2022 (7) TMI 1044 - AT - Income Tax

Addition on account of unaccounted cash payments u/s 69C - Addition on the basis of the statements given by four employees in the course of search u/s 132(4) - CIT-A deleted the addition - HELD THAT - As these statements considered on their own did not in itself inspire confidence to justify the addition made by the AO u/s 69C of the Act, for the reason that not only were there apparent factual inconsistencies but also the averments made by these four employees were general in nature and none of them divulged any specific details regarding any project in relation to which these so-called gratuitous payments were being made. Even the Ld. CIT-DR was unable to rebut the inconsistencies pointed out by the Ld. AR (as outlined in the preceding paragraphs) in the statements of the four (4) employees. It is also noted that each of the above four (4) employees had named Mr. Rajesh Sidhwani to be the person who was responsible for handling cash and that according to them, he would provide them with the cash for making the liaisoning expenses. We note that when Mr. Rajesh Sidhwani was confronted with the statements of these four employees, he had emphatically denied being involved in any such provision of cash for liaisoning work and gratifications. Effect of the retraction affidavits - As noted that the retraction affidavits had been sworn before the Notary Public (within seven days of the original statement) and were submitted before the AO (albeit late). We note that after perusal of the retracted affidavits, the AO had summoned all the four employees and cross-examined them under oath. Copies of their statements recorded upon cross examination by the AO have been placed before us. Having perused the same, it is noted that each of the four employees withstood the cross examination. And each of them stood by their retraction and re-affirmed that their original statements were obtained under duress and coercion. AO tried to but failed to extract any information or detail whatsoever in the cross-examination which would in any manner support his AO s allegation that gratuitous payments in cash were being made by the assessee. On these facts, we are unable to agree with the Ld. CIT-DR that the retraction statements ought to be discarded when they had stood the ground when cross-examined by AO that the statements recorded earlier was obtained involuntarily, so it is unsafe to rely on the four persons earlier statements to take an adverse view against the assessee regarding the purported gratuitous payments. Therefore, on conspectus of the aforesaid facts discussed, it is noted that not only were the original statements of the four (4) employees inconsistent, unreliable and suffers from contradiction and the admission made were not backed by any corroborative evidence and these statements had also been retracted and each of the four employees were able to withstand the cross-examination of the AO. Therefore, following the Board Instructions (supra), we find ourselves in agreement with the findings of the Ld. CIT(A), that it was improper for the AO to draw adverse inference on the basis of the retracted testimonies of the four employees. Thus we therefore do not see any reason to interfere with order of the Ld. CIT(A) and accordingly dismiss the Ground Nos. 1 to 3 raised by the Revenue in AY 2018-19. Disallowance u/s 14A of the Act read with Rule 8D - Scope of amendment brought in Section 14A - HELD THAT - Absence of any exempt income, no disallowance u/s 14A of the Act is permissible. Whether the following Explanation inserted by the Finance Act, 2022 in Section 14A of the Act is required to be retrospectively applied and fastened on the assessee or not? - the legislative intent is clear, the amendment brought in by the Finance Act, 2022 on this issue as discussed, will take effect from First April 2022 and not before as contended by the Ld DR. In our considered view, therefore, the new Explanation inserted in Section 14A of the Act with effect from 01-042022 cannot be applied in the assessment years under consideration for the present case as it is for AYs 2016-17 to 2018-19, and therefore according to us, the decisions cited in Paras 33 to 37 above continue to hold good and are binding upon us. - Decided against revenue.

Summary

Issues Involved:
1. Addition on account of unaccounted cash payments under Section 69C of the Income-tax Act, 1961.
2. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D.

Detailed Analysis:

1. Addition on Account of Unaccounted Cash Payments under Section 69C:

The Revenue appealed against the deletion of the addition made by the AO under Section 69C of the Act, based on statements recorded during a search operation under Section 132(4). The AO had added Rs. 4,80,00,000/- as unexplained expenditure for each assessment year from 2012-13 to 2018-19, relying on the statements of four senior employees of the assessee company, who initially admitted to cash payments for liaison work but later retracted their statements, claiming they were made under duress.

The Tribunal noted that the statements were recorded over several days, and the employees later retracted their statements, which were supported by affidavits sworn before a Notary Public. The AO cross-examined these employees, who stood by their retraction. The Tribunal observed that the initial statements lacked specific details and were inconsistent, and there was no corroborative evidence found during the search to support the AO's addition. The Tribunal emphasized that a statement under Section 132(4) is an important piece of evidence but not conclusive, especially when retracted and unsupported by corroborative evidence. The Tribunal also referred to CBDT Instructions advising against making additions solely based on confessions obtained during search operations without credible evidence.

In the absence of corroborative evidence and considering the retraction, the Tribunal upheld the CIT(A)'s decision to delete the addition under Section 69C, finding the original statements unreliable and insufficient to justify the addition.

2. Disallowance under Section 14A read with Rule 8D:

The Revenue also appealed against the deletion of disallowance made under Section 14A read with Rule 8D, arguing that the disallowance should be made even if no exempt income was earned during the year, based on CBDT Circular No. 5/2014. The Tribunal, however, noted that judicial precedents, including decisions from the Delhi, Madras, and Bombay High Courts, have consistently held that in the absence of exempt income, no disallowance under Section 14A is warranted.

The Tribunal also addressed the Explanation inserted in Section 14A by the Finance Act, 2022, clarifying that the provisions apply even if no exempt income is earned. However, the Tribunal held that this amendment is prospective, effective from 01.04.2022, and does not apply to the assessment years under consideration (2016-17 to 2018-19). The Tribunal relied on the Supreme Court's decisions in M.M. Aqua Technologies Ltd. and Vatika Township Pvt. Ltd., which emphasized that amendments imposing new obligations should be treated as prospective unless explicitly stated otherwise.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 14A, as no exempt income was earned during the relevant assessment years, and the amendment brought by the Finance Act, 2022, does not apply retrospectively.

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s orders deleting the additions under Section 69C and the disallowance under Section 14A for the assessment years 2012-13 to 2018-19.