Block assessment based solely on retracted statement without seized material is invalid
Issue
Whether a block assessment addition can be sustained solely based on a Managing Director’s statement recorded under Section 132(4) which was later retracted, in the complete absence of any incriminating material seized during the search.
Facts
Search Operation: A search and seizure operation under Section 132 was conducted in the case of the assessee-company, its Managing Director (MD), and other directors.
Block Period: The assessment covered the block period from 1992-93 to 2000-01.
No Seizures: During the search, the Department did not find or seize any unaccounted money, bullion, jewelry, valuable articles, or incriminating documents from the company premises or the directors’ residences.
Sole Basis of Addition: The Assessing Officer (AO) quantified the undisclosed income and passed the block assessment order solely relying on a statement recorded from the MD under Section 132(4) during the search.
Retraction: The statement was subsequently retracted/challenged, arguing it lacked evidentiary value in the absence of corroborative material.
Decision
Lack of Corroboration: The Tribunal noted that the quantification of the assessment was done purely on the basis of the oral statement.
Requirement of Material: For a valid block assessment under Chapter XIV-B (Section 158BB/BC), there must be evidence of “undisclosed income” found as a result of the search.
Evidentiary Value: A statement recorded under Section 132(4), which is subsequently retracted and not supported by any seized asset or incriminating document, holds no evidentiary value for making additions.
Conclusion: Consequently, the statement could not be made the sole basis for tax quantification. The impugned block assessment order was set aside.
Key Takeaways
Corroboration is Mandatory: While a statement under Section 132(4) is admissible evidence, it cannot be the only evidence for block assessment additions. It must be corroborated by tangible material (money, assets, or papers) found during the search.
Retraction Validity: A retracted statement loses its evidentiary weight if the Department fails to produce independent evidence linking the assessee to tax evasion.
Scope of Undisclosed Income: “Undisclosed income” in block assessment must generally be derived from evidence unearthed during the search, not merely from confessions obtained under pressure without supporting proof.
HIGH COURT OF TELANGANA
Surabhi Shelters (P.) Ltd.
v.
Deputy Commissioner of Income-tax
P. Sam Koshy and SUDDALA CHALAPATHI RAO, JJ.
ITTAppeal No. 429 OF 2010
OCTOBER 31, 2025
Y. Ratnakar for the Appellant. Ms. B. Sapna Reddy, Ld. Sr. Standing Counsel for the Respondent.
JUDGMENT
Suddala Chalapathi Rao, J.- This appeal is filed aggrieved by the order of the Income Tax Appellate Tribunal, Hyderabad, ‘B’ Bench, Hyderabad (for short ‘the ITAT’) in IT(SS)A.No.79/HYD/2006, for the block period 1992-93 to 2000-01(up to 17.08.2000).
2. Heard Sri Y.Ratnakar, learned counsel for the appellant/assessee, Ms B.Sapna Reddy, learned Senior Standing Counsel for Income Tax Department for respondent/Revenue, and perused the record.
3. The brief facts of the case are that, the appellant/assessee is a property developer. On 17.08.2000, the respondent-authorities have conducted a search at the office premises of the appellant/assessee and also at the residential premises of its Managing Director and other directors. During search, no incriminating material relating to tax evasion was found, but, however, the statement of the Managing Director of the appellant/assessee was recorded under Section 132(4) of the Income Tax Act, 1961(for short ‘the Act’), who alleged to have disclosed an amount of Rs.1,50,00,000/- as undisclosed income in the return filed by the appellant/assessee for the disputed period, and the respondents-authorities basing on the same have quantified the income of the assessee for the block assessing period for 1992-93 to 2000-01(up to 17.08.2000), as hereunder:
| “Gross Sales of projects completed after 1997 as per accounts Add: On money estimated at 30% of the above amount not shown in the books | Rs.10,59,93,593 Rs.3,52,20,603/- |
| Rs.14,12,14,197 | |
| Income estimated at 15% on Rs.14,12,14,197/- Less: Income assessed earlier in the regular assessment | Rs. 2,11,82,129 Rs. 59,50,905 |
| Rs.1,52,31,205/- |
and thus, directed the appellant/assessee to pay tax on the said undisclosed amount.
