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also, since the return of income for AY 2016-17 was filed on 17.10.2016, and undisputedly the time limit for issuance of notice u/s 143(2) of the Act for this year had expired as on the date of search on 30-11-2017. Accordingly, the AY 2016-17 was also unabated, and was not pending before the AO on the date of the search. With regard to AY 2017-18, it was pointed out that the time limit for issuance of notice u/s 143(2) of the Act had not expired on the date of search i.e. 30-11-2017. Hence, AY 2017-18 was pending before the AO on the date of search and consequently, AY 2017-18 was an abated assessment year. Therefore, except AYs 2017-18 & 2018-19, all the other AYs 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 & 2016-17 are unabated assessments. On these admitted facts, we now take up the grounds taken in the appeals.

3. It is noted that for AYs 2016-17 to 2018-19 the Revenue has preferred appeal against the order of Ld. CIT(A) deleting the additions made by the AO on two counts viz., (a) addition on account of unaccounted cash payments u/s 69C of the Act and (b) disallowance u/s 14A of the Act read with Rule 8D. Whereas, for AYs 2012-13 to 2015-16, the Revenue has preferred appeal only against the action of the Ld. CIT(A) deleting the addition on account of unaccounted cash payments u/s 69C of the Act. Both the sides, therefore, agreed that the AY 2018-19 may be taken as the lead case and the result of which shall be followed in all the earlier assessment years with regard to their respective issues. For A.Y 2018-19, the Revenue has preferred the following grounds which are as under:-

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1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition made u/s 69C of the Act without appreciating the fact that the key employees of the company handling the cash related matter have accepted the payment of the same in their statements given u/s 132(4) of the Act during the course of the search proceedings.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made u/s 69 of the Act on the basis of retraction of the employees who had given their statements during the course of search proceedings u/s 132(4) of the Act for the reasons that the statement given by them under coercion and threat, however, they failed to give any evidence of the reason given by them for their retraction.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made u/s 69 of the Act without appreciating the decision of the Hon'ble Apex Court in the case of Bannalal Jat Construction (P) Ltd Vs Assistant Commissioner of Income-tax wherein it had been held that the statement recorded during the course of search action which was in presence of independent witnesses having overriding effect over the subsequent retraction.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance u/s 14A of the IT Act as there was no exempt income received by the assessee during the year under consideration without appreciating the Circular No. 5 of 2014 dated 11.02.2014 of CBDT

4. First, we will take up Ground Nos. 1 to 3 which are common in all the years wherein the Revenue has assailed the action of the Ld. CIT(A) deleting the addition of Rs.4,80,00,000/- made by the AO u/s 69C of the Act. Brief facts are that, the assessee is a Private Limited Company which is engaged in the business of providing project and business support services and leasing of premises. In the year under consideration, the company had earned income by way of license fees, rent, compensation, maintenance cost recovery, business support fees, management consultant fees, royalty, interest, sale of scrap, etc. The AO noted that, in the course of search conducted u/s 132 of the Act at the premises of M/s K Raheja group (hereinafter Raheja group) on 30-11-2017, the Investigation authorities had recorded the statements of four (4) senior level officers of the Raheja group under

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Section 132(4) of the Act, viz. (1) Shri Anand Chandan (VP-Finance), (2) Shri Nikhil R Mehta (VP - Architect), (3) Shri Manoj J Shah (DGM - Architect & Liaison) (4) Shri Amogh R Patankar (VP - Planning and Strategy). Their statements were recorded over several days spanning from 02-12-2017 to 05-12- 2017, copies of which are available at Pages 1 to 47 of the paper book. It is noted that the AO in his assessment orders, has extensively referred to these statements in which these persons had stated that cash was being arranged for extending favours to authorities in connection with their real estate projects. According to the AO, these statements revealed that the assessee was expending Rs.40,00,000/- per month in cash for performing liaison work and therefore required the assessee to explain its nature & source and why the same should not be added to the total income by way of unexplained expenditure u/s 69C of the Act. In response, the assessee had pointed out to the AO, that when confronted with these statements, Mr. Rajesh Sidhwani (Senior Manager-Banking), who was named by the four (4) aforementioned employees of the Raheja Group, as the person who would handle and provide them with cash, had denied any cash dealings of such sort in his statement which was also recorded u/s 132(4) of the Act. It was further pointed out by the assessee that, even the promoter, Mr. Neel Raheja had refuted these statements and stated that the Raheja group/assessee was not into handling any cash for liaisoning work or any other works. The assessee also furnished the retraction statements of these employees before the AO, which they had sworn before the Notary Public on 15.12.2017. It was further pointed out by the assessee that, had it been a case that the assessee was regularly handling cash for liaison

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work, then excess cash ought to have been found on the date of search. According to the assessee, however, the physical cash found by the Investigating authorities and the cash as per the books of accounts reconciled, and that there was no excess cash found. It was thus contended by the assessee that, the statements of these four employees were not reliable as they were not backed by any corroborative evidence and therefore no addition was warranted. In this factual background, the AO summoned each of these four employees who had retracted their statements and cross-examined them on oath. Upon examination, each of these employees stood by their retraction statements and stated that the statements u/s 132(4) of the Act were recorded under duress and coercion. They affirmed that there were no cash favours extended by them for undertaking liaisoning work. The AO however did not agree with the same. Primarily relying on the statement of Mr. Chandan, the AO concluded that the assessee was indeed incurring cash expenses of Rs.40 lakhs per month towards liaisoning work which were not accounted for in the books; and accordingly he extrapolated the same across all seven AYs 2012-13 to 2018-19 and added Rs.4,80,00,000/- as unexplained expenditure u/s 69C of the Act in each of these years. Aggrieved by the order of the AO, the assessee preferred appeals before the Ld. CIT(A) who deleted the addition made by the AO. The Revenue is now in appeal before us.

5. Assailing the action of the Ld. CIT(A), the Ld. CIT-DR appearing on behalf of the Revenue supported the action of the AO. He contended that the four(4) different employees of the assessee had originally admitted to making cash

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payments for liaison work on behalf of assessee and therefore according to him it was erroneous on the part of the Ld. CIT(A) to simply brush aside their original statements. According to the Ld. CIT-DR an admission made u/s 132(4) of the Act was an important piece of evidence in itself and therefore, according to him, the AO had rightly made addition u/s 69C of the Act by relying on such statements. Taking us through the statements given by the four persons, the Ld. CIT-DR pointed out that these employees had categorically stated that they used to go to the local authorities for obtaining approvals for the projects undertaken by the Group as a whole. According to the Ld. CIT-DR, it is quite common knowledge that in order to get clearance for the projects, developers are required to make gratuitous payments or otherwise the projects will get stuck. According to him, the assessee in question was tasked by the Group for getting clearances for the various projects being undertaken by the other entities of the Group. The Ld. CIT-DR thus submitted that it was based on such inputs that the Investigating Wing had undertaken the search operation u/s 132 of the Act and when the employees were interrogated they admitted that they were undertaking liaison work for obtaining approval for the projects undertaken by the Group and the demands of the local authorities/officers were being fulfilled after obtaining sanction/payment from the management. The CIT-DR submitted that, although these statements by the four employees were retracted by them later, but such retraction was shown to the AO only at the fag end of the assessment proceedings. The Ld. CIT-DR contended that these retraction statements were given before the notary public and not before the AO and that the subsequent statements given by these employees before the AO

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were only an after-thought. According to him, the delay in furnishing the retraction statements before the AO cast doubt on the genuineness of the retraction itself and therefore, according to him, these retraction statements deserve to be ignored. He thus contended that the AO had rightly taken note of the statements recorded u/s 132(4) of the Act to make the additions u/s 69C of the Act. According to the Ld. CIT-DR, the modus operandi revealed by the four employees of the assessee clearly showed that this liaison activity and consequent cash payments had being going on for a long time and therefore the AO had rightly inferred that these gratuitous payments of Rs.40 lakhs per month tendered to the officials for getting the approvals for the projects had been made in earlier years as well. So, according to Ld. CIT-DR, the AO had rightly extrapolated the addition of Rs.4,80,00,000/- made u/s 69C of the Act in AY 2018-19 in earlier years as well. He thus contended that the order of the Ld. CIT(A) be reversed and that of the AO be restored. Per contra, the Ld. AR appearing on behalf of the assessee mainly relied on the finding recorded by the Ld. CIT(A) which will be discussed (infra) in detail.

6. We have heard both the parties and perused the material on record. As stated above, we take AY 2018-19 to be the lead AY. The main thrust of the Revenue's argument is that the addition made by the AO u/s 69C of the Act was justified as it was made on the basis of the statements given by four employees in the course of search u/s 132(4) of the Act which is an important piece of evidence in itself and that their subsequent retraction was of no relevance. In order to adjudicate this

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contention, it is first relevant to examine the extant provisions of Section 132(4) of the Act which reads as follows:

"(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.

Explanation.—For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act."

7. From a bare reading of the aforesaid provision it reveals that during the course of search proceedings, Section 132(4) of the Act empowers the authorized officer (of search team), to examine on oath any person who is found to be in possession or control of any books of account, documents, money etc; and such a statement made by that person may thereafter be used in evidence in any proceedings under the Act. So such a statement recorded on oath of a person found to be in possession or control of any books, document, money, valuable thing during the course of search is relevant evidence which can be used as evidence in any proceeding under the Act. So if a statement qualifies as per section 132(4) of the Act, then it can be used as evidence in any proceedings of the Act. So next question is what is evidence ? Evidence is a mode or means to prove a fact-in- issue. Statement is an oral testimony of relevant fact; and an admission of a fact- in-issue is an important piece of evidence provided it has been voluntarily given

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without any inducement, promise, threat or coercion. If it is tainted by any of these physical or mental influences, then the statement loses its probative value and it is not safe to rely solely on the basis of it. Once a statement recorded of a person who is in possession of any valuable thing or control of books found during search then it can be used as evidence in any proceedings under the Act and the presumption would be that it has been given by that person voluntarily. The burden to prove that the statement is not voluntarily obtained, but due to threat, coercion, promise etc, is upon the maker of statement. And such a burden would be discharged, if the maker of the statement is able to create "reasonable doubt" that the admission made in respect of fact-in-issue was not voluntary or was obtained by threat or coercion or inducement, then the onus shifts on the shoulder of Revenue to prove that statement was taken voluntarily. For that it is always emphasized that such statement may be recorded before independent/respectful witnesses. In this context, the Hon'ble Apex Court in the case of Pullengole Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18) has held that although an admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It was held that, it is open to the assessee who made the admission to show that it is incorrect. The same view has been expressed by the Hon'ble Supreme Court in the case of Sarwan Singh Rattan Singh v. State Of Punjab AIR 1957 SC 637 where it was observed that admission is not conclusive as to the truth of the matters stated therein. It is only a piece of evidence, and the weight to be attached to it must

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depend on the circumstances in which it is made. It is open for the assessee to show it to be erroneous or untrue.

