of appellant company by making deduction of director’s remuneration, then the allegation of department of making fictitious payments to reduce liability looses ground - Appeal of the Assessee is 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.