4. Aggrieved by the same, the appellant/assessee filed appeal before the Commissioner of Income Tax Appeals (for short ‘CIT(A)’), and the same was dismissed. Aggrieved by the same, the appellant filed second appeal before the ITAT, and that the learned ITAT also dismissed the said appeal. Aggrieved by the said order, the appellant/assessee has filed the present appeal before this Court.
5. The appeal was admitted on 05.07.2010 for hearing on the following substantial questions of law as raised by the appellant/assessee in the grounds of appeal:
“1. Whether on the facts and in the circumstances of the case, the transaction and income thereon which were processed in a regular assessment made u/s.143(1)/143(3) of the IT Act can again be the subject matter of block assessment u/s.158BC of the IT Act.
2. Whether on the facts and in the circumstances of the case, it was proper on the part of the Assessing Officer to consider the gross receipts of in the block assessment when the said amount was already considered during Rs.10,59,93,593 for the purpose of once again estimating the income thereon Whether on the facts and in the circumstances of the case, it was proper the course of regular assessment
3 Whether on the facts and in the circumstances of the case, the appellant is entitled to the deduction of Rs.78,23,552 being the income already Whether on the facts and in the circumstances of the case, the appellant computed in the regular assessment from the block assessment income and not merely Rs.59,50,905 which is a part of the income assessed in the regular assessments.
4. Whether on the facts and in the circumstances of the case, is the appellant liable to tax on receipt of Rs.2,53,48,067 when the said amount was processed for quantification of income up to the assessment year 1997-98 under the Mar Varad Samedhan Scheme. VDIS
5. Whether on the facts and in the circumstances of the case, it is open to the Income-tax Appellate Tribunal which is a fact finding authority to ignore the submissions advanced before it while dispose of the appeal.
6. Whether on the facts and in the circumstances of the case, the finding the Income-tax Appellate Tribunal that the statement of the appellant agreeing to disclose undisclosed income of Rs.1.5 Crores can be said to be voluntary and relevant when the income in the block assessment itself was computed independent of the statement given by the appellant.”
6. Considering the above questions of law, though a specific question of law was not framed, the main question of law that arises for consideration before this Court is:
Whether the finding of the Income Tax Appellate Tribunal that the statement recorded u/s.132(4) of the Act of the Managing Director of the appellant/assessee in respect of undisclosed income of Rs.1.5 crores, can be made basis for quantification, more so when the said statement was retracted, without there being any seizure of incriminating material or documents found in the course of search?
7. The learned counsel for the appellant/assessee submits that during the search conducted on 17.08.2000, at the business premises of the assessee as well as the residences of its Managing Director and other directors, no incriminating material or documents were found and as such, the statement recorded under Section 132(4) of the Act of the Managing Director has no evidentiary value, as it was subsequently retracted stating that it was obtained under coercion and threat.
8. It is further argued that the disclosure made in the said statement was extracted in a leading ‘question and answer’ format, dictated by the search authorities, and thus, lacks voluntariness. Accordingly, the block assessment order passed by the Assessing Officer, as confirmed by the appellate authorities, are both non-est in the eye of law. Therefore, any addition to income or quantification of amounts solely on the basis of such a statement is unsustainable in law and liable to be set aside.
9. Learned counsel for the appellant relied on CBDT Circular No. 286/2/2003-IT (INV), dated 10.03.2003, as to the confessions made during search and seizure or survey operations. The Circular acknowledges that assessees often retract such confessions on the grounds of coercion and the CBDT emphasizes that disclosure of undisclosed income must be based on credible evidence, but not merely on statements obtained during search. It further directed that no attempt should be made to extract confessions and instead efforts should be made on gathering evidence. On a perusal of the said circular it further clarified that it applies to all pending assessments, and in the instant case also the authorities are bound by it.
10. Reliance is also placed by the learned counsel for the appellant/assessee on the judgment of a Division Bench of erstwhile High Court of Andhra Pradesh in CIT v. Naresh Kumar Agarwal (T & AP), wherein it was held that statements recorded under Section 132(4) cannot be treated as conclusive evidence and are akin to statements recorded under Section 162 of the Cr.P.C, and such statements may assist in initiating proceedings but cannot independently justify penal consequences, unless corroborated by substantive evidence and incriminating material.
