The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that a post-midnight confession made during a search by a non-accounting partner with limited knowledge of the firm’s finances could not be treated as reliable evidence without corroborative material.

Vision Exports,appellant-assessee, is a partnership firm engaged in the manufacturing and export of Indian handicrafts from Veerpur Industrial Area, Moradabad. The firm filed its return of income on November 7, 2017, declaring a total income of ₹3.03 crore.

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Earlier, on December 15, 2016, a search and seizure operation was conducted under Section 132 at the firm’s premises. During the search, incriminating materials were found, based on which the firm voluntarily surrendered ₹9.85 crore as unaccounted income. This surrender was confirmed through a letter signed by partner Mr. Tariq Ali.

The surrendered amount included ₹7 crore for purchases made outside the books, ₹2.5 crore as unrecorded construction expenses for a building in Veerpur, and ₹35 lakh for other unaccounted income and investments not recorded in the books during the period from August 17, 2011, to December 14, 2016.

The case was later transferred to the Central Circle, Moradabad, under Section 127. On examination of the return, the Assessing Officer ( AO) noted that the firm had not disclosed the surrendered amount, nor had it filed any retraction.

After issuing notices under Sections 143(2) and 142(1), the assessment was completed by treating ₹9.85 crore as undisclosed income. The total assessed income was determined at ₹12.38 crore as per the order dated December 30, 2018.

The two member bench comprising Anubhav Sharma ( Judicial Member) and S.Rifaur Rahman ( Accountant Member) examined the submissions and material placed on record in detail. It observed that Section132(4) of the Income Tax Act allows statements recorded during a search to be used in evidence only if made on oath and corroborated by incriminating material found during the search.

The appellate tribunal noted that the statement of Tariq Ali was recorded late at night on 15.12.2016, and resumed again the next day. In his responses, Tariq Ali admitted that he had little knowledge of the accounts, which were managed by his brother Danish Ali. He stated that the accounts were not properly maintained after one Rinku Sharma left the firm and were being managed by a newly appointed accountant.

Despite this, Tariq Ali, in response to a question, agreed to surrender Rs.11 crores in the name of Vision Exports and Kohinoor Crafts without providing a detailed breakup or explanation. The tribunal found this midnight confession vague and unsupported by material evidence, noting that the CBDT Circular No. 286/2/2013 discourages confessions during search operations.

The ITAT further highlighted that the statement lacked reference to specific assessment years or a clear allocation of surrendered income between the firms and individuals. Additionally, although loose papers were allegedly found during the search, they were neither confronted to Tariq Ali for explanation nor used in the assessment order to substantiate the additions.

The appellate tribunal observed that in response to notice under Section 142(1), the firm was asked to explain the basis of the surrendered income. The breakdown included amounts towards unrecorded purchases, construction costs, and other unexplained investments. However, the assessee's response explained the cash found and the loose papers, which the AO failed to disprove or substantiate with any evidence.

Citing earlier decisions, including the ITAT order in the case of Kohinoor Crafts and Delhi High Court rulings such as PCIT vs. Pavitra Realcon Pvt. Ltd. and CIT vs. Harjeev Aggarwal, the bench held that a statement recorded under Section 132(4) without corroborative material cannot form the sole basis for additions. It emphasised that the absence of evidence to support the statement renders the addition unsustainable.

Accordingly, the appellate tribunal held that the statement of Tariq Ali was not supported by any incriminating material found during the search. Even if the details were later provided in response to notice, the additions made solely on the basis of the retracted statement lacked legal backing.

The tribunal allowed the appeal and deleted the impugned additions.

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