8. Hence, the position which emerges is that a statement u/s 132(4) of the Act by itself cannot be reason enough to justify an addition if the assessee is able to raise a reasonable doubt that it was obtained by threat or coercion or able to prove that the facts admitted by him was purely based on wrong assumption of facts and able to adduce evidence/material to show that he was wrong on the facts he admitted. The maker of statement can later explain the circumstance which led him to make the admission and bring out the correct facts and rebut the facts stated in the admission and in that way retract from the admission made by him u/s 132(4) of the Act. The settled position of law on this is that admission legally made by a person u/s 132(4) of the Act is relevant evidence in any proceedings of the Act and if that person later explain the circumstances which led him to make such a statement which raises 'reasonable doubt' that the admission was obtained by threat or inducement, or the admission was based on wrong assumption of facts (and able to show/prove that assertion) then it would be unsafe to rely solely on the "retracted admission" without independent corroboration. So when an admission u/s 132(4) of the Act has been retracted on the aforesaid reasons, then the AO should cross-examine the person again to ascertain the correct facts and conduct proper investigation into the affairs of the assessee and gather corroborative material which would negate such retraction and prove that the facts admitted originally is correct facts and thus retraction can be discarded. Otherwise,

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an addition made solely on the basis of a statement which has been subsequently retracted, and is not backed by corroborative evidence, may not be sustainable. For this, we may gainfully refer to the Instruction F.No.286/2/2003-IT (Inv. II), dated 10-3-2003 issued by the CBDT to the Assessing Officers:

"Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of search and seizure and survey operations. Such confession, if not based upon credible evidence, are later retracted by the concerned assessee while filing returns of income. In these circumstances, such confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. Similarly, while recording statement during the course of search and seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.

Further, in respect of pending assessment proceedings also, Assessing Officers should rely upon the evidences/materials gathered during the course of search/survey operations of thereafter while framing the relevant assessment orders."

9. This view was again reiterated by the CBDT in their Circular No. F.NO.286/98/2013-IT (INV.II)], dtd 18-12-2014 which read as follows:

"Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light.

2. I am further directed to invite your attention to the Instructions/Guidelines issued by CBDT from time to time, as referred above, through which the Board has emphasized upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence.

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3. In view of the above, while reiterating the aforesaid guidelines of the Board, I am directed to convey that any instance of undue influence/coercion in the recording of the statement during Search/Survey/Other proceeding under the I.T.Act,1961 and/or recording a disclosure of undisclosed income under undue pressure/ coercion shall be viewed by the Board adversely.

4. These guidelines may be brought to the notice of all concerned in your Region for strict compliance.

5. I have been further directed to request you to closely observe/oversee the actions of the officers functioning under you in this regard.

6. This issues with approval of the Chairperson, CBDT.

10. In view of the above position of law, we now proceed to examine the given facts of the present case and whether the statements of the four employees recorded in the course of search did constitute sufficient material on their own to justify the impugned addition and whether their subsequent retractions could be entertained or not. In the present case, it is noted that the K Raheja Group was subjected to search action u/s 132 of the Act on 30-11-2017 which went on for seven days and was concluded on 06-12-2017. The Ld. AR took us through the original statements of each of the four employees, from which it is noted that these employees had been interrogated over several days and the chronological sequence of the statements showed that they had been continuously questioned over several days. For instance, Mr. Nikhil Mehta (VP-Architect) was being examined from the date of search, i.e. 30.11.2017, and his statement was recorded over several days and the interrogation finally concluded after four days i.e. 03.12.2017. Similarly, Mr. Anand Chandan (Associate VP-Finance) whose statement forms the basis of the impugned addition, was continuously questioned over three days (began on

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02.12.2017 and ended on 04.12.2017). The Ld. AR pointed out that Mr. Amogh Patankar, who was on leave and in Kolhapur on 01.12.2017, had been summoned by the Investigating Officer and that after travelling continuously for several hours, he had reached the office at 4 p.m. He was immediately interrogated for several hours on the same date and his statement was recorded. Having regard to these facts and surrounding circumstances, the Ld. AR contended that these statement which were recorded during the search proceedings continued for long periods. He submitted that it is common knowledge that in a search, employees or individuals are continuously interrogated and questioned for several hours at a stretch (which in the present case was days) and therefore many a times the said individuals would give involuntary statement solely with the intent to put an end to the agony of interrogation. So, according to him, when it is found as fact that a statement has been recorded after days of interrogation, one has to carefully examine and ascertain whether the statement was given involuntarily. The Ld. AR pointed out that, it was in this background that the CBDT had issued the Instructions (supra) wherein the field officers were instructed to gather evidence in search to justify addition/disallowance rather than solely relying on admissions given in statements obtained under duress or coercion. Adverting to the facts of the present case, he stated that, it was a matter of that the four (4) employees, on whose statements the AO had relied upon, had been interrogated for days and therefore, according to him, the prolonged examination led them to the make involuntary statements. Referring to the questions put to these four employees, he pointed out that leading

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questions had been put to these employees and therefore having regard to the prolonged interrogation and surrounding circumstances, these employees had involuntarily given pre-determined answers to these leading questions to get out of the harassment of interrogation. Having regard to these aforesaid circumstances, we take note of the decision rendered by the coordinate Bench of this Tribunal in the case of Deepchand & Co. v. Asstt. CIT (51 TTJ 421) wherein on similar facts it was held that the statements recorded over undue long periods of time can be successfully retracted contending the same was recorded under pressure and force and not while in the proper frame of mind. Gainful reference may also be to the decision of the Hon'ble Gujarat High Court in the cash of Kailashben M. Chokshi (328 ITR 411) relied upon by the Ld. AR of the assessee, wherein also the statements that were recorded at odd hours were held to be taken under duress, particularly when such statement was not backed by any corroborative material or evidence found in the course of search. The relevant findings are as follows:

"22…..It is true that in normal circumstances this Court would not interfere in the finding of fact arrived at by the authorities. It is, however, to be seen as to whether the explanation tendered by the assessee would be considered by the authorities below. It is also to be seen as to whether an addition made is merely based on the statement recorded by the Assessing Officer under section 132(4) of the Act and whether any cognizance may be taken of the retracted statement. So far as case on hand is concerned, the glaring fact required to be noted is that the statement of the assessee was recorded under section 132(4) of the Act at mid night. In normal circumstances, it is too much to give any credit to the statement recorded at such odd hours. The person may not be in a position to make any correct or conscious disclosure in a statement if such statement is recorded at such odd hours. Moreover, this statement was retracted after two months.

23. The main grievance of the Assessing Officer was that the statement was not retracted immediately and it was done after two months. It was an afterthought and made under legal advise. However, if such retraction is to be viewed in light of the evidence furnished along with the affidavit, it would immediately be clear that the assessee has given proper explanation for all the items under which

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disclosure was sought to be obtained from the assessee………..….There was, therefore, no reason for making addition of Rs. 4 lakhs on the basis of alleged disclosure made by the assessee in his statement recorded under section 132(4) of the Act. In support of this statement the Revenue has not brought any evidence whatsoever which would establish that the assessee had in fact incurred an amount of Rs. 4 lakhs on the construction of the first floor and that amount was invested out of the undisclosed income. Hence there is no justification for making account of Rs. 4 lakhs merely on the basis of statement recorded under section 132 (4). None of the authorities have considered this explanation and the CIT(A) as well as Tribunal both have proceeded on the footing that the Assessing Officer has considered the explanation.

26. In view of what has been stated hereinabove we are of the view that this explanation seems to be more convincing, has not been considered by the authorities below and additions were made and/or confirmed merely on the basis of statement recorded under section 132(4) of the Act. Despite the fact that the said statement was later on retracted no evidence has been led by the Revenue authority. We are, therefore, of the view that merely on the basis of admission the assessee could not have been subjected to such additions unless and until, some corroborative evidence is found in support of such admission. We are also of the view that from the statement recorded at such odd hours cannot be considered to be a voluntary statement, if it is subsequently retracted and necessary evidence is led contrary to such admission. Hence there is no reason not to disbelieve the retraction made by the Assessing Officer and explanation duly supported by the evidence. We are, therefore, of the view that the Tribunal was not justified in making addition of Rs. 6 lakhs on the basis of statement recorded by the Assessing Officer under section 132(4) of the Act. The Tribunal has committed an error in ignoring the retraction made by the assessee."

