2013 (8) TMI 1021 - AT - Income Tax

Addition made on the basis of the statement recorded u/s 132(4) - Held that - The ingredient for retraction of statement made during the search, therefore, stand duly satisfied as the assessee is found to have made retraction within a reasonable time immediately after the copies of statement were provided to him. Since the documents found as a result of search were pertaining to the income of the other two persons namely S/Shri Praful Mittal and Murari Lal Mittal and there being no material or evidence on record to show that the appellant has carried any business outside the books for sale and purchase of medicines that could give rise to the income to the extent of ₹ 25 lacs, the addition merely on the basis of such statement which stood validly retracted could not have been made. We, therefore, find no factual or legal justification in sustenance of addition by Ld. CIT (A) in this regard. Addition on account of alleged excess stock of medicines found at the time of search - Held that - . The inventory so found reveals that some of the medicines which were sample and had no value and also medicines with expiry which were to be discarded by the assessee have also been included in the list. The value thereof, could not be included for determining unexplained investment in stock. In this view of the matter, we set aside this issue to the assessing authority so that the assessee can demonstrate his claim for exclusion of value of such items of stocks for sustaining only the resultant addition, if any, as his undisclosed income. Disallowance of remuneration to the partners - addition on the ground that the interest income cannot be a subject matter of deduction under section 40(b) - Held that - The perusal of material reveals that the amount of ₹ 31,711/- is a journal entry by which the assessee reversed the excess amount of bank interest charged. This has gone to reduce the expenses charged under the head Bank Interest and charges. The resultant income has also been assessed as income from business. This amount of ₹ 31,711/- is not shown to have been assessed as assessee s income from other sources. We, therefore, do not find any justification in excluding such amount for making disallowance of ₹ 12,685/- under section 40(b) of the Act. Accordingly the ground raised in appeal stands allowed.

Issues Involved:
1. Addition of Rs. 25,00,000 based on the statement recorded under section 132(4) of the IT Act, 1961.
2. Rejection of books of account by the Assessing Officer.
3. Addition of Rs. 79,928 on account of alleged excess stock found during the search.
4. Addition of Rs. 12,685 due to disallowance against excess remuneration to partners.
5. Denial of the benefit of telescoping, recycling, or rotation of funds against the addition of Rs. 25,00,000.

Issue-wise Detailed Analysis:

1. Addition of Rs. 25,00,000 Based on Statement Recorded under Section 132(4):
The primary issue was whether the addition of Rs. 25,00,000, based solely on a statement recorded during the search under section 132(4), was justified. The search was conducted on 27.08.2008, and a partner of the assessee firm, Shri Murari Lal Mittal, admitted to unrecorded income of Rs. 25,00,000 in his statement. This was corroborated by Shri Radhey Shyam Mittal. However, the income was not reflected in the return filed on 29.09.2009. The Assessing Officer emphasized the evidentiary value of statements recorded during the search, dismissing the retraction made after seven months as an afterthought. The CIT (A) upheld this view, noting the lack of timely retraction and the presence of corroborative documents (Annexure A-1 to A-13) indicating unrecorded income.

The assessee argued that the statement was taken out of context and under duress, and no corroborative documentary evidence was found during the search. The retraction was made promptly after obtaining the statement copy on 13.03.2009, through an affidavit filed on 31.03.2009. The assessee cited judgments from the Hon'ble Apex Court and the Rajasthan High Court, asserting that admissions during searches are not conclusive proof and can be retracted.

The Tribunal found merit in the assessee's arguments, noting that the retraction was made within a reasonable time and was not countered by the authorities. The Tribunal concluded that the addition of Rs. 25,00,000, based solely on the retracted statement without corroborative evidence, was unjustified and deleted the addition.

2. Rejection of Books of Account:
This issue was not pressed by the assessee during the appeal, and thus, no detailed analysis was provided.

3. Addition of Rs. 79,928 on Account of Alleged Excess Stock:
The CIT (A) confirmed the addition of Rs. 79,928 for alleged excess stock found during the search. The assessee contended that the inventory included samples and expired medicines, which should not be valued for determining unexplained investment in stock.

The Tribunal directed the Assessing Officer to re-examine the inventory, excluding the value of samples and expired medicines, and to sustain only the resultant addition, if any.

4. Addition of Rs. 12,685 Due to Disallowance Against Excess Remuneration to Partners:
The CIT (A) disallowed remuneration to partners, arguing that the interest income of Rs. 31,711 could not be deducted under section 40(b) of the Act. The assessee clarified that the amount was a journal entry reversing excess bank interest charged, reducing expenses under bank interest and charges, and was assessed as business income.

The Tribunal found no justification for excluding this amount for disallowance and allowed the ground raised by the assessee.

5. Denial of Benefit of Telescoping:
Since the Tribunal ruled in favor of the assessee on the primary issue of the Rs. 25,00,000 addition, the question of telescoping became moot. The ground was disposed of accordingly.

Conclusion:
The appeal by the assessee was partly allowed. The addition of Rs. 25,00,000 based on the retracted statement was deleted, the issue of excess stock was remanded for re-examination, and the disallowance of partner remuneration was reversed. The rejection of books of account was not pressed, and the telescoping issue was rendered moot.

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