A confessional statement admitting extra income during search, may be retracted. However, one should be cautious on following points to make the retraction successful.

1. The Retraction must be made without delay:Kantilal C. Shah v. ACIT [2011] 133 ITD 57 (Ahd) held that retraction of statement made u/s 132(4) will not be permissible if it has been made after a lapse of considerable time and not done immediately. In this case, after a lapse of around 9 months through an Affidavit, and the said retraction was submitted before the AO with a covering letter after 50 days of its retraction. According to department’s pleadings the said delay thus demonstrated that the assessee was not confident about filing of the retraction. There must be some convincing and effective evidence in the hands of the assessee through which he could demonstrate that the said statement was factually incorrect. Further there should also be some strong evidence to demonstrate that the earlier statement recorded was under coercion. In the present case, it was held that the retraction is general in nature and lacking any supportive evidence, rather assessee took several months to retract the initial statement, which by itself created a serious doubt.

2. A belated retraction would fall in the category of afterthought:In Council of Institute of Chartered Accountants of India v Mukesh R. Shah [2004] 134 Taxman 265 (Guj) the Court held that it goes without saying that a retraction made after a considerable length of time, would not have the same efficacy in law as a retraction made at the earliest point of time from the day of admission. A belated retraction would fall in the category of afterthought instead of being retraction.

3. Evidences to corroborate reasons for retraction:

   1. Sudharshan P. Amin v. Asst. CIT [2013] 35 taxmann.com 370 (Gujarat): In search, assessee had disclosed a sum as undeclared income. However, during assessment proceedings, assessee retracted from his statement. Assessee’s CA who was present at time of confessional statements did not suggest any undue pressure or allurement by department. It was held that retraction made by assessee could not be accepted and addition should be made to his income as undeclared investment.When retracting a statement made on oath under section 132(4), it should always be supported by effective evidence which shows that the statement which was earlier recorded was incorrect on facts or was taken under inter alia coercion and intimidation. Merely mentioning that the statement was recorded using undue influence, threat or coercion, or that there was a mistake of facts or law, may not be enough. What has to be seen is how clearly the same is spelt out and what evidence, has been furnished to demonstrate the same.

   2. In  CIT v. Rameshchandra R. Patel [2004] 89 ITD 203 (Ahd.) (TM)it was held that the assessee had a right to retract but that has to be based on evidence brought on record to the contrary and there must be justifiable reason and material for accepting retractioni.e., cogent and sufficient material have to be placed on record for acceptance of retraction. All that has to be done by the assessee if he is to retract the statement which was recorded in the presence of witnesses unless there is evidence of pressure or coercion. Further corroboration of retracted statement is necessary where the assessee established at the earliest possible opportunity by leading reliable evidence and proving thereby the erroneous or incorrect nature of the facts admitted or confessed and also where evidence available on record is inconsistent with the confessional statement.

4. Intimation of retraction to higher authorities: In Principal CIT v. Roshan Lai Sancheti [2019] 306 CTR (Raj) 140, the Court held that “Statement recorded under sec. 132(4) and later confirmed in statement recorded under sec. 131, cannot be discarded simply by observing that the assessee has retracted the same because such retraction ought to have been generally made within reasonable time or by filing complaint to superior authorities or otherwise brought to notice of the higher officials by filing duly sworn affidavit or statement supported by convincing evidence.Duration of time when such retraction is made assumes significance and in the present case retraction has been made by the assessee after 237 days.

5. Statements made involuntarily i.e. obtained under coercion, threat, duress, undue influence etc.:In Deepchand & Co v. ACIT [1995] 51 TTJ (Bom.) 421, the ITAT, Mumbai held that there is no supporting evidence to confirm the additions except the statements of two partners recorded at the time of search. It would not be out of context to mention that the statements recorded by the search party for 2 days cannot be considered to be free, fearless and voluntary. There is a considerable substance in the assessee’s contention that the statements were recorded under pressure and force. The Tribunal had held that retraction should be allowed if it is based on proper principles and evidence. In the ordinary course, no assessee would say that he had much concealed unaccounted money as mentioned in the statements herein. Putting in the mouth of the assessee that so much amount was unaccounted and concealed would itself indicate that the admission was forcible and not voluntary.

