Statements recorded under section 132(4) of third party have evidentiary value only- Cannot justify additions in absence of corroborative material- Section 153A, 153C

High Court Decision

• The statement recorded under section 132(4) alone cannot justify the additions made by AO. The Revenue has failed to produce any corroborative material to justify the additions.
• The existence of incriminating material found during the course of search is a sine qua non for making additions pursuant to a search and seizure operation. In the event, no incriminating material is found during the search, no addition could be made in respect of the assessments that had become final.
• The statements of a third party have the evidentiary value but these cannot on a standalone basis, without reference to any other material discovered during the search operations, empower the AO to frame the block assessment u/s 153A.
• As per section 153C, if this statement is to be construed as an ‘incriminating material’ belonging to or pertaining to a person other than person searched, then the only legal recourse available to the department was to proceed in terms of section 153C of the Act by handing over the same to AO who has the jurisdiction over such person.
• An assessment framed u/s 153A on the basis of alleged incriminating material (being the statement recorded u/s 132(4) of the Act) is not correct. The assessee also had no opportunity to cross-examine the said witness.

Brief Facts

• The assessee purchased shares of an unlisted private company in 2010. This unlisted company then merged with another unlisted company M/s Focus Industrial Resourced Limited and shares of the merged entity were allotted to the assessee. Later, the merged entity allotted further bonus shares to the assessee and thereafter listed on BSE. The assessee sold these shares on BSE in 2014 and earned a huge profit claimed as exempt LTCG income.
• A search was conducted u/s 132 at the premises of the assessee, its relatives as well as at the premises of one Pradeep Kumar Jindal. During search, Pradeep Kumar Jindal admitted to providing accommodation entries to the assessee in form of Bogus LTCG. The findings of AO were confirmed by CIT(A). However, in further appeal before the ITAT, the said findings were set aside.
• Being aggrieved, the Revenue filed the present appeal u/s 260A of the Act proposing the following questions of law: -

1. Whether the ITAT is justified in deleting the additions made on account of bogus LTCG on the ground that the evidences found during the search at the premises of the entry operator cannot be the basis for making additions in assessment completed u/s 153A in the case of beneficiary ignoring the vital fact that there was a common search u/s 132 conducted on the same day in both the cases of the entry provider and the beneficiary?
2. Whether ITAT was justified in holding that mere failure of cross examination of entry operator is fatal when copy of statement was provided to the assessee and the assessee failed to discharge the onus of providing the genuineness of LTCG especially in view of the apex court decision in the case of State of UP vs. Sudhir Kumar Singh [AIR 2020 SC 5215]

Submission of Department

• There is no statutory right to cross-examine a person whose statement is relied upon by AO, so long as the assessee is provided with the statement and given an opportunity to rebut the statement of the witness.
• The assessee is provided with a copy of the statement of Pradeep Kumar Jindal. Further, the assessee has failed to bring in any evidence to dispute the factual position emerging therefrom and has therefore failed to establish any prejudice on account of not getting the opportunity to cross-examine the witness.
• In view of the statement of Mr. Jindal, it was incumbent upon the assessee to discharge the onus of proof which had been shifted on him. The assessee ought to have produced evidence to negate or to contradict the evidence collected by the AO during the course of search and assessment proceedings which followed thereafter.

The decision by the Hon’ble High Court was supported by the following judgements: -

• CIT Vs. Kabul Chawla
• PCIT Delhi Vs. Best Infrastructure (India) P. Ltd. – Delhi HC
• CIT vs. Harjeev Agarwal
• CIT v. Sri Ramdas Motor Transport Ltd. (1999) 238 ITR 177 (AP)- AP High Court
• CIT vs. Naresh Kumar Aggarwal (2014) 3699 ITR 171 (T&AP)- Telangana & AP High Court

Conclusion: - The appeal made by the department was dismissed by the High Court on the basis of the above facts and grounds of the case and in reliance of the above rulings.

Click on this link to access detailed order:- PCIT (Central)- 3 vs. Anand Kumar Jain (HUF)