ITAT Bangalore Rules Statements from Tax Surveys Lack Evidentiary Value, Reverses Major Disallowance

Bengaluru: The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has delivered a significant ruling, holding that statements recorded during a survey under Section 133A of the Income Tax Act, 1961, have no independent evidentiary value and cannot be the sole basis for making additions to an assessee's income, especially when promptly retracted.

The bench, comprising Vice President Shri Prashant Maharishi and Judicial Member Shri Keshav Dubey, allowed the appeals of a civil contractor, deleting a massive disallowance of Rs. 4.65 crore for Assessment Year 2017-18 and Rs. 1.94 crore for AY 2018-19.

Case Background

The case involved a civil contractor for the Bruhat Bengaluru Mahanagara Palike (BBMP) who claimed substantial expenditure towards payments made to labour contractors. During the assessment proceedings, the Income Tax Department conducted a survey under Section 133A at the assessee's business premises.

During the survey, statements were recorded from the assessee's employee and son-in-law, which suggested that individuals claimed as labour contractors were actually employees and that the payments were not genuine business expenses. Based on these statements, the Assessing Officer (AO) disallowed the entire expenditure, a decision later upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

Key Arguments

Assessee's Position:

The assessee, represented by Sri Sandeep C., vehemently argued that the authorities misunderstood the nature of the business and the statements recorded.

- The statements were obtained under pressure and were immediately retracted within five days of receiving the copies.

- The individuals in question were "labour contractors," not "sub-contractors" or "employees," a distinction lost on the revenue authorities. The term "worker" was wrongly interpreted as "employee."

- The assessee had provided substantial evidence, including payment registers, bank statements showing payments via banking channels, TDS deduction (Form 16A), and affidavits from the contractors.

- It was argued that in the civil construction industry, formal written agreements for labour supply are impractical and uncommon.

Revenue's Position: The department, represented by Sri N. Balusamy, stood by the AO's findings.

- The initial statements recorded during the survey were admissions of fact.

- The assessee failed to produce documentary evidence like contracts, bills, or vouchers to prove the genuineness of the transactions.

- The subsequent retraction was an afterthought to evade taxes.

- Mere deduction of TDS does not automatically validate a transaction if it is otherwise found to be bogus.

Tribunal's Analysis and Ruling

The ITAT conducted a thorough analysis, siding firmly with the assessee. The bench emphasized that the legal position on statements recorded under Section 133A is well-settled.

On Evidentiary Value of Survey Statements: The Tribunal cited the Supreme Court in Pullangode Rubber Produce Co. Ltd. v. State of Kerala and the Madras High Court in CIT v. S Khader Khan Son , reinforcing the principle that statements under Section 133A are not recorded on oath and thus lack evidentiary value.

> “Whatever statement is recorded under section 133A of the Act, is not given any evidentiary value obviously for the reason that the Officer cannot administer any oath and to take any sworn statement which alone has an evidentiary value as contemplated in law... without any material evidence the statement given in survey proceeding cannot be made the sole basis for the addition of income.”

The bench noted that the retractions were filed promptly—within five days of receiving the statement copies—and should have been considered. The Tribunal found the assessee's explanation for the delay reasonable and held that the retraction could not be brushed aside as a mere afterthought.

On Business Realities and Corroborative Evidence: The ITAT acknowledged the practical realities of the construction business, agreeing with the assessee's contention that formal agreements for labour are not always feasible.

> “We completely agree with the contentions of the AR of the assessee that as the business of the assessee is a Civil construction work & in this kind of business practically no body enters into an MOU/agreements for supply of labour.”

The Tribunal gave significant weight to the corroborative evidence presented, such as the "Workers and Drivers payment book" found during the survey, bank statements, and TDS compliance. The AO's failure to find defects in these documents or to reject the assessee's books of accounts was a crucial factor.

Final Decision

The ITAT concluded that the Revenue's entire case was built on the shaky ground of retracted statements without any supporting evidence. The authorities had ignored crucial documents like payment registers while insisting on formal agreements not typical for the industry.

Finding the sub-contract/labour contract expenses to be incurred "wholly & exclusively for the purposes of the business," the Tribunal directed the AO to delete the entire disallowance for both assessment years. This judgment serves as a strong reminder to tax authorities to base their assessments on concrete evidence rather than solely on statements recorded during surveys, which can be prone to pressure and misinterpretation.