ITAT Patna on Search Assessments: No Additions Without Corroborative Evidence or Rejection of Books

1. Background of the Dispute

The Patna Bench of the Income Tax Appellate Tribunal decided a group of cross-appeals filed by Rajesh Agrawal Vs DCIT/ACIT (ITAT Patna) for Assessment Years (AYs) 2018-19 to 2023-24. The controversy stemmed from a search and survey action under Section 132(1) conducted on 03.08.2022 at the residence and business premises of the assessee, a leading Muzaffarpur-based dealer in Gutka and Pan Masala operating through:

  • M/s Balajee Enterprises (individual proprietorship), and
  • M/s Maa Annapurna Enterprises (HUF),

acting as franchisee of Raj Niwas Pan Masala.

The Department framed reassessments and search-related assessments on the footing that:

  • There were large undisclosed sales of Raj Niwas Pan Masala;
  • The assessee had allegedly made unexplained commission payments and incurred unexplained expenditure;
  • Bank deposits exceeded declared turnover and were allegedly unexplained; and
  • Certain immovable property purchases attracted Section 56(2)(x).

Most of these additions were driven by:

  1. Statements recorded during search/survey from employees and one related person, which were subsequently retracted; and
  2. Ad hoc estimations of undisclosed turnover and gross profit, without rejecting books of account under Section 145(3) and without any concrete seized material relatable to the relevant AYs.

The Tribunal examined each issue year-wise, but its reasoning followed a clear, consistent pattern: no addition can be sustained solely on the basis of retracted statements or arbitrary estimations in the absence of corroborative evidence and proper rejection of books.

2. Reopening of Assessment under Section 147 (AY 2018-19)

2.1 Assessee’s Challenge to Jurisdiction

For AY 2018-19, the assessee had originally filed a return declaring income of ₹ 5,17,340 under Section 139(1). Post-search, the Assessing Officer (AO) issued notice under Section 148 on 20.03.2024, reopening the assessment under Section 147 on the ground that income had escaped assessment based on materials found during the search.

The assessee argued before the CIT(A) and the Tribunal that:

  • No assessment-year-specific incriminating material was found during the search relating to FY 2017-18;
  • Reassessment was based merely on statements recorded during search, which were later retracted;
  • Under the law laid down in CIT v. Kelvinator of India Ltd. (320 ITR 561), reassessment must be grounded in tangible, relevant material having a live nexus with escapement of income for that particular year, and not on mere suspicion or change of opinion.

On this basis, the assessee pleaded that the entire reassessment was void ab initio.

2.2 Tribunal’s View on Reopening

The Tribunal noted that a search had indeed been carried out and that incriminating material had been found and seized. It concluded that:

The reopening for AY 2018-19 was founded on material unearthed during search and, therefore, the assumption of jurisdiction under Section 147 was valid.

Accordingly, the challenge to reopening for AY 2018-19 was rejected, and similar jurisdictional grounds for subsequent years were dismissed on a mutatis mutandis basis.

3. Additions for Alleged Undisclosed Turnover & Gross Profit on Raj Niwas Pan Masala

3.1 Nature of Additions

Across multiple years, the AO made large additions on account of purported undisclosed turnover and suppressed gross profit from sales of Raj Niwas Pan Masala. For instance:

  • AY 2018-19: ₹ 1,44,00,000
  • AY 2019-20: ₹ 2,76,33,761
  • AY 2020-21: ₹ 1,38,34,052

Broadly, the AO’s case rested on:

  1. Statement of accountant Shri Pradeep Kumar Sharma recorded under Section 132(4) on 04.08.2022;
  2. A seized invoice/loose paper (SK-01, page 5) relating to Malwa Packaging, Kota dated 27.07.2022;
  3. Extrapolation of pouch-wise profit margins to compute alleged GP rates as high as about 23.54%; and
  4. Pure estimates of undisclosed turnover and profit, unrelated to the actual books of account.

3.2 Retraction of Statements and Lack of Corroboration

Crucially:

  • The statement of Shri Pradeep Kumar Sharma recorded on 04.08.2022 was retracted by way of a sworn affidavit on 18.08.2022, i.e., shortly after the search, stating that the earlier statement was given under mental stress and panic.
  • The Department did not bring any material on record to discredit this retraction or to show that the earlier admission was true.
  • No opportunity of cross-examination of Shri Pradeep Kumar Sharma (or other third parties like Shri Suresh Khetan) was ever given to the assessee.

The Tribunal emphasized settled law that:

  • A retracted statement by itself cannot form the sole basis of an addition unless supported by corroborative evidence, as recognised in Pullangode Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18) and Kishinchand Chellaram v. CIT (125 ITR 713);
  • Reliance on third-party statements without affording cross-examination is contrary to principles of natural justice, as reiterated in Andaman Timber Industries v. CCE (281 CTR 241) and `Kishinchand Chellaram v.