6. Retraction after obtaining copy of Statement on ground of mistaken belief either of fact or law:

   1. In Jyotichand Bhaichand Saraf & Sons (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 11(1) (ITAT Pune) [2012] 139 ITD 10 (Pune),
      during search action, statement of the Director of assessee was recorded on 6th November 2001. The assessee was given copies of the statement recorded under section 132(4) on 20th May 2002.On receipt of copy of the statement, assessee realized that there was a mistake in the declaration of income. The assessee submitted a letter clarifying the mistake on 21st June 2002 to the Assessing Officer and retracted the statement made under mistake of fact. The assessment was accordingly made but was set aside by the CIT under sec. 263 stating that the same was prejudicial to the interest of the revenue and was made by A.O. without application of mind. On appeal, ITAT held that the department has not brought on record any corroborative evidence so as to establish undisclosed income having been invested in agricultural land. Statement of the assessee cannot be sole basis without any cogent and corroborative evidence. The mistake in the statement is immediately clarified on the receipt of the statement by the appellant. Moreover, no material/evidence was found during the course of search action indicating on-money payment or any undisclosed investment in land. The statement was given under mistaken belief of law that the suppressed sale is unaccounted/undisclosed income instead of correct legal position that the gross profit arising from unaccounted sale is the undisclosed income. Statement of Director indicate that he was not mentally composed at relevant point of time.

   2. Amritsar ITAT Bench in  CIT v. Janak Raj Chauhan [2006] 102 TTJ 316 (Asr.),observed that admission made at the time of search is an important piece of evidence, but the same is not conclusive. It is open to the assessee to show that it is incorrect and same was made under mistaken belief of law and fact.

   3. Hotel Kiran v. Asstt. CIT [2002] 82 ITD 453 (Pune)– Admission by a person is a good piece of evidence though not conclusive. The Legislature in its wisdom has provided that such a statement under sec. 132(4) may be usedas evidence in any proceedings under the Act. However, there are exceptions to such admission where the assessee can retract from such statement/admission. The first exception exists where such statement is made involuntarily, i.e., obtained under coercion, threat, duress, undue influence, etc. But the burden lies on the person making such allegation to prove that the statement was obtained by the aforesaid means. The second exception is where statement has been given under some mistaken belief either of fact or of law. If he can show that the statement has been made on mistaken belief of facts, and the facts on the basis of which admission was made were incorrect.

7. Principles of Natural Justice to be applied: ITAT, Jodhpur Bench in Maheshwari Industries v. Asstt. CIT [2005] 148 Taxman 74 (Jodh) (Mag.) held that additions should be considered on merits rather than merely on the basis of the fact that the amount was surrendered. It is settled legal position that unless the provision of statute warrant or there is a necessary implication on reading of section that the principles of natural justice are excluded, the provision of section should be construed in manner incorporating principles of natural justice and quasi-judicial bodies should generally read in the provision relevant section a requirement of giving a reasonable opportunity of being heard before an order is made which will have adverse civil consequences for parties effected.

8. Mode and Manner of Retraction: Retraction of a statement later on, which was made during the search operation is not an easy way to escape the tax implications and requires corroborative evidence and documents to support the retraction and show the circumstances as to why the person is retracting his statement made earlier.
   The person has to go through minute scrutiny by the tax authorities and the Courts later on, if the need be. The following aspects should be kept in mind:

   1. Affidavit– A retraction should be made on an affidavit along with supporting evidences, if any;

   2. Affidavit of witnesses– Additional affidavit of the witnesses present during search may also be filed. Such statement holds good value and may aid the assessee in getting relief.

   3. Elaborate– It must clearly lay down the facts of the case and detail the evidences showing inter alia use of force, coercion, intimidation or any mistake of fact/law, whatever may be the case.

   4. Highlight Error– In case of a mistake of fact or law, it must clearly lay down as to what mistake took place in making the statement, the reason for the same and the actual correct position. Evidences in support of the correct facts must also be attached.