11. The Ld. AR thereafter took us through the contents of the original statements of these four employees to demonstrate the factual infirmities and inconsistencies therein, which according to the Ld. AR, showed that they were recorded under duress and undue influence. It was brought to our notice that, Mr. Nikhil Mehta was the Vice President, Architect and that Mr. Manoj Shah was the DGM - Architect and Liaison. Mr. Manoj Shah had admitted to have been working under Mr. Nikhil Mehta. Mr. Manoj Shah in his statement had stated in his Answer to Q No. 13 that he was responsible for handling the cash matters. According to his Answer to Q No. 11, he would discuss the requirements of the local authorities

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with his senior, Mr. Nikhil Mehta who in turn would discuss with his senior, Mr. K Bhatija who would sanction the payments, which would range between Rs.3-5 lakhs per approval for each project. In the backdrop of such an averment, the Ld. AR wondered as to how he (Manoj Shah) was not able to spell out the specific details of even one project, for which he had dealt with local authorities and got it completed, which could have supported the so-called modus-operandi which he explained to the Investigating Officer. According to the Ld. AR, if the statement of Shri Manoj Shah is taken at its face value, then according to Mr. Shah, he was responsible for negotiating with local authorities, estimating the expected gratuitous payments to be made, conveying it to seniors, obtaining sanction for the same and thereafter handling the cash. The Ld. AR however brought to our notice that apart from stating general modus operandi, the statement of Mr. Shah did not even contain a whisper of any specific details viz., the specific approvals for which such sums were being purportedly paid, or the names of the specific projects, or the projected/sanction amount qua any one of such project for which payments had been made or the name/designation of the concerned authority to whom payments were made etc. The Ld. AR pointed out that Mr. Shah had initially stated that he himself was handing the cash at the ground level and liaisoning with the concerned authorities, but later on, in the same statement, he averred that he did not maintain any accounts nor did he have any details whatsoever of the actual cash expended by him. This purported statement of Shri Manoj Shah according to the Ld. AR was extracted under duress and for that reason it does not contain any specific details concerning the assessee, as according to him, no such modus operandi was being

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undertaken by the assessee. Taking us through the statement, the Ld. AR submitted that there were only general averments in the statement regarding the alleged misconception of corruption in the society and that ad-hoc figures were mentioned therein which had no basis what so ever. Per se the statement according to the Ld. AR, was hollow and therefore cannot be used to draw adverse inference in any manner against the assessee, particularly in the absence of any evidence or material to corroborate these empty allegations. Therefore, according to the Ld. AR, Shri Manoj Shah's statement was bald and bereft of any factual basis and so it deserves to be ignored and no weight be given to it.

12. The Ld. AR thereafter took us through the statement of Mr. Manoj Shah's senior, Mr. Nikhil Mehta, and he pointed that Mr. Nikhil Mehta's version differed from that of his junior, Mr. Manoj Shah. For instance, in his Answer to Q No. 18, he had stated that it was difficult for him to assign any specific amount of gratification for each approval. Instead, according to him, the cash payments were not approval wise but paid month on month, which ranged from Rs.8-10 lakhs. Surprisingly, just like Mr. Manoj Shah, even Mr. Nikhil Mehta did not name the specific projects for which payments were being made nor did he name the persons to whom such cash payments were being made. The Ld. AR submitted that, Mr. Nikhil Mehta was an old employee of the company holding the position of Vice- President and therefore it was highly unusual that he was unable to provide any of these details, but he was able to conveniently do the math and state that monthly payment ranged from Rs.8-10 lakhs. According to the Ld. AR, these

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inconsistencies in the statement fortified his contention that the statements reflected the version of the Department which the employees were pressured to accept and sign. So according to the Ld. AR, the aforementioned statement cannot be taken as a voluntary statement and also cannot be taken as a sole basis to act against the assessee and therefore it has to be discarded.

13. Taking us through the statement of Mr. Amogh Patankar who was the Vice President of Planning & Strategy, the Ld. AR pointed out similar fallacies and inconsistencies, as was noted in the statements of Mr. Nikhil Mehta and Mr. Manoj Shah. In response to Q No. 16, Mr. Amogh Patankar stated that he would inform the requests of the officials to Mr. Rajesh Sidhwani, Senior Manager, Banking, who would then sanction his request and inform him whether to honour the requests made by the officials or not. According to Ld. AR, this averment is appalling for the reason that Mr. Amogh Patankar, VP was senior to Mr. Rajesh Sidhwani, Senior Manager and therefore it was unusual for a VP to seek permission/sanction of a manager. The Ld. AR then took us through the answers given by him to Q. Nos. 17 to 21, wherein even Mr. Amogh Patankar denied having maintained the details such as the requests received, authorities to whom payments were made, projects in relation to which these requests were entertained etc. Mr. Amogh Patankar also did not maintain any records of the monies received from Mr. Rajesh Sidhwani and purportedly paid to the officials. The Ld. AR thus pointed out that even this statement was made on the same lines and exhibiting the

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same pattern as the statement of Mr. Nikhil Mehta and Mr. Manoj Shah which contained vague and empty allegations.

14. As regards the statement of Mr. Anand Chandan, Associate VP - Finance, which formed the basis of the impugned addition, the Ld. AR pointed out that, according to his statement, Mr. Anand Chandan would arrange cash from Mr. Rajesh Sidhwani after obtaining approval from the promoters i.e. Mr. N Raheja and would then hand it over to Mr. Mehta, Mr. Manoj Shah and Mr. Amogh Patankar for making onward payments. According to Mr. Chandan, Mr. Nikhil Mehta, Mr. Manoj Shah and Mr. Amogh Patankar, would communicate their requests to him, and he in turn would seek the consent of the promoters. This averment in particular, according to Ld. AR, is in contradiction to the statements of Mr. Mehta, Mr. Manoj Shah and Mr. Amogh Patankar, as none of them have named Mr. Anand Chandan, as their go-to person in their statements. Mr. Nikhil Mehta & Mr. Manoj Shah state that they would communicate with Mr. K. Bhatija whereas Mr. Amogh Patankar stated that he would directly communicate with Mr. Rajesh Sidhwani. These inconsistencies, according to the Ld. AR, raised serious doubt on the correctness of this statement and the purported modus-operandi itself is in question. He thus contended that this statement cannot be the bedrock on which addition could have been made and it is quite unsafe to do so. He pointed out that, according to the statement of Mr. Anand Chandan, his role was always that of an intermediary, who would receive cash from Mr. Rajesh Sidhwani and would hand

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it over to the other three employees. However, according to Ld. AR even he did not maintain any records nor was he aware of any specific details. Instead, Mr. Anand Chandan vaguely stated that a sum of Rs.35-45 lakhs per month was expended towards liaisoning expenses. According to him, the source of such expenses to the extent of Rs.10 lakhs was out of the cash withdrawals from the accounts of the promoters and that the source of the balance sum was unknown to him, but within the knowledge of Mr. Rajesh Sidhwani and the promoters. Again, even Mr. Anand Chandan did not provide the specific details of such liaisoning expenses such as the name of project, nature of approval, concerned payee, quantum of payment, etc. which he ought to have had known and divulged had such liaisoning expenses been genuinely made by the assessee.

15. In view of the above discussion, according to the Ld. AR, these statements relied upon by the AO to justify the addition impugned in these grounds were not only general and vague but factually inconsistent as well. He therefore submitted that the Ld. CIT(A) had rightly discarded these statements, in as much as even if they were considered at their face value, these statements in itself did not contain any evidence or material which could be used against the assessee to justify the addition made u/s 69C of the Act.

16. It is further noted that, the testimonies of the four employees which are the substratum of the addition has been retracted within seven (7) days, which is evident from the affidavits sworn before a Notary Public. The authenticity of the

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affidavit has not been doubted by the Revenue. According to the Ld. CIT, DR however since this affidavit was not furnished before the Assessing Officer on the same date but only in the course of assessment, it deserves to be ignored and the original statements given u/s 132(4) of the Act should be treated as the gospel truth. On the given facts therefore, the question for our consideration is, whether the original testimonies of the four employees could be acted upon when the same has been retracted and therefore stood vitiated.

17. Having carefully examined these four statements ourselves, we find that, these statements considered on their own did not in itself inspire confidence to justify the addition made by the AO u/s 69C of the Act, for the reason that not only were there apparent factual inconsistencies but also the averments made by these four employees were general in nature and none of them divulged any specific details regarding any project in relation to which these so-called gratuitous payments were being made. Even the Ld. CIT-DR was unable to rebut the inconsistencies pointed out by the Ld. AR (as outlined in the preceding paragraphs) in the statements of the four (4) employees.

18. It is also noted that each of the above four (4) employees had named Mr. Rajesh Sidhwani to be the person who was responsible for handling cash and that according to them, he would provide them with the cash for making the liaisoning expenses. We note that when Mr. Rajesh Sidhwani was confronted with the statements of these four employees, he had emphatically denied being involved in any such provision of cash for liaisoning work and gratifications. The relevant

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excerpts of his statement has been reproduced by the AO at Pages 15 of the assessment order, which is being extracted below as well, for the sake of convenience.

"Q.8 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051 the statement of Shri Nikhil Mehta, Vice President (Architect) was recorded on oath on 03.12.2017. You are requested to go through Q.No.12 to Q18 of the said Statement and offer your comments.

Ans: I have gone through the statement. I am not involved in arranging any cash for providing favours to various officials and I cannot offer any comments.

Q.9 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051 the statement of Shri Amogh Patankar [Vice President (Planning & Strategy - Industrial Infrastructure Division}, was recorded on oath on 02.12.2017. You are requested to go through Q.No.13 to Q21 and offer your comments

Ans: I have gone through the statement. I am not involved in arranging any cash for providing favours to various officials and I cannot offer any comments.

Q.10 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra: (E), Mumbai 400 051 the statement of Shri Anand Chandan [Associate Vice President (Finance)], was recorded on oath on 02.12.2617. You are requested to go: through Q.No.16 to Q31 and offer your comments.

Ans: I have gone through the statement. I am not involved in arranging any cash for providing favours to various officials and I cannot offer any comments.

Q. 11 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051, certain loose papers were found and seized paper Annexure A-22 of the Punchnama from the dustbin of your room located at 7th Floor, Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra (E), Mumbai - 400 051. Please go through Annexure A-22 and explain the contents thereon;

Ans: During the course of search, due to ill health | was hospitalized. I have gone through loose papers and confirm that they do not belong to me and J am not aware how they were lying in the dustbin.

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Q.12 In reference to your reply in Q. No.11, it can be said that your office has a very secured access and no one else is allowed to enter your office. These how can you say that you are not aware of those loose papers which were lying in your dustbin inside your office.

Ans: Sir, I have already replied in answer to Q. No. 11 that I was ill and I have no idea about the loose papers recovered from dustbin. 1 will not make any further comment in this matter."

6. 3. Though Mr. Rajesh Sadwani has denied his involvement in cash handling for liasioning work, but the statements of Mr. Anand, Chandan, Mr. Nikhil Mehta and Ma. Amogh Patankar, clearly points that he was the key person as a custodian of cash and was actively involved in handling unaccounted cash."

