Facts of the Case

The assessee company had entered into transactions relating to currency derivatives and claimed loss arising from such transactions in its return of income. During the course of assessment proceedings, the Assessing Officer relied upon a statement recorded during survey/search proceedings wherein certain statements were made regarding the nature of the derivative transactions.

Subsequently, the statement was retracted by the concerned person. The Assessing Officer, however, treated the currency derivative loss claimed by the assessee as bogus primarily relying on the earlier statement and made additions to the income of the assessee.

The assessee contended that the derivative transactions were genuine and supported by proper documentary evidence including contract notes, bank statements, and broker confirmations. 

Issues Involved

  1. Whether currency derivative loss claimed by the assessee could be treated as bogus solely on the basis of a statement recorded during survey/search proceedings which was later retracted.
  2. Whether additions can be sustained in the absence of corroborative evidence supporting the allegation of bogus transactions.
  3. Whether the benefit of the safe harbour provided under the third proviso to Section 50C could be allowed. 

Petitioner’s Arguments (Assessee)

  • The derivative transactions were genuine and executed through recognized brokers and supported by proper documentation.
  • The Assessing Officer relied solely on a statement recorded during proceedings which was later retracted and therefore could not be considered conclusive evidence.
  • No independent or corroborative evidence was brought on record by the department to establish that the transactions were bogus.
  • Documentary evidence such as contract notes, ledger accounts, and bank statements clearly established the authenticity of the transactions.
  • The assessee was also entitled to the benefit of the safe harbour limit of 5% provided under the third proviso to Section 50C. 

Respondent’s Arguments (Revenue Department)

  • The statement recorded during the proceedings clearly indicated that the derivative transactions were not genuine.
  • Based on the said statement, the Assessing Officer was justified in treating the derivative loss as non-genuine.
  • The additions made by the Assessing Officer were therefore valid and required to be sustained.

Court Order / Findings

The Income Tax Appellate Tribunal (ITAT) observed that the addition made by the Assessing Officer was primarily based on a statement which was subsequently retracted.

The Tribunal held that a retracted statement by itself cannot form the sole basis for making additions unless it is supported by independent corroborative evidence.

In the present case, the department failed to bring on record any material evidence demonstrating that the derivative transactions were bogus or fictitious. On the contrary, the assessee had produced documentary evidence supporting the transactions.

Accordingly, the Tribunal held that the derivative loss could not be disallowed merely on the basis of a retracted statement. The Tribunal also allowed the assessee the benefit of the safe harbour rule of 5% under the third proviso to Section 50C.

Important Clarification

  • A statement recorded during survey or search proceedings does not automatically constitute conclusive evidence.
  • If such a statement is retracted, the burden lies on the department to provide corroborative evidence supporting the allegation.
  • In the absence of such evidence, additions based solely on the statement cannot be sustained.

Sections Involved

  • Section 132 – Search and seizure
  • Section 143(3) – Scrutiny assessment
  • Section 50C – Special provision for full value of consideration in certain cases

Link to download the order -  https://itat.gov.in/public/files/upload/1735640400-DxUWVY-1-TO.pdf

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