Top Stories ITAT quashes AO’s Additions of Undisclosed Income and Bogus Expenses due to Lack of Corroborative Evidence [Read Order] The ITAT ruled that the statement made during the search could not serve as conclusive evidence without further supporting material By Sneha Sukumaran Mullakkal – On November 20, 2024 7:40 pm – 3 mins read The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) quashed the Assessing Officer’s ( AO ) addition of undisclosed income and bogus expenses due to the lack of corroborative evidence. Late Kari Thimmegowda,appellant-assessee,underwent a search and seizure on 19th July 2017. Following this, notices under Section 153A of the Act were issued, requiring the filing of returns. The assessee filed the returns, and assessments were made accordingly. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

During the search, the assessee surrendered Rs. 13 crores for the years under investigation. However, when filing the returns, he reported less additional income than originally surrendered. The AO observed that the assessee incurred “route expenses” for his transport business, some of which lacked proper vouchers. Relying on the assessee’s statement during the search, the AO disallowed these expenses, despite the assessee’s claim that they were recorded and supported by vouchers. The assessee appealed to the Commissioner of Income Tax (Appeals)[CIT(A)] against the AO’s order, arguing that no material found during the search supported the surrender made or proved the expenses were bogus. The assessee also sought relief for the additional income offered in the return, claiming no material was unearthed to justify any addition for the years not pending on the date of the search. The CIT(A) rejected the relief request, stating that although there was no direct material, other evidence allowed the AO to examine the matter. The assessee’s representative acknowledged that some material was found for all the years. The CIT(A) partly upheld the AO’s order, granting a 40% reduction in the disallowed expenses.

The only issue to be decided was whether the AO was correct in adding the difference between the returned income and the surrender made as undisclosed investment or bogus expenses in the assessee’s hands. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here The two member bench comprising Prakash Chand Yadav ( Judicial Member ) and Padmavathy S ( Accountant Member ) examined the case and noted that although the assessee had made a surrender during the search, it was not fully reflected in the return of income. Instead, the assessee had offered Rs.50 lakh as additional income when responding to notices under section 153A. The search team recorded a statement about unsubstantiated expenses, but the assessee clarified that these were for small operational costs in the transport business.

The surrender was made to close the proceedings, but after seeking professional advice, the assessee realized it was incorrect and did not honor it in the return. The appellate tribunal ruled that the statement made during the search was not enough to justify the AO’s additions, especially in the absence of further corroborating evidence. It highlighted that the AO had not questioned the legitimacy of the expenses but focused on the availability of the drivers, ignoring the search findings. Citing legal precedents, the bench reaffirmed that statements made during a search could not stand as conclusive evidence without additional supporting material. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here Given that no evidence showed the expenses were fraudulent, the tribunal determined that the additions upheld by the CIT(A) were unjustified and subsequently deleted them. The claim for additional income offered by the assessee was dismissed as not pursued, and the issue of interest under section 234B was considered consequential. Ultimately,the appeal was allowed.