19. Further, according to these four (4) employees, the promoters had the final say in such matters. We note that when their statements were put before the promoter, Mr. Neel Raheja, and he denied being involved any such cash handling activities. The question put before him and answer given, is extracted and reproduced as under: -

"Q-31 During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s, K Raheja Group at Raheja Tower, Plot No.C-30, G Block, Bandra Kurla Complex, Bandra (E), Mumbai — 400 051 the statement of Shri Nikhil Ramesh chandra Mehta, Vice President (Architect) was recorded on oath u/s.132(4) of the Income-tax Act, 1961 on 03-12-2017. Please go through the statement of Shri Nikhil Ramesh chandra Mehta and confirm that you have understood the contents therein.

Ans. Sir, I have gone through the statement of Shri Nikhil Rameshchandra Mehta recorded u/s. 132(4) of the Act dated 03-12-2017 and I confirm that I understood the content thereon. Q.32 In the statements recorded on oath Shri Anand Chandan, Associate Vice President During the course of search action u/s.132 of the Income-tax Act, 1961 in the case of M/s. K Raheja Group at Raheja Tower, Plot No.C-30, G-Block, Bandra Kurla Complex, Bandra ({E), Mumbai - 400 051 the statement of Shri Anand Chandan, Associate Vice President (Finance) was recorded on oath + w/e. 132(4) of the Income-tax Act, 1961 on 02-12-2017 / 03-12-2017 & 04-12-2017. Please go through the statement of Shri. Anand Chandan and confirm that you have understood the contents therein. Ans, Sir, 1 have gone through the statement of Shri Anand Chandan recorded u/s.132(4) of the Act dated 02-12-2017 / 03-12-2017 and 04-12-2017 and confirm that I understood the content thereon."

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20. It is noted that the Revenue was unable to bring on record any post-search enquiries conducted by the Investigating authorities wherein they would have re- examined or confronted these four (4) employees, whose statements had already been refuted by Mr. Rajesh Sidhwani and Mr. Neel Raheja, the alleged key persons involved in providing funds for the alleged modus operandi of arranging & providing them with cash for liaisoning expenses. In view of the aforesaid facts, we find merit in the submissions of the Ld. AR that the statements of four (4) employees alleging that, there was a modus operandi being followed by the assessee for making gratuitous payments to local authorities in cash, was not reliable, unless there was any corroborative evidence found in the course of search to support the same.

21. In this context, we note that the Revenue has been unable to bring on record any material or evidence, found in the course of search, which would reveal details of any on-monies/unrecorded sales or bogus purchases or unrecorded cash etc. which would justify or correlate with the cash payments being allegedly made by the assessee regularly. It is also not the case of the Revenue that there was any incriminating documents or papers found from the assessee's premises, which by any manner indicated payment of any unaccounted monies. We thus find force in the Ld. AR's contention that, the AO has advocated an impossible proposition that large scale generation & payment of unaccounted monies took place without there being any corroborative evidence to support, viz. some unrecorded sales, undisclosed bank accounts or unrecorded cash found etc. Had the assessee been

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earning and spending such huge unrecorded sums every month and that too regularly, it would have certainly reflected in some incriminating papers, documents or assets, which would have been found in the course of search. There is however no such evidence or material discernible from the facts on record.

22. The Ld. AR also invited our attention to the details of the cash found by the Investigating authorities and the cash appearing in the books of accounts on the date of search. He argued that, had it been a case that the assessee was regularly handling cash for liaison work, excess cash ought to have been found on the date of search. Instead, the cash as per books and the physical cash corroborated which fortified the assessee's case that the original statements of these four employees were bald and thus unreliable.

23. Having regard to the above, even if the statements of the four (4) employees are considered at their face value (ignoring the retraction, as sought by the Ld. CIT-DR), then also in our view, these original testimonies lacked probative value on account of long duration of sustained interrogation running for days and the inconsistency/contradiction brought out and discussed (supra). In the light of the infirmities discussed, we are of the view that some kind of material corroboration was required. Otherwise, such statements alone cannot be sufficient to fasten the assessee with any liability. Eventhough, on first blush, these statements may appear relevant but as noted in the foregoing on account of the infirmities and failure of the Revenue to corroborate the same with some independent evidence about the purported general modus operandi as carried out by them on behalf of assessee

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[that monies were actually paid for getting approval of projects] it is not prudent to rely on the same to drew adverse inference against the assessee. We note that the Ld.AR appearing on behalf of the assessee has brought out the apparent fallacies in these four (4) statements as discussed (supra) and the key persons who were alleged to be the main perpetrators involved in providing the monies for gratuitous payments have denied the statements of these four employees under oath in the course of search and in post search enquiries. On these facts, we thus hold that these original statements, even if considered on their own (leaving aside the retraction affidavits), lacks probative value and it is un-safe to rely on it and therefore cannot be neither the basis nor justify the impugned addition made by the AO u/s 69C of the Act.

24. Now coming to the effect of the retraction affidavits, it is noted that the retraction affidavits had been sworn before the Notary Public (within seven days of the original statement) and were submitted before the AO (albeit late). We note that after perusal of the retracted affidavits, the AO had summoned all the four employees and cross-examined them under oath. Copies of their statements recorded upon cross examination by the AO have been placed before us. Having perused the same, it is noted that each of the four employees withstood the cross examination. And each of them stood by their retraction and re-affirmed that their original statements were obtained under duress and coercion. The AO tried to but failed to extract any information or detail whatsoever in the cross-examination which would in any manner support his AO's allegation that gratuitous payments

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in cash were being made by the assessee. On these facts, we are unable to agree with the Ld. CIT-DR that the retraction statements ought to be discarded when they had stood the ground when cross-examined by AO (supra) that the statements recorded earlier was obtained involuntarily, so it is unsafe to rely on the four persons earlier statements to take an adverse view against the assessee regarding the purported gratuitous payments.

25. Therefore, on conspectus of the aforesaid facts discussed, it is noted that not only were the original statements of the four (4) employees inconsistent, unreliable and suffers from contradiction and the admission made were not backed by any corroborative evidence and these statements had also been retracted and each of the four employees were able to withstand the cross-examination of the AO. Therefore, following the Board Instructions (supra), we find ourselves in agreement with the findings of the Ld. CIT(A), that it was improper for the AO to draw adverse inference on the basis of the retracted testimonies of the four employees.

26. As for as the reliance placed by the Revenue on the decision of the Hon'ble Rajasthan High Court in the case of Bannalal Jat Constructions (P.) Ltd.Vs.

ACIT(106 taxmann.com 128)is concerned, we have perused the facts involved in the said judgment and find ourselves in agreement with the Ld. CIT(A) that the said judgment was distinguishable on facts and has been not relied by the Ld CIT(A). The relevant Para 6.9 of the Ld. CIT(A)'s order is as under:-

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"6.9 In the current case, the undisputed fact is that there are no documents relating to sourcing of funds required for meeting the demands of local authorities not there is any evidence of actual payment made to them. There is also no evidence of any internal memo / correspondence / conversation / noting in this regard. The statements given by various persons do not match with respect to either the process or the estimate of actual expenditure. In the assessment order, the AO has relied on various judicial pronouncements in support of his decision to reject the statement of promoter Neel Raheja, Rajesh Sadhwani and retracted statements of the four employees in favour of the original statements of these four persons. The assessee has objected to the reliance claiming that the facts in these cases were not identical. It is necessary to examine these cases to decided whether these cases indeed provide binding precedent in this case.

a. Bannalal Jat Construction (P.) Ltd. Vs. Assistant Commissioner of Income-tax, Central Circle-2 Ajmer {2019] 106 taxmann.com 128 (SC)/[2019] 264 Taxman 5 (SC) —In this case, the Hon'ble Supreme Courts upheld the order of the Rajasthan High Court in their order dated 31^st August 2018 [2019] 106 taxmann.com 127 (Raj.) The facts of this case aware that a, search was conducted at the business/residential the, Director of appellant company M/s. Bannalal jat Construction Private Limited 10.10.2014, in which he was also operating M/s. Bannalal Jat Contract premises of Shri Bannalal Jat inventorised. He, in his statement, recorded under section 132(4) of the Income Tax Act, 1961 during the course of search and even subsequent statement if recorded under Section 131 of the IT Act, admitted the same as undisclosed income of the appellant-company. However, subsequently while filing the return of income for the relevant assessment year, the appellant-company did not offer the said undisclosed income to tax. During assessment proceedings, the AO observed that on examination of books of account it was found that at several places there were instances of unaccounted incomes/profit, some of which were even surrendered by the assessee during the post search proceedings. He noted that in the statement of Shri Bannalal Jat recorded on 10.10.2014, in reply to question no.6, he admitted that the books of account of the appellant- company has been written up to 09.10.2014 but expenses for last 3-4 months were yet to be entered. Shri Bannalal Jat, in reply to question no.8, admitted that in his business of civil construction, he inflated various expenditure and income so generated by inflating the expenditure is in form of cash which was found at his residence and the same was not recorded in his books of accounts and he surrendered the cash so found amounting to Rs.1,21,43,210/-.

During the course of post search proceedings and after three months of search action, Shri Bannalal Jat, vide statement recorded under Section 131 on 04.12.2014 again confirmed the admission of undisclosed cash of Rs.1,21,43,210/as has already been offered under Section 132(4) of the IT Act. The CIT (Appeals) and ITAT concurred with the findings recorded by the Assessing Officer and dismissed the appeal filed by the appellant-company. The High Court upheld rejection of subsequently produced cash books / ledgers of the proprietary firm which were not produced at the time of search action doubting their correctness. The High Court observed that:

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19.Reverting back to the present case, the ITAT, on the basis of such statement of Shri Bannalal Jat, concluded that he was managing his business affairs of both his proprietary concern as well as appellant-company from his residence and that in the absence of individual cash-book of respective concerns and other details maintained by him, it is not possible to identify whether the cash so found belongs to the proprietary concern or to the assessee company. Subsequently, when the statement under Section 132(4) of the IT Act was recordeddt. 10. 10.2014, which was concluded at his residence, Shiv Bannalal Jat categorically admitted that the cash amount of Rs.1,24,43,210/- belonged his company M/s. Bannalal Jat Construction Private Limited and the same was its undisclosed income. Thereafter another statement under Section 132(4) of the IT Act was recorded at his business premises on 11.10.2014. In reply to question No. 8 he was asked to explain the source of cash amounting to Rs.3,380/- found at his office and Rs.1,21,43,210/- found at his residence that he was unable to give any explanation and admitted that he was in the business of civil construction and in such business, various expenses have been inflated and shown in the books of accounts, and that the income so generated on account of such inflation in expenses is represented in the form of cash was found at his residence.