   5. Inform Senior Officers– In addition to the A.O., Authorised Officer (who conducted the Search), a retraction which is made on affidavit or otherwise should also be communicated to higher authorities.

   6. Earlier the better– Any retraction should be done at the earliest without any delay. A retraction made immediately may strengthen the case of the assessee whereas a belated retraction will in most cases would be seen as an afterthought.

9. Some decisions where Retraction of Statement was held VALID:

   1. Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 (SC): Their Lordships while observing that admission is an extremely important piece of evidence, held that, it cannot be said to be conclusive and the maker can show that it was incorrect.[Also refer  Arjun Singh v. CWT [1989] 175 ITR 91/[1988] 41 Taxman 272 (Delhi)].

   2. Avadh Kishore Das v. Ram Gopal AIR 1979 SC 861: The Supreme Court held that evidentiary admissions are not conclusive proof of the facts admitted and may be explained or shown to be wrong, but they do raise an estoppel and shift the burden of proof on to the person making them. The Supreme Court further held that unless shown or explained to be wrong, they are an efficacious proof of the facts admitted.

   3. In CIT Central-III v. Lavanya Land Pvt. Ltd. and Others [2017] 397 ITR 246 (Bom.), the Hon’ble Bombay High Court dismissed an appeal filed by the revenue against the order of the ITAT, Mumbai had set aside the additions made by the revenue based on the statement made by person during search which was later retracted by him. In this case, a search was conducted at the premises of one of handlers of the assessee company and his statement was recorded which showed an admission that a large sum of money was received by him to purchase lands in the name of the assessee company. The statement was retracted by him after a period of two and a half months. On appeal, the ITAT Mumbai set aside the addition made. Adverting to the fact that the concerned person has retracted his statement, the Tribunal arrived at the conclusion that merely on the strength of the alleged admission in the statement, the additions could not be made as the essential ingredients of Section 69C of the IT Act enabling the additions were not satisfied. This was not a case of ‘no explanation’. Rather, the Tribunal concluded that the allegations made by the authorities are not supported by actual cash passing hands.Bombay High Court, held while dismissing the appeal of the revenue: “It is not possible for us to reappraise and re-appreciate the factual findings. The finding that Section 153C was not attracted and its invocation was bad in law is not based just on an interpretation of Section 153C but after holding that the ingredients of the same were not satisfied in the present case. That is an exercise carried out by the Tribunal as a last fact finding authority. Therefore, the finding is a mixed one. There is no substantial question of law arising from such an order and which alternatively considers the merits of the case as well.”

   4. Retraction of statements recorded at odd hours:The admissibility of retraction of statements which were given in an exhausted state and at odd hours was allowed by Gujarat High Court in Kailashben Manharlcil Choksi v. CIT [2010] 320 ITR 411 (Guj,). It was held that a statement which has been recorded u/s 132(4) at odd hours is not a voluntary statement if it is subsequently retracted. The Court observed that the main grievance of the A.O. was that the statement was not retracted immediately and it was done after two months. It was an afterthought and made under legal advise. High Court held : Merely on the basis of admission the assessee could not have been subjected to such additions unless and until, some corroborative evidence is found in support of such admission. The Court also held that the statement recorded at such odd hours cannot be considered to be a voluntary statement, if it is subsequently retracted and necessary evidence is led contrary to such admission.

   5. Principal CIT, Central III v. Krutika Land (P.) Ltd. [2019] 103 taxmann.com 9 (SC): During search certain incriminating documents were found in possession of one DD, handling land acquisition on behalf of assessee-company and his statement was recorded. He stated that there were amounts disbursed for purchase of lands and a certain amount of cash had also been received by him to purchase lands. However, later he had retracted his statement. A.O. issued notice under section 153C and initiated proceedings against assessee and made additions under section 69C. High Court held that since seized documents did not belong to assessee but were seized from residential premises of one Mr. DD who had later retracted his statement, no action under section 153C could be undertaken in case of assessee. It further held that since entire decision was based on seized documents and there was no material to conclusively show that huge amounts revealed from seized documents were actually transferred from one side to another, additions under section 69C were not sustainable. SLP of Revenue was dismissed.

