Introduction
The case of Satya Narayan Choudhary & Anr. vs. Assistant Commissioner of Income Tax & Anr. , adjudicated by the ITAT, Jodhpur Tribunal on 19th March 2020, is a landmark ruling on the evidentiary value of statements recorded during search operations under the Income-tax Act, 1961. The Tribunal, comprising R. C. Sharma (Accountant Member) and Sandeep Gosain (Judicial Member), delivered a decisive judgment in ITA No. 266/Jodh/2019 and 392/Jodh/2019 for the Assessment Years 2012-13 and 2017-18. The core issue revolved around additions made under Section 69 (unexplained investments) and Section 69A (unexplained money) based solely on a retracted statement given during a search, without corroborative evidence. The Tribunal firmly held that income duly declared and explained in the books of accounts cannot be treated as unexplained money or investment, reinforcing the principle that assessments must be grounded in tangible evidence rather than coerced confessions. This commentary provides a deep legal analysis of the Tribunalās reasoning, its reliance on CBDT directives, and its implications for taxpayers facing similar search assessment proceedings.
Facts of the Case
The assessee, engaged in the business of real estate, earning income from business, rental income, and other sources, was subjected to a search operation under Section 132 of the Act on 16th September 2016. During the search, the assesseeās statement was recorded by the search party. Subsequently, the Assessing Officer (AO) completed the post-search assessment under Section 143(3) read with Section 153A of the Act, determining the total income at Rs. 1,34,47,871/- vide assessment order dated 28th December 2018. The AO made two key additions:
1. Addition of Rs. 1,18,11,569/- under Section 69A, treating it as unexplained money/undisclosed income and taxing it at a higher rate under Section 115BBE.
2. Addition of Rs. 1,00,00,000/- under Section 69, treating it as unexplained investment in construction.
The assessee challenged the assessment order before the Commissioner of Income Tax (Appeals) [CIT(A)]-2, Udaipur. The CIT(A) provided partial relief by deleting the addition of Rs. 1,13,36,569/- (out of Rs. 1,18,11,569/-), holding it to be business income, but confirmed the addition of Rs. 4,75,000/- as undisclosed income under Section 69 (unexplained investment) and upheld the full addition of Rs. 1,00,00,000/- as unexplained investment. The assessee appealed to the ITAT against the CIT(A)ās order, while the Revenue did not file any cross-appeal.
Reasoning and Legal Analysis
The ITATās reasoning is the cornerstone of this judgment, providing a meticulous dissection of the applicability of Sections 69 and 69A, the evidentiary value of search statements, and the binding nature of CBDT circulars.
1. Applicability of Sections 69 and 69A
The Tribunal first examined the nature of the income of Rs. 4,75,000/-. The assessee had declared this amount in its return of income (ITR) filed under Section 139, which included the sum in its business income from property transactions. The AO and CIT(A) had treated this as unexplained money under Section 69A or unexplained investment under Section 69. The ITAT categorically held that the provisions of Section 69 or 69A are not applicable in this case. The Tribunal observed:
> “The provisions of Section 69 or 69A of the Act are not applicable in the facts of the case as far as the question of income of Rs. 4,75,000/- from property transaction is concerned, which is in the nature of business income as assessee is duly engaged in the business of real estate only.”
The Tribunal clarified that Sections 69 and 69A apply only to unrecorded transactions where the nature and source of the investment or money are not explained. In the present case, the assessee had duly explained the nature and source of the transaction and had declared it in the ITR, balance sheet, and profit & loss account. Therefore, the question of any income from an undisclosed source did not arise. The Tribunal directed the AO to treat the income of Rs. 4.75 lacs as income from business.
2. Addition of Rs. 1,00,00,000/- under Section 69
Regarding the addition of Rs. 1,00,00,000/- as unexplained investment in construction, the Tribunal applied the same principle. The assessee argued that Section 69 is attracted only when investments are not recorded in the books of accounts and there is no explanation about their nature and source. Since the AO and CIT(A) had not rejected the books of accounts or the details of expenses incurred towards construction, the provisions of Section 69 could not be invoked. The Tribunal relied on several judicial precedents cited by the assessee, including:
– Pirani vs. ACIT (250 ITR 467)
– Vasanthi vs. ACIT (257 ITR 94)
– Surendra Khandhar vs. ACIT (321 ITR 254) (Bom.)
– Jagjit Pal Singh Anand vs. CIT (320 ITR 106) (Del.)