Noting that the above statement was affirmed by Bannalal Jat once again on 04.12.2014 during the post-search proceedings, when the statement of Shri Bannalal Jat was again recorded under Section 131 of the IT Act. It was under such circumstances, that the High Court refused to accept that the retraction of the assessee was correct and valid and needed to be accepted. The High Court observed that:

The reliability, importance and sanctity of admission made during search could be refuted only by cogent and convincing evidence. We may in this connection refer to earliest judgment of the Supreme Court in Pullangode Rubber Produce Co. Ltd., (supra) wherein it was held that admission is an extremely important piece of evidence but it can't be said that it is conclusive. It is open to the person, who made admission to show that it is incorrect. The assessee should be given proper opportunity to show the correct state of affairs. The law with regard to this has developed much thereafter. There is no gainsay the fact that admission made during the search can be disputed by the assessee and at the same time however it is equally well settled that the statement made voluntarily by the assessee could form - the basis of assessment. Mere fact that the assessee retracted the statement at later point of time could not make the statement unacceptable.The burden lay on the assessee to show that the admission made by him in the statement earlier at the time of survey was wrong. Such retraction, however, should be supported by a strong evidence stating that the earlier statement was recorded under duress and coercion, and this has to have certain definite evidence to come to the conclusion that indicating that there was an element of compulsion for assessee to make such statement.

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In this case, the statement of the owner / promoter was under challenge and it related to explanation regarding source of unaccounted cash of Rs 1,21,43,210/- which had been found and seized during search action."

27. Instead, we find merit in the following decisions relied upon by the Ld. AR:

(i) Pr.CIT Vs Nageshwar Enterprises (277 Taxman 86) (Guj HC)

28. In the decided case, on the basis of information received from Department of Revenue Intelligence (DRI), search action u/s 132 of the Act was conducted upon the residential premises of the partners of the assessee firm in which one of the partners admitted to importing goods from China/Japan at undervalued figures and stated that the differential was paid in cash to the sellers. The said statement was later on retracted by the partner stating that it was obtained under duress.

29. The AO, however, by placing reliance on this statement made addition in the hands of the assessee firm. On appeal both the Ld. CIT(A) and this Tribunal deleted the addition as it was made merely on the basis of the statement which had been retracted and there was no corroborative material or evidence brought on record by the AO to justify the addition. Before the Hon'ble Gujarat High Court, the Revenue relied upon the decision in the case of M/S Bannalal Jat Constructions Pvt. Ltd. v. Acit (supra). The Hon'ble High Court noted that the facts involved this judgement was distinguishable and therefore the ratio laid down therein could not be applied to the case of the assessee. The relevant observations of the Hon'ble High Court are as follows:

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"11. The ratio of this decision is that there is a statement recorded in the course of the search proceedings and such statement is retracted and the burden is on the maker of the statement to establish that the admission in his statement was wrong and that such statement was recorded under duress and coercion. It is further brought to our notice that the decision of the Rajasthan High Court was carried in appeal by the assessee before the Supreme Court and the Supreme Court has dismissed the SLP. There need not be any debate with the proposition of law as laid down in the decision of the Rajasthan High Court, but a close look at the decision of the Rajasthan High Court would indicate that the confessional statement was not the only piece of evidence. There was no material to corroborate the statement made by the assessee in the form of confession. In the case on hand, as noted above, there is no material except the confessional statement of the assessee recorded under section 108 of the Customs Act.

12. In view of the concurrent findings recorded by both, the CIT(A) as well as the Appellate Tribunal, we are of the view that we should not disturb the finding of facts. None of the questions as proposed by the Revenue could be termed as substantial question of law."

(ii) Chetnaben J Shah Vs ITO (288 CTR 579) (Guj HC)

30. In this case, it is noted that in the course of search, the assessee had admitted in the statement u/s 132(4) of the Act that it was regularly purchasing and selling shares which were not forming part of the regular books and disclosed a sum of Rs.10,50,000/- to have been earned over the years. In the course of assessment, the assessee retracted his statement and contended that it was taken under pressure. The assessee also stated that although during the course of search, books of accounts and loose papers were found and seized, but there was no evidence unearthed which showed that the assessee was involved in the purchase and sale of shares which yielded income of Rs. 10,50,000/-. The AO however did not agree with the objections put forth by the assessee and added the impugned sum as undisclosed income of the assessee. On appeal the appellate authorities noted that there was no evidence to support the very existence of this income except the so called statement u/s 132(4) of the Act. It appreciated the contention of the assessee

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that, the said admission defied logic for the reason that why would any assessee admit any income in his statement, which admittedly the Department did not unearth from any documents or material found in the course of search. The appellate authorities accordingly deleted the addition. On appeal, the Hon'ble High Court answered the question in favour of the assessee by holding as follows:

"6. We have heard learned Counsel for the respective parties and perused the records of the case. We are of the view that the CIT (Appeals) has rightly appreciated the case based on the sound principles of law and has also considered the statement made by the assessee at the relevant point of time. We are of the view that in light of the observations made by this Court in the case of Kailashben Manharlal Chokshi (supra), mere speculation cannot be a ground for addition of income. There must be a some material substance either in the form of documents or the like to arrive at a ground for addition of income. Considering the ratio laid down in the above decision and in the facts of the present case, we are of the view that the issue raised in this Appeal is required to be answered in favour of the assessee and against the Department."

(iii)Shree Ganesh Trading Co Vs CIT (214 Taxman 262) (Jhar HC)

31. In the decided case, Mr. S had admitted undisclosed income of Rs.20 lakhs in his statement recorded u/s 132(4) of the Act in the course of search. However in the return of income filed for the relevant year, the said disclosure was not admitted and it was contended that the declaration u/s 132(4) of the Act was misconceived and divorced from real facts. The AO however added the sum of Rs.20 lakhs to the total income of the assessee by placing reliance on the statement given u/s 132(4) of the Act. On appeal the appellate authorities noted that the addition had been made by solely relying on the statement which was not backed by any corroborative evidence unearthed during the course of search. It further observed that in view of the retraction, the AO had full jurisdiction to proceed for

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further enquiry and could have collected evidence in support of alleged admission of undisclosed income of the assessee, which he failed to do. The appellate authorities accordingly deleted the addition holding that the statement alone lacked any evidentiary value. On appeal, the Hon'ble High Court upheld the order of the lower authorities by holding as under:

"6. We are of the considered opinion that statement recorded under section 132(4) of the Income Tax Act, 1961 is evidence but its reliability depends upon the facts of the case and particularly surrounding circumstances. Drawing inference from the facts is a question of law. Here in this case, all the authorities below have merely reached to the conclusion of one conclusion merely on the basis of assumption resulting into fastening of the liability upon the assessee. The statement on oath of the assessee is a piece of evidence as per section 132(4) of the Income Tax Act and when there is incriminating admission against himself, then it is required to be examined with due care and caution. In the judgement of Kailashben Manharlal Chokshi (supra), the Division Bench of Gujarat High Court has considered the issue in the facts of that case and found the explanation given by the assessee to be more convincing and that was not considered by the authorities below. Here in this case also, no specific reason has been given for rejection of the assessee's contention by which the assessee has retracted from his admission. None of the authorities gave any reason as to why Assessing Officer did not proceed further to enquire into the undisclosed income as admitted by the assessee in his statement under section 134(2) in fact situation where during the course of search, there was no recovery of assets or cash by the Department. This fact also has not been taken care of and considered by any of the authorities that in a case where there was search operation, no assets or cash was recovered from the assessee, in that situation what had prompted the assessee to make declaration of undisclosed income of Rs. 20 lakhs. Mere reading of statement of assessee is not the assessment of evidentiary value of the evidence when such statement is self-incriminating. Therefore, we are of the considered opinion that in the present case, a wrong inference had been drawn by the authorities below in holding that there was undisclosed income to the tune of Rs. 20 lakhs."

(iv) CIT Vs S.S.R.D Somany Sikshan Sansthan (201 Taxman 313) (P&H HC)

32. The facts involved in this judgement are somewhat similar to that of the present case. In the decided case also, an employee of the assessee had admitted in his statement u/s 132(4) of the Act that the salary expenses of assessee were inflated as the employees were required to refund portion of their salaries back to

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the assessee in cash. Certain other employees were also examined in the course of search but none of them admitted to any refund of salaries in cash. The said employee also later on retracted his statement by filing an affidavit. The AO however went by the original statement of the employee and disallowed salary expenses holding that assessee had inflated the same. On appeal the Ld. CIT(A) deleted the addition which was affirmed by the Hon'ble High Court by holding as follows:

"7. The Tribunal while affirming the findings of CIT(A), after elaborate discussion had concluded that the Assessing Officer was not right in holding that the assessee had inflated the expenses under the head "salary to staff". The relevant findings recorded by the Tribunal in paras 13 and 14 of its order are as under :—

"13. We have heard the rival submissions and have gone through the material available on record. We find that the ld. CIT(A) has decided this issue after discussing all the facts in proper perspective and hence we reproduce below the finding of ld. CIT(A) from page Nos. 13 to 15 of his order :— I have carefully considered the contention of the ld. counsel for the appellant and perused the relevant record. The Assessing Officer has made this addition mainly on the basis of statements of Mr. Surinder Miglani S/o Mr. Om Prakash Miglani, who was a lecturer of MBA with SSRD since August, 2005. This statement was recorded during the course of search. Though Mr. Miglani has retracted from his statement by filing affidavit before the Assessing Officer, this affidavit has not been accepted by the Assessing Officer on the ground that Mr. Surinder Miglani was not an assessee, who facing search action when his statement on oath was recorded. However, the Assessing Officer cannot be said to be justified in rejecting the sworn affidavit of Mr. Miglani on the above ground. Though I agree with the Assessing Officer that none can be allowed to retract from the statement made during the course of search, unless there was evidence to establish that such statement was recorded under duress etc., in the case of appellant, though there is apparently no evidence of such duress etc., this aspect is to be seen keeping in view the totality of the facts and circumstances. As brought out in the assessment order also, the statements of other 11 employees was also recorded during the course of search. Even the names of these persons are mentioned in para 10.2 of the assessment order. The Assessing Officer admits in the assessment order itself that all these statements were in favour of the appellant. However, he has rejected such evidence on the ground that the employees would speak in conformity with interest of their employees. However, again the Assessing Officer cannot be held to be justified in rejecting the evidence as above on this

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ground. Whereas he has based his entire assessment order on the basis of statement of one such employee, he has ignored the statement of other 11 similar employees. If the statements of all these 11 persons are considered, the adverse inference drawn by the Assessing Officer against the appellant is not sustainable.

