ITAT Mumbai Upholds Reliance on Retraction of Section 132(4) Statements and Limits Disallowance Under Section 14A to Exempt Income

Introduction

The case of Asstt. Commissioner of Income-tax, Central Circle-4(2), Mumbai versus K. Raheja Corporate Services Pvt. Ltd., Mumbai before the Income Tax Appellate Tribunal (ITAT), Mumbai Bench "H" addressed critical issues pertaining to the reliability of statements recorded under Section 132(4) of the Income Tax Act, 1961, and the applicability of Section 14A regarding the disallowance of expenditures against non-exempt income. Hearing multiple appeals consolidated together for assessment years (AYs) 2012-13 to 2018-19, the Tribunal rendered a comprehensive judgment on June 17, 2022.

Summary of the Judgment

The Revenue appealed against the order of the CIT(A)-52, Mumbai, which had deleted additions made by the Assessing Officer (AO) under Sections 69C and 14A of the Income Tax Act. The AO had alleged that K. Raheja Corporate Services Pvt. Ltd. had made unaccounted cash payments for liaising with authorities, leading to additions in total income. These additions were primarily based on statements recorded during a search under Section 132 of the Act. However, the employees who made these statements later retracted them, asserting coercion and lack of corroborative evidence.

The ITAT Mumbai Bench, after thorough examination, upheld the deletion of these additions, emphasizing the unreliability of the initial statements in absence of corroborative evidence and valid retraction affidavits. Additionally, the Tribunal addressed the disallowance under Section 14A, ruling that such disallowances cannot exceed the amount of exempt income, which was nil in this case. The Tribunal further held that the new Explanation introduced in the Finance Act, 2022, was not retrospective and thus did not apply to the AYs in question.

Analysis

Precedents Cited

The judgment extensively referenced numerous precedents to substantiate its findings:

Pullangole Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18): Held that admissions under Section 132(4) are important but not conclusive.
Sarwan Singh Rattan Singh v. State Of Punjab AIR 1957 SC 637: Affirmed that admissions are pieces of evidence subject to corroboration.
M/s Bannalal Jat Construction (P.) Ltd. vs Assistant Commissioner of Income-tax: Distinguished in facts regarding the reliability of retracted statements.
Pr.CIT Vs Nageshwar Enterprises (277 Taxman 86) (Guj HC), Chetnaben J Shah Vs ITO (288 CTR 579) (Guj HC), and others: Reinforced the principle that retracted statements without corroborative evidence do not justify additions.
CJ. Shah & Co Vs CIT (214 Taxman 262) (Jhar HC), Sree Ganesh Trading Co Vs CIT (214 Taxman 262) (Jhar HC): Emphasized that corroboration is essential for admissions under duress.
M. M. Aqua Technologies Ltd vs CIT (436 ITR 582) & CIT vs Vatika Township Pvt Ltd (367 ITR 466): Discussed the retrospective application of legislative amendments.

Legal Reasoning

The Tribunal's reasoning hinged on several legal principles:

Reliability of Admissions: Statements made under Section 132(4) can be used as evidence but require corroboration, especially if retracted. The burden is on the Revenue to prove voluntariness and reliability.
Retraction Affidavits: Affidavits sworn before a notary public within a stipulated period, supporting retraction claims, significantly undermine the credibility of initial statements.
Explanatory Circulars and Legislative Amendments: Circulars like CBDT Circular No. 5/2014 cannot override statutory provisions. Moreover, legislative changes intended to clarify provisions are not retrospective unless explicitly stated.
Section 14A Limitation: Disallowances under Section 14A cannot exceed the amount of exempt income, ensuring that hypothetical incomes are not taxed, aligning with Section 5's definition of real income.
Natural Justice: Emphasized the necessity of fair hearing and opportunity to contest adverse statements, aligning with principles upheld in various High Court and Supreme Court judgments.

Impact

This judgment has significant implications for future Income Tax assessments and appeals:

Strengthening Due Process: Reinforces the necessity for the Revenue to provide substantial, corroborative evidence before making additions based on admissions under duress.
Clarity on Section 14A: Limits the scope of disallowances strictly to the extent of exempt income, preventing the imposition of taxes on unfounded hypothetical incomes.
Non-Retrospectivity of Amendments: Establishes that legislative changes are prospective unless explicitly stated, protecting taxpayers from unforeseen retroactive applications.
Judicial Consistency: Aligns lower tribunals with High Court and Supreme Court judgments, promoting uniformity in tax law interpretations.

Complex Concepts Simplified

Section 132(4) Statements: These are statements made by individuals during a tax search, which can be used as evidence. However, their reliability is questioned if later retracted under claims of coercion.
Section 14A Disallowance: Allows the tax authorities to disallow expenses if they are related to income not included in the total income. However, disallowances cannot exceed the actual exempt income earned.
Retraction Affidavits: Legal documents wherein individuals formally withdraw their earlier statements, stating they were made under duress or coercion.
Circulars vs. Statutory Provisions: Circulars provide guidance but cannot override the actual law. Amendments to laws are only retroactive if explicitly stated.

Conclusion

The ITAT Mumbai's judgment in ACIT - CC 4(2), Mumbai v. K. Raheja Corporate Services Pvt. Ltd. underscores the imperative for the Revenue to substantiate additions with reliable, corroborative evidence, especially when initial statements are retracted under claims of coercion. By limiting disallowances under Section 14A to the actual exempt income and rejecting retrospective applications of legislative amendments without explicit intent, the Tribunal reinforced taxpayer protections and adherence to due process. This ruling aligns with established judicial precedents, promoting fairness and consistency in the interpretation and application of the Income Tax Act.