– Rajendra Kumar vs. DCIT (ITA No.1959/Del/2017 dated 27.02.2020)
The Tribunal emphasized that no addition is warranted under Section 69 where no evidence is available to prove that the assessee made payments beyond the sale agreement or that the books of accounts are unreliable.
3. Evidentiary Value of Retracted Statements
A critical aspect of the Tribunalās reasoning was its treatment of the statement recorded during the search under Section 132(4). The assessee had retracted the statement, and the Tribunal held that such statements are not conclusive evidence and require corroboration. The Tribunal relied on the CBDT Instruction No. F. no. 286/2/2003-IT (Inv) dated 10.03.2003, which directs that:
> “Instances have come to the notice of the Board where assessee have claimed that they have been forced to confess the undisclosed income during the course of search & seizure and survey operations. Such confessions, if not based upon reliable evidence, are later retracted by the concerned assessee while filing return of income. In these circumstances, on confessions during the course of search & seizure and survey operations do not serve any useful purpose.”
The Tribunal noted that this circular is binding on all Income Tax Authorities, as per settled law that benevolent circulars are binding even if they deviate from the provisions of the Act. The Tribunal also cited the decision of the Honāble Madras High Court in M. Narayanan & Bros. vs. ACIT (2011) 13 taxmann.com 49 (Mad.), which held that while a statement rendered at the time of search may be used as evidence, it cannot be the sole material to rest the assessment, especially when the assessee retracts it by producing material evidence.
4. Reliance on Judicial Precedents
The Tribunal extensively relied on a series of Supreme Court and High Court judgments to reinforce its position:
– Pangamban Kalanjoy Singh vs. State of Manipur (1956 SC 9): No assessing authority can proceed on the basis of a surrender made at the time of search without corroboration through an independent source.
– Kailashben Manharlal Chokshi vs. CIT (2008) 174 Taxman 466 (Guj.): Merely on the basis of an admission, additions cannot be made unless corroborative evidence is found.
– ACIT vs. Mrs. Sushiladevi S. Agarwal (49 TTJ 663): A search operation causes great stress and anxiety, and statements received during search are not free from ambiguity.
– Palinode Rubber Produce Co. Pvt. Ltd. vs. State of Kerala (1971) 91 ITR 18 (SC): An admission is an important piece of evidence but is not conclusive proof; it is rebuttable.
– G. Morgues & Bros. vs. CIT (1973) 88 ITR 432 (SC): An assessee is entitled to show that an admission was made out of ignorance of law or was otherwise vitiated.
– CIT vs. Bhanwarlal (225 ITR 870) (Raj.): The statement under Section 132(4) is not always a universal truth and must be corroborated with facts on record.
5. Distinction Between Business Income and Unexplained Money
The Tribunal drew a clear distinction between business income and unexplained money. It held that income from property transactions by a real estate business is business income, not income from undisclosed sources. The CIT(A) had already deleted the bulk of the addition (Rs. 1,13,36,569/-) by treating it as business income, but the Tribunal extended this logic to the remaining Rs. 4,75,000/-. The Tribunal observed that the assessee had declared the income in the ITR and explained its nature and source, supported by books of accounts. Therefore, the higher rate of tax under Section 115BBE could not be applied.
Conclusion
The ITAT, Jodhpur Tribunal, in Satya Narayan Choudhary & Anr. vs. ACIT, delivered a taxpayer-friendly ruling that reinforces fundamental principles of tax jurisprudence. The Tribunal held that:
1. Additions under Sections 69 and 69A cannot be made when the income is duly declared and explained in the books of accounts, and the nature and source are clearly established.
2. Statements recorded during search operations under Section 132(4) are not conclusive evidence and require corroboration through independent material. Retracted confessions, without supporting evidence, cannot sustain additions.
3. CBDT circulars are binding on tax authorities, and assessments must be based on tangible evidence, not coerced confessions.
4. Income from property transactions by a real estate business is business income, not unexplained money, and cannot be taxed at higher rates under Section 115BBE.
The Tribunal allowed the assesseeās appeal, directing the AO to treat the income of Rs. 4.75 lacs as business income and deleting the addition of Rs. 1,00,00,000/- under Section 69. This judgment serves as a strong precedent for taxpayers facing search assessments, emphasizing that the burden of proof lies on the Revenue to produce corroborative evidence, and that admissions made under duress are not sacrosanct.