In addition to the above evidence, the Assessing Officer has himself mentioned that he was making addition on the basis of certain circumstantial evidence. Circumstantial evidence may be important for deciding an issue in the assessment proceedings in a normal case. However, in my opinion, when an assessee is subjected to search and all the important premises are covered, there could not be any scope for making such huge additions on the basis of circumstantial evidence. Finding of blank signed cheques books of the employees have been considered for adverse inference by the Assessing Officer. However, as brought out in para 10.2 of the assessment order itself, in the statement recorded during the course of search itself, Mr. Anil Sharma Accountant of SITM has duly explained the reasons for the same. What has been stated by Mr. Anil Sharma is the consistent stand on the appellant right from the date of search. Therefore, the conclusion drawn by the Assessing Officer that the amount from the respective bank accounts of the employees is first withdrawn by the appellant and then part of it is handed over to the employees after pocketing the balance is without evidence. Not even single seized document has been discussed which showed that the appellant did not retain part of cash withdrawn from the respective bank accounts of the employees. If the version of the Assessing Officer was correct, there should have been least some evidence found during the course of search in this regard. The increase in salary from assessment years 2005-06 to 2006-07, in itself would further not constitute conclusive evidence that the appellant claimed certain in genuine expenses under the head. Keeping in view the above discussion, I am not inclined to agree with the Assessing Officer that the appellant inflated expenses under the head "Salary". Though on the basis of statement of Mr. Surinder Miglani recorded during the course of search, adverse inference could be drawn against the appellant, as far as payment of salary to him alone is concerned, keeping in view the entirely of the facts and circumstances i.e., statement of 11 other employees recorded during the course of search and the subsequent affidavit of Mr. Miglani which has been rejected by the Assessing Officer not for some good and valid reasons, it would not be appropriate even to sustain addition even in respect of salary paid to Mr. Miglani. In view of the above, addition of Rs.14,33,132 made by the Assessing Officer is, therefore,deleted.

14. From the above, we find that ld. CIT(A) has decided this issue in proper perspective because the Assessing Officer has based his conclusion on the statement of one employee whereas 11 other employees have stated in the statements that they were getting full salary as debited by the assessee in its books. We also find that the statement of one employee of Shri Miglani was also retracted by him by filing an affidavit. Under these facts we find no good reason to interfere in the order of the ld. CIT(A) on this issue and hence we uphold the same. This ground of the revenue is dismissed."

8. No perversity or illegality could be pointed out by the learned counsel for the appellant in the aforesaid findings recorded by the Tribunal. The only endeavour of the learned counsel was to

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reappreciate the evidence so as to pursuade this Court to take a different view, which is not permissible."

33. As far as the dispute regarding extrapolation is concerned viz., the AO's action of adding the sum of Rs.4,80,00,000/- estimated in AY 2018-19, in the earlier AYs 2012-13 to 2017-18 as well; we find merit in the Ld. AR's contention that, the AO had applied the theory of extrapolation simply on assumption, without bringing on record any corroborative evidence to justify the same. We note that the Hon'ble jurisdictional Bombay High Court in the case of C.J. Shah & Co. (246 ITR 671) had rejected the application of theory of extrapolation on mere assumption by the Revenue, across the entire block period, by observing as under:

"3. It is well-settled that in cases where material is detected after search and seizure operations are carried out, the Assessing Officer is required to determine the undisclosed income. In such cases additions are generally based on estimates. In matters of estimation some amount of latitude is required to be shown to the Assessing Officer, particularly when relevant documents are not forthcoming. However, it does not mean that the Assessing Officer can arrive at any figure without any basis by adopting an arbitrary method of calculation. In the present matter, A3, A4 and A6 nowhere records the turnover of the assessee as found by the Tribunal and yet on the wrong basis of the incoming and outgoing cash transactions, the Assessing Officer has arrived at the turnover. Moreover, the peak investment was Rs. 40,14,806 for three months. However, there is no material seized to justify any figure to be included for a period earlier to the said period of three months. In the circumstances, the Tribunal has recorded a finding of fact and has held that the addition of Rs. 3.40 crores was totally unjustified. The entire finding of the Tribunal is based on the facts. No substantial question of law arises. Hence, the appeal is dismissed."

34. We also find that the coordinate Bench of this Tribunal at Ahmedabad in the case of Savaliya Buildcon v. Dy. CIT (ITA No. 401/Ahd./2014 and 3188/Ahd./2014) dated 30-4-2019 on somewhat similar facts and circumstances deleted the addition/s made by the AO by extrapolating the statements of two

38

purchasers across the entire block period. The relevant findings of the Tribunal are as under:

"8.2 The statement of two purchasers is the bedrock for additions in controversy. It is an admitted position that the statements of two purchasers allegedly claiming to have paid cash money of Rs.

14.10 Lakhs in aggregate, were obtained behind the back of the assessee. The copy of the statement was not provided to the assessee at all. The cross examination of the purchasers were also not provided by the Revenue authorities despite several requests made by the assessee. Such overwhelming facts remain unrebutted on behalf of the Revenue. This being so, the action of the AO in placing reliance upon statement of third party to crucify the assessee is clearly in negation of overriding principles of natural justice which is supposed to be guiding factor in an adjudication process. Needless to say, the appropriate opportunity to an affected party is not a gift but an absolute and salutary right which cannot be simply bypassed. The infringement of basic principles of natural justice has thus vitiated the order of the AO to the core. The legitimate expectation of the assessee to seek cross examination of a person making adverse comments against the assessee to enable it to traverse the assertions cannot be shunned in sub-version of judicial propriety while weighing an issue. The right to fair hearing is a guaranteed right. Every person affected by the statement of third party has indispensible right to know the evidence used against him. The AO as well as the CIT (A) has violated this cardinal principle as squarely underscored in Kishanchand Chellaram v. CIT 125 ITR 713 (SC) and host of other decisions. Apart from a bald statement of third party loaded against the assessee which was never confronted, the Revenue has not adduced any material which could expose the falsehood in the records of the assessee despite drastic action of search. Therefore, we are unable to subscribe to the view taken by the AO for exercise of the power in a manner most beneficial to the Revenue and consequently most adverse to the assessee in total disregard of fairness in its action. From its submissions before lower authorities, the assessee has clearly demonstrated that it has repeatedly asked for cross examination of the witnesses against him. The department was thus duty bound to produce its witness for cross examination more particularly when no other tangible material is shown to be available to implicate the assessee. In the absence of any corroborating evidence and in the absence of cross examination offered, the statement of third party cannot be taken cognizance of, as it will apparently lead to miscarriage of justice. Therefore, we find total justification in the action of the CIT (A) in directing the AO to delete the estimated additions towards unaccounted receipt in respect of flats sold on the basis of some unverified and bald statement. Once such statements of the purchasers are taken out of reckoning, the edifice of estimated additions towards sale of residential flats would crumble down.

8.3 Besides, estimated cash receipts on-money of sale of all flats merely on the basis of statement of two purchasers without any tangible corroboration clearly falls in the realm of conjunctures and surmises. It is obvious that driven by misplaced suspicion, the AO has presumed the presence of on- money in respect of each of the residential flat sold. The action of the AO is a mere ipse dixit which is

39

not objectively justifiable by some inculpatory evidence. It is only elementary to say that estimation of unaccounted money cannot be made only on the basis of contemplation. The order of the AO in making additions of Rs. 3.28 Crores is thus clearly arbitrary and unsustainable in law. It is well settled that the Revenue authorities cannot base its findings on suspicions, conjunctures or surmises nor should it act on no evidence at all or on vague considerations partly on evidence and partly on suspicion, conjunctures or surmises. The Revenue could not demonstrate any material except unsupported statements of two persons. Such unverified statements without any proof towards its assertions are not a good evidence and do not raise any estoppel against the assessee. Therefore, the addition made by the AO is in the realm of speculation without any basis whatsoever. Hence, we decline to interferewith the order of the CIT (A) in so far as appeal of the Revenue is concerned."

35. For the various reasons set out above, we therefore do not see any reason to interfere with order of the Ld. CIT(A) and accordingly dismiss the Ground Nos. 1 to 3 raised by the Revenue in AY 2018-19. The same findings shall mutatis mutandis apply to Ground Nos. 1 to 3 of the appeals for AYs 2012-13 to 2017-18 as well. Hence, the Ground Nos. 1 to 3 raised by the revenue in AYs 2012-13 to 2018-19 stands dismissed.

36. Ground No. 4 of the appeal is against the Ld. CIT(A)'s action of deleting the disallowance made u/s 14A of the Act read with Rule 8D. Briefly stated, the assessee holds investments in shares of various group/associate companies, none of which yielded any exempt income in the AYs 2012-13 to 2018-19. It was the case of the assessee that, in absence of any exempt income being derived from such investments, the disallowance u/s 14A of the Act was unwarranted. The AO however relying on the CBDT Circular No. 5/2014 rejected this contention of the assessee and made disallowance u/s 14A of the Act by applying Rule 8D. On

40

appeal, the Ld. CIT(A) deleted the disallowance made by the AO. Aggrieved by the same, the Revenue is now in appeal before us.