   6. Satinder Kumar (HUF) v. CIT [1977] 106 ITR 64 (HP):It was held that it is true that an admission made by an assessee constitutes a relevant piece of evidence but if the assessee contends that in making the admission he had proceeded on a mistaken understanding or on misconception of facts or on untrue factssuch an admission cannot be relied upon without first considering the aforesaid contention.

   7. CIT v. Jorawar Singh M. Rathod [2005] 148 Taxman 35 (Ahd. – Trib.) (Mag.): Assessee stated in retraction that during recording of statement he was under constant threat of penalty and prosecution and was confused about various questions asked by the search party about documents, papers, etc., of other persons found from his premises. He declared the sum under pressure which was evident from the fact that no such corroborative evidence, asset or valuables were found in form of immovable or movable properties from his residencein support of the amount of disclosure which was later on retracted but not accepted by the department. The Tribunal observed: “…It is true that simple denial cannot be considered as a denial in the eyes of law but at the same time it is also to be seen (that) the material and valuables and other assets are found at the time of search. The evidence ought to have been collected by the revenue during the search in support of the disclosure statement.” The retraction was held valid.

   8. R. Koshti v. CIT [2005] 193 CTR (Guj.) 518:If assessee under a mistake, misconception or on not being properly instructed, is over assessed, the authorities are required to assist him and ensure that only legitimate taxes due are collected. The decision in CIT v. Durga Prasad More [1973] CTR (SC) 500,was followed i.e., test of human probabilities. The High Court said “We do not find any material on record on which basis it can be said that the disclosure of the assessee of Rs. 16 lakhs is in accordance with law or in spirit of section 132(4)…”.

   9. CIT (LTU) v. Reliance Industries Ltd. [2019] 102 taxmann.com 372 (Bombay)/[2020] 421 ITR 686 (Bombay) [SLP granted in [2020] 114 taxmann.com 320 (SC)], the Appellate Authorities allowed payments made to ‘S’, a consultant holding that there was sufficient evidence justifying the payments made and A.O. other than relying upon statement of ‘S’ recorded in search had no independent material to make disallowance. The CIT (Appeal) and Tribunal concurrently held that ‘S’ retracted his statement within a short time by filing an affidavit. Subsequently his further statement was recorded in which he also reiterated the stand taken in affidavit. The High Court slammed AO for making disallowance of payment merely relying on statement of payer recorded during search, which said that ‘S’ had not rendered any service to assessee so as to receive such payments. The allowance of payments made to ‘S’,a consultant, was allowed as business expenditure. The assessee had set up a captive power generating unit and provided electricity to its another unit. It claimed deduction u/s 80-IA in respect of the profits arising out of such activity. It contended before the A.O. that the valuation of electricity provided to another unit should be at the rate at which the electricity distribution companies were allowed to supply electricity to consumers. The issue had been examined by the Bombay High Court on earlier occasion in Income Tax Appeal No. 2180 of 2011 and the view taken by the Tribunal in similar circumstances was upheld. Similar view was taken in CIT v. Godawari Power & Ispat Ltd. [2014] 42 taxmann.com 551/223 Taxman 234 (Chhattisgarh); and Pr.CIT v. Gujarat Alkalies & Chemicals Ltd. [2017] 395 ITR 247/88 taxmann.com 722 (Gujarat) and allowed the expenditure.

   10. Other cases in which Retraction was accepted:These are CIT v. Uttamchand Jain [2009] 182 Taxman 343 (Bom) / [2010] 320 ITR 554 (Bombay); CIT v. Rakesh Ramani [2018] 94 taxmann.com 461 (Bom.)/ [2018] 256 Taxman 299 (Bom.) / 168 DTR 356 (Bom.)(HC); Surinder Pal Verma v. Asstt. CIT [2004] 89 ITD 129 (Chd.) (TM); Asstt. CIT v. Anoop Kumar [2005] 147 Taxman 26 (Asr.) (Mag.); Gyan Chand Jain v. ITO [2001] 73 TTJ (Jodh.) 859– Part Relief allowed.