Facts of the Case

A search and seizure operation under Section 132 of the Income Tax Act, 1961 was conducted on the premises of M/s Rajdarbar Group. During the course of such proceedings, statements were recorded, including the statement of a supplier of the Rajdarbar Group, namely the proprietor of M/s Supariwala & Co.

Based on the statement of that supplier, the Assessing Officer made additions in the assessment of Manoj Hora, treating such statement as sufficient basis for taxation.

The assessee challenged the additions on two grounds:

  1. Statements recorded under Section 132(4) against another person cannot bind a third party.
  2. No incriminating material was found from the assessee’s premises to justify additions.

The Commissioner of Income Tax (Appeals) deleted the additions, which deletion was affirmed by the Income Tax Appellate Tribunal.

The Revenue preferred appeals before the Delhi High Court.

Issues Involved

  1. Whether a statement recorded under Section 132(4) during search proceedings can be used against a third party without corroborative evidence?
  2. Whether additions can be sustained in absence of incriminating material found from the assessee’s premises during search proceedings?
  3. Whether the principle laid down in Commissioner of Income Tax v. Kabul Chawla applies in the present matter?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the statement recorded during search proceedings constituted valid material for making additions.
  • It was argued that the Assessing Officer rightly relied upon the supplier’s statement for bringing various amounts to tax.
  • The Revenue challenged the deletion ordered by the CIT(A) and affirmed by ITAT.

Respondent’s Arguments (Assessee)

  • The assessee contended that Section 132(4) statements are confined to the person searched and cannot automatically bind a third party.
  • The assessee argued that he was a stranger to the searched premises and therefore adverse inference could not be drawn merely based on another person’s statement.
  • It was further submitted that no incriminating material was recovered from his premises.
  • Hence, additions were legally unsustainable.

Court Findings / Court Order

The Delhi High Court upheld the findings of the CIT(A) and ITAT and dismissed the Revenue’s appeals.

The Court held:

  • The presumption under Section 132(4) arises only against the searched person.
  • Statements recorded from the searched party cannot be automatically attributed to a third party.
  • There must be clear corroborative material connecting the third party with such statements.
  • In absence of such corroboration, additions are unsustainable.
  • Since no incriminating material was found from the assessee’s premises, the law laid down in Kabul Chawla squarely applied.

Accordingly, the Court held that no substantial question of law arose and dismissed all appeals.

Important Clarification

This judgment clarifies that:

  • Section 132(4) statements do not have universal applicability against unrelated third parties.
  • Third-party statements require independent corroboration before being used adversely.
  • In absence of incriminating material, completed assessments cannot be disturbed merely on assumptions.
  • Search assessments must be based on legally admissible and corroborated evidence.

Sections Involved

Income-tax Act, 1961

  • Section 132 – Search and Seizure
  • Section 132(4) – Statement during Search Proceedings
  • Search Assessment Proceedings

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:7256-DB/SRB27112017ITA10452017.pdf

 

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