37. At the time of hearing, the Ld. CIT, DR supported the order of the AO by relying on the CBDT Circular No. 5/2014 which states that disallowance u/s 14A of the Act is required to be made, irrespective of whether the investments yielded exempt income during the year or not. The Ld. CIT, DR further contended that a new Explanation has been inserted in Section 14A of the Act by the Finance Act, 2022, which according to him, was applicable retrospectively, and therefore urged that the order of the Ld. CIT(A) be reversed and the order of the AO be restored. Per contra, the Ld. AR of the assessee relied on the order of the Ld. CIT(A). He contended that the Explanation inserted in Section 14A of the Act has been made effective from 01.04.2022 and therefore did not apply in the relevant AYs under consideration. Relying on the judgements of the Hon'ble Supreme Court in the case of M M Aqua Technologies Ltd Vs CIT (436 ITR 582)&CIT Vs Vatika Township Pvt Ltd (367 ITR 466), wherein it has been held that any legislation which imposes new obligation or new duties or a new levy shall have to be necessarily treated as prospective in nature.

38. We have heard both the parties. Firstly, we deem it fit to deal with the CBDT Circular No.5/2014 relied upon by the Revenue. It is by now well settled in law that any Rule or Circular issued by the CBDT cannot go beyond the literal language used in the main provision. As a corollary, the computation mechanism

41

as set out in Rule 8D of Income Tax Rules 1962 (herein after the Rules), cannot go beyond the provision contained in Section 14A of the Act itself. Going by the language employed in Section 14A of the Act, the position which emerges is that, where the assessee has not earned any exempt income, there cannot be

"disallowance" of expenditure, as it would result in imposing tax on hypothetical income, which is wholly impermissible in law. We find that the Hon'ble Delhi High Court in the decision rendered in the case of Pr. CIT Vs IL&FS Energy Development Pvt Ltd (399 ITR 483) after considering the Board Circular No.5/2014, has upheld the assessee's contention that, in absence of any exempt income earned in the year in question, the disallowance u/s 14A of the Act is unwarranted. The relevant findings of the High Court is as under:

"18. The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered.

19. In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration.

20. In Redington (India) Ltd. v. Addl. CIT [2017] 392 ITR 633/77 taxmann.com 257 (Mad.), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income."…

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….

23. The decisions of the ITAT in Ratan Housing Development Ltd. (supra) and Relaxo Footwears Ltd. (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit report for the AY in question, the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position. That would not preclude the Assessee from taking a stand that no disallowance under Section 14 A of the Act was called for in the AY in question because no exempt income was earned.

24. For all of the aforementioned reasons, this Court is of the view that the CBDT Circular dated 11th May 2014 cannot override the expressed provisions of Section 14A read with Rule 8D."

39. We may also gainfully refer to the following observations of the Hon'ble Madras High Court in the case of Marg Ltd. vs CIT (120 taxmann.com 84)

wherein also the High Court rejected the proposition set out in the Board Circular No. 5/2014 and held that the disallowance of expenditure u/s 14A can never exceed the amount of exempt income so earned by the assessee. The relevant extracts of the decision are as follows:

"5. What seems to have caused this continuous problem is the CBDT Circular No. 5/2014 dated 11-2- 2014, referred to in paragraph 5 of the impugned order of the Tribunal dated 6-4-2016 before us in the present case. In that Circular, the CBDT has clarified that Rule 8D read with Section 14A of the Act provides for disallowance of expenditure even where the taxpayer in a particular year has not earned any exempt income. This argument of Revenue, which prevailed with the Tribunal, is not at all tenable.

…

12. Another Bench of Madras High Court in the case of Commissioner Of Income Tax v. Chettinad Logistics Pvt. Ltd. [2017] 80 taxmann.com 221 248 Taxman 55 wherein the Division Bench of the Court followed another Division Bench judgement in the case of Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.) and held that the view of the Central Board of Direct Taxes in Circular No. 5 of 2014 dated 11- 2-2014, which has been relied by the Tribunal in the impugned order cannot be upheld and the disallowance under section 14A of the Act cannot go beyond the extent of exempted income itself. Paragraph 12.3 of the said judgement is quoted below for ready reference.

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…….

13. …. Unfortunately, the Revenue Authority and the Tribunal have read Rule 8D without context and as an independent provision of disallowance, as if it was an island provision of law and the disallowance computed as per Rule 8D of the Rules can go beyond the exempted income itself and can be added as a taxable income in the hands of the Assessee. Such an interpretation put by Revenue Authorities is pathetic, to say the least.

14. It is well settled that the Rule cannot go beyond the main parent provision. Therefore, what has been provided as computation method in Rule 8D cannot go beyond the roof limit of section 14A itself under any circumstances. The Courts have time and again reiterated this correct, reasonable and clear position of law. But, merely to somehow make more disallowance and impose tax on the hypothetical income of the Assessee, in contrast to the concept of "real income" to be taxed as per section 5 of the Income-tax Act, the authorities under the Income-tax Act keep on adopting such absurd procedures. The disallowance to this extent, if it was to have its way, will constitute a hypothetical 'income' taxable in the hands of the Assessee, which could never be the intention of section 14A of the Act, providing for a proportionate disallowance of expenditure incurred to earn the exempted income.

…..

22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assessee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income-tax Rules, 1962."

40. It is also noted that the Hon'ble Supreme Court in its judgement dated

08.02.2019 in the case of CIT vs Oil Industry Development Board (SLP (Civil) No. 2755/2019) has dismissed the SLP filed by the Revenue against the judgement of the Hon'ble Delhi High Court dated 16.02.2018 by relying upon its decision in the case of CIT vs Essar Teleholdings Limited (2018) 3 SCC 253. The Hon'ble Delhi High Court had ruled that, in absence of any exempt income, disallowance u/s 14A of the Act of any amount was not permissible. In arriving at this

44

conclusion, the Hon'ble Delhi High Court had relied upon its earlier decision in the case of Cheminvest Ltd. vs CIT (378 ITR 33). The relevant extracts of the judgement are as under:

"1. The Revenue's appeal challenges an order of the Income Tax Appellate Tribunal (ITAT) which had set aside the disallowance of Rs. 1,62,49,000/- under Section 14A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act').

2. The Assessing Officer (AO) and later the CIT (A) made the disallowance by taking into account only the investment patterns of the assessee for the concerned assessment.

3. The ITAT relied upon the ruling of this Court in Cheminvest Limited v. Commissioner Of Income Tax-Vi [2015] 378 ITR 33 which ruled in the absence of any exempt income, disallowance under Section 14-A of the Act of any amount was not permissible. Since the decision in Cheminvest Ltd. (supra) was followed, there is no substantial question of law that requires consideration.

4. The appeal is therefore dismissed."

41. The jurisdictional Bombay High Court in the case of Pr.CIT Vs Kohinoor Project Pvt Ltd (121 taxmann.com 177) following the above judgement of Hon'ble Delhi High Court has also held that in absence of exempt income, no disallowance is warranted u/s 14A of the Act. The relevant findings of the Hon'ble High Court are as follows:

"6. Aggrieved by the reduction in the quantum of disallowance revenue preferred appeal before the Tribunal. The Tribunal considered the contention of the assessee that no exempt income was claimed by the assessee under section 14A of the Act and, therefore, no disallowance could have been made by the Assessing Officer by invoking section 14A together with Rule 8D(2)(ii) of the Income-tax Rules, 1962. Tribunal relied upon the decision of the Delhi High Court in the case of Cheminvest Limited v. Commissioner Of Income Tax-Vi [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi); the decision of the Punjab and Haryana High Court in CIT v. Lakhani Marketing Inc. [2014] 49 taxmann.com 257/226 Taxman 45 (Mag.); and decision of the Allahabad High Court in the case of Commissioner of Income-tax v. Shivam Motors (P.) Ltd. [2015] 55 taxmann.com 262/230 Taxman 63 (All.) and observed that there is uniformity in the view that in case there is no exempt income claimed by the assessee in the return of income, no

45

disallowance can be made by the revenue. Consequently, vide order dated 18-10-2016 Tribunal dismissed the appeal of the revenue."

42. The above proposition may also be viewed from another angle. It is noted that several judicial forums inter alia including the Hon'ble Supreme Court have held that the disallowance computed u/s 14A read with Rule 8D, cannot exceed the amount of exempt income. In the facts of the present case, admittedly the exempt income earned by the assessee was NIL. As a corollary, therefore, no disallowance could have been made u/s 14A of the Act. The relevant judgements in this regard, are as under:

(i) The Hon'ble Supreme Court in the case of Maxopp Investment Ltd Vs CIT(402 ITR 640) which is set out hereunder:

"40. We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT though we are not subscribing to the theory of dominant intention applied by the High Court."

(ii) The Hon'ble Delhi High Court in the case of PCIT vs DLF Home Developers Ltd. (114 taxmann.com 97) also restricted the disallowance u/s 14A to the extent of exempt income earned during the year. The relevant extracts of the said decision are as follows:

"2. As far as first issue - disallowance under Section 14A is concerned, the Court notices that the exempted income in this case is Rs. 3.17 lakhs. The Assessing Officer had disallowed Rs. 59 crores

46

which was reduced to Rs. 8 crores by the CIT(A). Following the decision of this court in Joint Investments Pvt. Ltd. v. Commissioner Of Income Tax [2015] 59 taxmann.com 295/233 Taxman 117/372 ITR 694, the ITAT restricted the disallowance to the income earned i.e. Rs. 3.17 lakhs. So, there is no infirmity in this approach. No question of law arises."

43. The SLP filed by the Revenue against the above judgement has since been dismissed by the Hon'ble Supreme Court vide its order dated 26.08.2019 (114 taxmann.com 98) and therefore the decision of Delhi High Court has attained finality.

(iii) The Hon'ble Madras High Court in the case of Chettinad Logistics Pvt Ltd. vs CIT (257 Taxman 2) observed as under:

"8. According to us, this exercise, in the given facts which emerge from the record, was clearly unnecessary, as the CIT(A) had returned the finding of fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the present appeal.

9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act.

9.1 The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.

10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year.

10.1 Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. ……..