11. Learned counsel for the appellant/assessee further contended that the Division Bench, in its observations, has categorically held that the burden of proof lies on the Department to substantiate its claims and that such burden can only be discharged through independent and corroborative material, beyond the contents of any statement made during the search. He further contended that the statement under Section 132(4) assumes the character of a proven fact only when it is not disputed or retracted by the assessee, and in cases where the statement is retracted, the Assessing Officer is required to independently establish the Department’s case through cogent evidence and a retracted statement, by itself, cannot form the sole basis for an assessment under Section 158BC of the Act.
12. The appellant also placed reliance on the judgment of the erstwhile High Court of Andhra Pradesh in CIT v. Sree Ramdas Motor Transport (Andhra Pradesh)/[1999] 238 ITR 177 (Andhra Pradesh), wherein it was held that the authority has power to examine a person under Section 132(4) of the Act only when the authorized officer finds such person in possession of undisclosed income, books of account, bullion, or other incriminating material, and in the instant case, the Department failed to recover any unaccounted cash, bullion, valuables, or incriminating documents from either the company premises or the residences of its directors, including the Managing Director. Therefore, the statement of the Managing Director recorded under Section 132(4) violates the CBDT Circular, dated 10.03.2003, and more so the said statement, if retracted, lacks evidentiary value and cannot form basis for such quantification.
13. Per contra, the learned Senior Standing Counsel for the respondent/Revenue submits that the confession made by the Managing Director during the course of search was voluntary, and though the said statement was retracted after approximately 5% months, such delay in retraction stating that it was obtained by coercion is untenable, and as such, the original confession remains admissible for the purposes of quantification of undisclosed income, and thus, the order of assessment passed by the Assessing Authority for the block period as well as the orders passed by both the Appellate Authorities in affirming the order of Assessing Authority, are valid.
14. The respondent/Revenue also relied on the judgment of a Division Bench of this Court in Smt. Konda Sanjeeva Rani v. Asstt. CIT (Telangana), wherein it was held that statements recorded on oath under Section 132(4) of the Act carry evidentiary value, unless the assessee successfully pleads and proves that the statement was obtained by coercion, undue influence, or threat. It is contended that in the present case, the assessee has failed to discharge the burden of establishing that the statement made by the Managing Director was either false or made under coercion. No supporting material or attempt has been made in that regard by producing contra evidence. As such, the statement recorded under Section 132(4) is admissible and can be used against the assessee for quantification of undisclosed amount in the block assessment.
15. We have given earnest consideration to the submissions made on either side. Perused the record.
16. Before delving into the matter, it is appropriate to refer to Section 27 of the Indian Evidence Act, 1872(Old), which deals with admissibility of a confession made to a police officer, if it leads to discovery of material evidence, thereby giving an exception to the general rule that confessions made to a police officer are inadmissible. This principle of the Indian Evidence Act, 1872 (old) is vis-a-vis applicable to the confessions recorded under Section 132(4) of the Act and this cardinal principle of law is the genesis and foundation of any statute for uniform procedure for its applicability.
17. On 09.09.2025, this Court directed the learned Senior Standing Counsel for respondent/Revenue to produce the copy of the panchanama, so as to verify, whether it contained any seizure of incrementing material or documents, but the same was not produced before this Court, except contending that in the order of the CIT(A), a reference was made to seizure of books of accounts. Thus, in the absence of the panchanama being produced before us, the reference in the order of CIT(A), does not deserve merit.
18. The fact remains that, no incriminating material was seized during the course of search on 17.08.2000 and the quantification was made basing on the confessional statement of the Managing Director recorded under Section 132(4) of the Act, who alleged to have disclosed an undisclosed profit of Rs.1,50,00,000/-.
