2014 (11) TMI 513 - HC - Income Tax

Scope and ambit of section 132(4) - Whether the Tribunal is justified in holding that Explanation to sec.132(4) is prospective in nature though the explanation laid down only rule of evidence and in that sense it is only procedural in nature Held that - Search and seizure for the purposes of preventing or detecting crime reasonably enforced was not inconsistent with the constitutional guarantee against search and seizure - the search of the assessee by a police officer was not justified by the warrant nor was it open to the officer to search the person of the appellant without taking him before a Justice of the Peace Nevertheless it was held that the court had a discretion to admit the evidence obtained as a result of the illegal search and the constitution protection against search of person or property without consent did not take away the discretion of the court. It was open to the court not to admit the evidence against the accused if the court was of the view that the evidence had been obtained by conduct of which the prosecution ought not to take advantage - But that was not a rule of evidence but a rule of prudence and fair play - the effect of explanation to Section 132(4) of the Act is that the AO can rely upon it in respect of pending proceedings also, as a piece of evidence, but not as the sole basis for imposing additional financial liability upon an assessee either in the form of denial of benefits which an assessee is otherwise entitled to, or subjecting him to prosecution - if there exists any other supportive material, the statement recorded u/s 132(4) can certainly be taken aid of - in the absence of other supporting material, a statement of that nature cannot constitute the basis to burden an assessee. Even in relation to the very block assessment, a statement referable to Section 132(4), but retracted by the person cannot constitute the sole basis - It can be relied upon if it is not retracted from and even if it is retracted from, it is supported by other material - The communication dated 11-03-2003 of the department to its officials throws light upon this - If the statement made during the course of search remains the same, it can constitute the basis for proceeding further under the Act, even if there is no other material - If, on the other hand, the statement is retracted, the AO has to establish his own case - The statement that too, which is retracted from the assessee, cannot constitute the basis for an order u/s 158BC of the Act thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues Involved:
1. Interpretation and scope of Section 132(4) of the Income Tax Act, 1961.
2. Retrospective or prospective application of the explanation to Section 132(4).
3. Evidentiary value of a retracted statement under Section 132(4).

Issue-wise Detailed Analysis:

1. Interpretation and Scope of Section 132(4):
The primary issue was whether the assessing officer could rely on a statement recorded under Section 132(4) of the Income Tax Act during a search operation, in subsequent assessment proceedings. The respondent claimed deductions for commission and brokerage payments, which were disallowed by the assessing officer based on a statement recorded during a 1988 search. The Tribunal held that the statement recorded under Section 132(4) could not be used as evidence for earlier assessment years. This was contested by the Revenue, who argued that an amendment to Section 132(4) allowed such statements to be used in any proceedings under the Act.

2. Retrospective or Prospective Application of the Explanation to Section 132(4):
The second issue was whether the explanation added to Section 132(4) should be applied retrospectively or prospectively. The Revenue argued that the amendment was procedural and thus retrospective, allowing the use of statements recorded during searches in pending proceedings. The respondent countered that the amendment should be prospective, as it would otherwise impose a disadvantage or penal consequence retroactively. The Court noted that while procedural amendments are generally retrospective, the legal effects of such amendments, especially those impacting substantive rights, must be carefully considered.

3. Evidentiary Value of a Retracted Statement under Section 132(4):
The third issue was whether a retracted statement recorded under Section 132(4) could be considered valid evidence. The respondent's Managing Director had retracted his statement, claiming it was forcibly extracted. The Court emphasized that a retracted statement alone could not form the basis for disallowing deductions unless supported by other independent evidence. The Court referenced the department's communication and previous judgments to assert that a retracted statement requires corroboration by other material evidence to be valid.

Judgment Summary:
The High Court concluded that the explanation to Section 132(4) is procedural but cannot be applied retrospectively to impose additional financial liabilities or deny benefits based solely on retracted statements. The Court held that while the assessing officer could use such statements as evidence, they could not constitute the sole basis for decisions without supporting material. Consequently, the Court answered the questions against the Revenue, affirming that the retracted statement of the Managing Director, unsupported by other evidence, could not justify the disallowance of deductions for the assessment years in question. The Court ruled in favor of the respondent, maintaining that procedural fairness and the need for corroborative evidence are paramount in such cases.