The Karnataka High Court has reaffirmed the evidentiary value of statements recorded during income tax search proceedings, holding that a belated and unsupported retraction of an admission made under Section 132(4) of the Income Tax Act cannot be accepted. 

The bench of  Justice S.G. Pandit and Justice Rajesh Rai K dismissed an assessee’s appeal and upheld the restoration of a ₹1.5 crore addition as unexplained investment under Section 69 of the Act. 

The case involved a dispute over whether an admission made during a search operation could subsequently be withdrawn without timely and convincing evidence. 

The matter originated from a search and seizure operation conducted under Section 132 of the Income Tax Act on February 4, 2015. During the search, the tax authorities allegedly found incriminating materials and recorded the assessee’s statement under Section 132(4). 

The assessee had originally filed a return declaring income of approximately ₹81.26 lakh. However, during assessment proceedings under Sections 143(3) read with 153A, the Assessing Officer made several additions, including a crucial addition of ₹1.5 crore under Section 69, treating it as unexplained investment in the construction of a convention hall. This addition ultimately became the focal point of the litigation. 

The Commissioner of Income Tax (Appeals) had granted relief to the assessee by deleting the ₹1.5 crore addition. The appellate authority accepted the contention that the admission made during the search had subsequently been retracted and explained by the assessee. 

The Revenue challenged this finding before the Income Tax Appellate Tribunal (ITAT). The Tribunal partly allowed the Revenue’s appeal and restored the ₹1.5 crore addition, concluding that the statement recorded during the search could not be ignored merely because the assessee later attempted to retract it. 

Aggrieved by the Tribunal’s decision, the assessee approached the Karnataka High Court under Section 260A of the Income Tax Act. 

The appeal raised significant legal questions concerning: Whether a statement recorded under Section 132(4) can be discarded merely because it is subsequently retracted. Whether filing a return of income inconsistent with the admission amounts to a valid retraction. Whether the Revenue could sustain an addition without independent corroborative evidence. Whether the investment should have been assessed in the hands of a partnership firm instead of the individual assessee. 

The Court noted that during the search proceedings, the assessee admitted that the actual investment in a convention hall was approximately ₹3.5 crore, whereas proper records were not maintained. The assessee further declared ₹1.5 crore as additional income in his individual capacity for Assessment Year 2014-15 over and above his regular income. 

According to the Court, the admission was clear, unequivocal and specifically attributed the undisclosed investment to the assessee in his personal capacity. 

One of the principal arguments advanced by the assessee was that the admission stood retracted when he filed his income tax return on March 31, 2015, without offering the additional amount to tax.

Rejecting the contention, the High Court observed that merely filing a return of income cannot amount to a retraction of a statement recorded under Section 132(4). The Court held that an income tax return merely declares income for a particular assessment year and does not automatically nullify a prior admission made during search proceedings. 

The High Court laid down important principles regarding retraction of search statements.

According to the Bench, a statement recorded under Section 132(4) carries substantial evidentiary value and is ordinarily binding on the person making it. Such a statement can be withdrawn only if the assessee establishes that it was made under:

• Mistaken understanding of facts or law; or
• Coercion, threat, pressure or duress. 

The Court emphasized that any retraction must be made at the earliest available opportunity and should be supported by cogent evidence. Such evidence may include an affidavit explaining the circumstances under which the statement was made or complaints to higher authorities alleging coercion. 

In the present case, the Court found that the alleged retraction before the Assessing Officer came nearly one-and-a-half years after the original admission, making it a highly belated exercise lacking supporting evidence. 

While acknowledging the Supreme Court’s ruling in Pullangode Rubber Produce Co. Ltd. v. State of Kerala that an admission is not conclusive proof and may be shown to be incorrect, the High Court reiterated that the burden lies on the person making the admission to establish its incorrectness. 

The Court also relied upon the Madras High Court’s judgment in CIT v. MAC Public Charitable Trust, which held that statements recorded under Section 132(4) possess legal force and that retractions must be prompt, supported by affidavits and backed by credible material. 

Addressing the argument that the Revenue lacked independent corroborative evidence, the Court observed that the Tribunal, as the final fact-finding authority, had already examined the issue.

The Tribunal had noted that the assessee’s admission regarding unexplained investment in the convention hall was corroborated by the physical existence of the building and the absence of any evidence demonstrating that the investment had actually been made by other partners or by the partnership firm. The High Court found no reason to interfere with that factual conclusion. 

Concluding that the Tribunal’s findings were based on adequate material and proper appreciation of evidence, the Karnataka High Court answered all substantial questions of law in favour of the Revenue and against the assessee.

The Court consequently dismissed the Income Tax Appeal and upheld the addition of ₹1.5 crore as unexplained investment under Section 69 of the Income Tax Act. 

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