2015 (11) TMI 286 - HC - Income Tax

Addition on account of cash seized from one of the employees of the assessee - assessment completed under Section 158 BC (1) - Held that - In the present case, the Assessee had an explanation for not retracting the statement earlier. He also furnished an explanation for the cash that was found in the hands of his employee and this was verifiable from the books of accounts. In the circumstances, it was unsafe for the AO to proceed to make additions solely on the basis of the statement made under Section 132(4) of the Act, which was subsequently retracted. Consequently, the Court is unable to find any legal infirmity in the conclusion reached by the ITAT that the addition of ₹ 86 lakhs to the income of the Assessee was not justified. Question (B) is answered in the affirmative, i.e., in favour of the Assessee and against the Revenue. Addition on total export realisation - Held that - Court finds that indeed no opportunity was given to the Assessee to cross-examine Mr. Sant Kumar Sharma, whose statement was the principal basis for making the addition of ₹ 1,38,41,971. The Court finds that in the present case the basis for making the addition of ₹ 1,38,41,971 was the statement of Mr. Sant Kumar Sharma. He had furnished various details which were incriminating as far as the Assessee was concerned. It was incumbent on the AO, in those circumstances, to afford the Assessee an opportunity of cross-examination of Mr. Sant Kumar Sharma. The ITAT also noted that the Assessee could not be said to have not cooperated at all in the assessment proceedings. The Court further notes that in M. Pirai Choodi s case (2010 (11) TMI 26 - Supreme Court of India) the Assessee had not availed the statutory remedy of filing an appeal before the Commissioner of Income Tax (Appeals) CIT(A) against the order of the AO but had approached the High Court directly by way of a writ petition. In those circumstances, the Supreme Court held that the High Court ought to have required the Assessee to avail the remedy of a statutory appeal instead of quashing the assessment proceedings on the ground of violation of natural justice. The Supreme Court, in fact, permitted the Assessee to approach the CIT (A). As almost two decades have elapsed since the date of the search. There must be some finality to proceedings that seek to cover a block period beginning 1st April 1986. Consequently, Question (A) is also answered in the affirmative, i.e., in favour of the Assessee and against the Revenue.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 1,38,41,971 by the ITAT.
2. Deletion of the addition of Rs. 86 lakhs on account of cash seized from an employee of the assessee.

Detailed Analysis:

Issue 1: Deletion of the addition of Rs. 1,38,41,971 by the ITAT
The Revenue appealed against the ITAT's order, which deleted the addition of Rs. 1,38,41,971. The background is that the Assessee was engaged in the business of plastic raw material and associated with multiple business entities. During a search and seizure operation, the Assessee's premises were raided, and despite the notice under Section 158BC of the Income Tax Act, the Assessee delayed filing the return. The AO concluded that the Assessee had introduced fictitious debtors and added Rs. 1,36,41,971 as unexplained cash credit under Section 68 of the Act, based on a statement by Mr. Sant Kumar Sharma.

The ITAT noted that the Assessee was not given an opportunity to cross-examine Mr. Sant Kumar Sharma, whose statement was critical to the addition. The ITAT's members had a difference of opinion, but the third member concluded that the addition could not be made without cross-examination. The High Court agreed with the ITAT, emphasizing the importance of cross-examination for natural justice and noting that the Assessee had not been given this opportunity. The Court found no legal infirmity in the ITAT's conclusion and upheld the deletion of the addition.

Issue 2: Deletion of the addition of Rs. 86 lakhs on account of cash seized from an employee of the assessee
The AO seized Rs. 86 lakhs from an employee of the Assessee during the search. The Assessee initially admitted that the cash was his undisclosed income but later retracted the statement, claiming it was made under duress and without consulting his records. The AO did not accept the retraction and maintained the addition based on the initial statement under Section 132(4) of the Act.

The ITAT deleted the addition, noting that the Assessee had surrendered a total of Rs. 2.26 crores, including the Rs. 86 lakhs, and provided an explanation for the cash, which was supported by his books of accounts. The ITAT found that the AO had accepted similar explanations for other amounts, and thus, the addition of Rs. 86 lakhs was not justified.

The High Court held that a retracted statement under Section 132(4) requires corroborative material for the AO to make additions. The Assessee provided a verifiable explanation for the cash, and the AO did not find that the cash represented amounts from sources other than sales. The Court concluded that the AO could not rely solely on the retracted statement without examining the Assessee's explanation. Thus, the deletion of the Rs. 86 lakhs addition by the ITAT was upheld.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming the ITAT's deletion of both additions. The Court emphasized the need for cross-examination and corroborative evidence when relying on retracted statements, ensuring the principles of natural justice were upheld.