19. In Pr. CIT v. Abhisar Buildwell (P.) Ltd (SC)/(2024) 2 SCC 433 the Apex Court while upholding the ratio of Hon’ble Delhi High Court’s in CIT v. Kabul Chawla (Delhi)/[2016] 380 ITR 573 (Delhi) and Hon’ble Gujarat High Court in CIT v. Saumya Construction (P) Ltd. (Gujarat)/[2016] 387 ITR 529 (Gujarat) held that for completed or unabated assessments, the Revenue has no jurisdiction under Section 153A or 153C of the Act, in the absence of any ‘incriminating material’ being found during a search under Section 132 or requisition under Section 132A and held that such statements in the absence of incriminating material cannot form basis for quantification. In the instant case assessment was completed for the subject assessment years and no incriminating materials was seized by the authorities during the course of search, except recording the statement of the Managing Director, which was retracted.
20. Further, in Ramdas Motor Transport’s case (supra), a Division Bench of the erstwhile High Court of Andhra Pradesh held that under Sub-Section (4) of Section 132 of the Act, during a raid, the authorized officer is empowered to examine any person found in possession or control of undisclosed material and record his statement, and such statements recorded can be used in evidence in any subsequent proceedings initiated against such person under the Act, only basing on the incriminating material found during the course of search. Further, the Division Bench of the erstwhile High Court of Andhra Pradesh in Naresh Kumar Agarwal’s case(supra), relying on Ramdas Motor Transport’s case (supra), has categorically held that when no incriminating material is found in the course of search conducted by the respondent-authorities, the confession recorded under Section 132(4) of the Act, especially if retracted on grounds of threat or coercion, lacks evidentiary value and such statement cannot form the basis for quantification.
21. The law laid by the Hon’ble Supreme Court in PCIT’s case(supra) as well as the judgments of the Division Bench of this Court in Naresh Kumar Agarwal’s case(supra) and Ramdas Motor Transport’s case (supra), squarely applies to the facts of the instant case, as it is evident that on the date of search, quantification of the assessment was done solely basing on the statement recorded under Section 132(4) of the Act and the department did not seize any unaccounted money, bullion nor any other valuable articles or things or any such other incriminating material either from the premises of the company or from the residential houses of the Managing Director or other directors. More so, no mention was made as to how the quantification was done. Therefore, we are of the considered view that the retracted statement of the Managing Director recorded under Section 132(4) of the Act has no evidentiary value and the said statement cannot be made sole basis for quantification of the amount.
22. Further, the judgment relied upon by the respondent/Revenue in Smt Konda Sanjeeva Rani’s case(supra), wherein it was held that burden is on the assessee to prove that the confession was obtained under threat or coercion, and in the absence of the same, the said statement can be relied upon, is distinguishable on the facts of the present case, in the light of the decision of the Hon’ble Supreme Court in PCIT’case(supra) that in the absence of any incriminating material, the Revenue has no jurisdiction under Section 153A or 153C. More so, the said issue is no longer res integra in view of the judgments of the erstwhile High Court of Andhra Pradesh in Ramdas Motor Transport’s case (supra) and Naresh Kumar Agarwal’s case(supra).
23. From the above, the finding of the learned ITAT in confirming the orders of the Assessing Authority and CIT(A) holding that there is no significant difference between a statement recorded pursuant to seizure of incriminating material and the one without seizure and therefore, the statement of Managing Director of the appellant/assessee recorded under section 132(4) of the Act, even in the absence of seizure, can be used to determine undisclosed income, is perverse, untenable and is liable to be set aside.
24. In the above stated facts and circumstances, we are of the considered view that the findings arrived at by the learned ITAT and CIT(A) in confirming the order of the assessing authority for the block period 1992-93 to 2000-01 up to 17.08.2001, are perverse and are liable to be set aside, by answering the substantial question of law in favour of the appellant/assessee and against the respondent/revenue.
25. For the aforesaid reasons, we hereby set aside the order passed by the Income Tax Appellate Tribunal in IT(SS) A No.79/Hyd/2006, dt.30.09.2009. Consequently, the orders passed by the CIT(A) and the Assessing Authority for the block period 1992-93 to 2000-01 (up to 17.08.2000), are hereby set aside.
26. Accordingly, the appeal is allowed. No order as to costs.
As a sequel thereto, miscellaneous petitions pending if any, shall stand closed.