11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, Redington (India) Ltd. v. Addl. CIT [2017] 77 taxmann.com 257 (Mad.) which was, subject matter of T.C.A.No.520 of 2016.

11.1 A Co-ordinate Bench of this Court, vide judgement dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf.

47

11.2 As a matter of fact, a perusal of the judgement would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income.

11.3 Pertinently, the Division Bench in Redington (India)Ltd. (supra) case has repelled this precise argument.

12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income.

12.1 The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked.

12.2 While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board.

……

15. However, it is, our view, as indicated above, independent of the reasoning given in Redington (India) Ltd. case (supra) that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act.

15.1 Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue."

The SLP filed by the Revenue against the above judgment has since been dismissed by the Hon'ble Supreme Court which is reported in 95 taxmann.com

250.

44. In view of the above catena of judgements, it is abundantly clear that in absence of any exempt income, no disallowance u/s 14A of the Act is permissible.

48

45. Having held so, the next question for our consideration is whether the following Explanation inserted by the Finance Act, 2022 in Section 14A of the Act is required to be retrospectively applied and fastened on the assessee or not.

"Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income."

46. In this regard, useful reference can be made to the decision of the Hon'ble Supreme Court in the case of M/s M.M. Aqua Technologies Ltd. vs. CIT (supra), in particular Para 22 thereof, wherein the Hon'ble Supreme Court has held that if the retrospectivity of a taxing statute is urged due to the use of the expression "for the removal of doubts" in the Statute, it cannot be presumed to be retrospective, if it alters or changes the law as it stood earlier. The relevant extracts of the decision of the Hon'ble Apex Court is as under:

"22. Second, a retrospective provision in a tax act which is 'for the removal of doubts' cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. vs. CIT (2005) 12 SCC 717 as follows:

17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement

49

(P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".

18. There was and is no ambiguity in the main provision of Section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word "earned" had been judicially defined in S.G. Pgnatale [(1980) 124ITR 391 (Guj)] by the High Court of Gujarat, in our view, correctly, to mean as income "arising or accruing in India". The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, "income payable for service rendered in India".

19. When the Explanation seeks to give an artificial meaning to "earned in India" and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.

23. This being the case, Explanation 3C is clarificatory - it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively, as has wrongly been held by the High Court.

24. Third, any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. Inland Revenue Commissioner (supra) as followed by judgments of this Court - See Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 at paras 60 to 70 per Kapadia, C.J. and para 333, 334 per Radhakrishnan, J."

47. According to Ld. AR, therefore the amendment brought in by Finance Act, 2022 cannot be said to be retrospective and for that proposition he cited the Constitution Bench decision of the Hon'ble Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. (supra) wherein it was held as under:

"42.1. "Notes on Clauses" appended to the Finance Bill, 2002 while proposing insertion of proviso categorically states that 'this amendment will take effect from 1.6.2002.' These become epigraphic 1 words, when seen in contradistinction to other amendments specifically stating those to be clarificatory or retrospectively depicting clear intention of the legislature. It can be seen from the same notes that a few other amendments in the Income tax Act made by the same Finance Act specifically making those amendments retrospective. For example, clause 40 seeks to amend S. 92-F. Clause (iii-

a) of S. 92-F is amended "so as to clarify that the activities mentioned in the said clause include the carrying out of any work in pursuance of a contract". (emphasis supplied). This amendment takes effect retrospectively from 01.04.2002. Various other amendments also take place retrospectively. The Notes on Clauses show that the legislature is fully aware of three concepts:

50

i) prospective amendment with effect from a fixed date;

ii) retrospective amendment with effect from a fixed anterior date; and

iii) clarificatory amendments which are retrospective in nature."

48. The above judgement of the Hon'ble Supreme Court was also taken note of by the Hon'ble Supreme Court in the case of M/s Snowtex Investment Ltd. vs. PCIT dated 30.04.2019 [Civil Appeal No(s). 4483 of 2019, Special Leave to appeal (c) No. 20017/2017] wherein the Hon'ble Supreme Court has explained the test to be applied to find out whether the intent of the Legislature/Parliament is to give retrospective operation of law and accordingly held as under:

"The Test to be applied is essentially one of the intent of the legislature.

28. In a more recent decision in Commissioner of Income Tax vs. Vatika Township Pvt. Ltd. (2015) 1 SCC 1, a Constitution Bench of this Court held thus:

29. In M/s. Vijay Industries (supra), decided on 1 March 2019, a three judge Bench of this Court held that the provisions of Section 80AB which were introduced by the Finance (No.

2) Act, 1980 with effect from 1 April 1981 could not be regarded as clarificatory in nature. The Court held that the provision was made with prospective effect and the amendment would not apply to assessment year 1979-1980 and 1980-1981 because the amended provision was brought on the statute book after the assessment years in question.

30. In conclusion, we therefore, hold that the amendment which was brought by Parliament to the Explanation to Section 73 by the Finance (No 2) Act 2014 was with effect from 1 April 2015. In its legislative wisdom, the Parliament amended Section 43(5) with effect from 1 April 2006 in relation to the business of trading in derivatives, Parliament brought about a specific amendment in the Explanation to Section 73, insofar as trading in shares is concerned, with effect from 1 April 2015 . The latter amendment was intended to take effect from the date stipulated by Parliament and we see no reason to hold either that it was clarificatory or that the intent of Parliament was to give it retrospective effect.

31. The consequence is that in A.Y. 2008-2009, the loss which occurred to the assessee as a result of its activity of trading in shares (a loss arising from the business of speculation) was not capable of

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being set off against the profits which it had earned against the business of futures and options since the latter did not constitute profits and gains of a speculative business."

49. In view of the above therefore, in order to test whether the amendment brought in Section 14A of the Act, is retrospective or not, one has to apply the test as laid by the Hon'ble Supreme Court in the case of M/s Snowtex Investment Ltd. (supra) wherein the Hon'ble Supreme Court took note of the law laid down on this issue by the Constitution Bench in M/s Vatika Township Ltd. (supra) and held that the intent of the Parliament/Legislature needs to be looked into for ascertaining whether the amendment should be retrospective or not. In the case of Vatika Township Ltd. (supra), the Hon'ble Supreme Court held that the notes on clauses appended to the Finance Bill will throw light as to the legislative intent; because it has to be borne in mind that Parliament/Legislature is aware of three concepts before an amendment is brought in, which can be discerned from reading of the

"Notes on Clauses" to the Bill which are (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature.

50. On the above touchstones, we note that the Memorandum explaining the Notes on Clauses of Finance Act, 2022 read as under:

"Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income as per the provisions of the Act (exempt income).

2.Over the years, disputes have arisen in respect of the issue whether disallowance under section 14A of the Act can be made in cases where no exempt income has accrued, arisen or received by the assessee during an assessment year.

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3.CBDT issued Circular No. 5/2014, dated 11/02/2014, clarifying that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. However, still some courts have taken a view that if there is no exempt income during a year, no disallowance under section 14A of the Act can be made for that year. Such an interpretation is not in line with the intention of the legislature. To illustrate, if during a previous year, an assessee incurs an expense of Rs.1 lakh to earn non-exempt income of Rs.1.5 lakh and also incurs an expense of 20,000/-to earn exempt income which may or may not have accrued/received during the year. By holding that provisions of section 14A of the Act does not apply in this year as the exempt income was not accrued/received during the year, it amounts to holding that Rs.20,000/-would be allowed as deduction against non-exempt income of Rs.1.5 Lakh even though this expense was not incurred wholly and exclusively for the purpose of earning non-exempt income. Such an interpretation defeats the legislative intent of both section 14A as well as section 37 of the Act.

4.In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.

5. This amendment will take effect from 1^st April, 2022.

6.It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.

7.This amendment will take effect from 1^st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years."

51. It is further noted the Notes of Clauses of Finance Act, 2022, is explicitly clear that the new Explanation will take effect from 1^stApril, 2022 and therefore will accordingly apply to the Assessment Year 2022-23 and subsequent years. The relevant Notes to Clauses are as under:

"Clause 9 seeks to amend section 14A of the Income-tax Act relating to expenditure incurred in relation to income not includible in total income. The said section, inter-alia, provides that no deduction shall be allowed in relation to income which does not form part of the total income under

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the Income-tax Act. It is proposed to amend sub-section (1) of the said section to provide that notwithstanding anything to the contrary contained in this Act, for the purpose of computing the total income, no deduction shall be allowable in respect of expenditure incurred in relation to income which does not form part of the total income.

This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not form part of the total income.

This amendment will take effect from 1st April, 2022."

52. From the above, the legislative intent is clear, the amendment brought in by the Finance Act, 2022 on this issue as discussed, will take effect from First April 2022 and not before as contended by the Ld DR. In our considered view, therefore, the new Explanation inserted in Section 14A of the Act with effect from 01-04- 2022 cannot be applied in the assessment years under consideration for the present case as it is for AYs 2016-17 to 2018-19, and therefore according to us, the decisions cited in Paras 33 to 37 above continue to hold good and are binding upon us.

53. For the reasons set out above we do not see any reason to interfere with the order of the Ld. CIT(A) on this issue and accordingly dismiss this Ground No. 4 of the Revenue in AYs 2016-17 to 2018-19.

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54. In the result, the appeals filed by the revenue are hereby dismissed. Order pronounced in the open court on 17/06/2022.

Sd/- Sd/-

(GAGAN GOYAL) (ABY T. VARKEY)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dt : 17/06/2022. Vijay Pal Singh, (Sr. PS)

आदेश की प्रतितिति अगे्रतिि/Copy of the Order forwarded to :

1. अपीलार्थी / The Appellant

2. प्रत्यर्थी / The Respondent.

3. आयकर आयुक्त(अपील) / The CIT(A)-

4. आयकर आयुक्त / CIT

5. विभागीय प्रविविवि, आयकर अपीलीय अविकरण, मुुंबई / DR, ITAT, Mumbai

6. गार्ड फाईल / Guard file.

आदेशानुसार/ BY ORDER, सत्यावपि प्रवि //True Copy// उि/सहायक िंजीकार /(Dy./Asstt. Registrar) आयकर अिीिीय अतिकरण, मुुंबई / ITAT, Mumbai