The Karnataka High Court has held that a statement recorded during a search under Section 132(4) of the Income Tax Act carries substantial evidentiary value and cannot be withdrawn through a belated and unsupported retraction. The Court upheld the restoration of an addition of ₹1.5 crore as unexplained investment under Section 69 of the Act.
The judgment was delivered in Sri. Kudlur Ramaswamy Sathyanarayana v. The Assistant Commissioner of Income Tax, Central Circle, Mysuru, in Income Tax Appeal No. 54 of 2025, decided on 18 June 2026 by a Division Bench comprising Justice S.G. Pandit and Justice Rajesh Rai K.
Background of the Dispute
A search and seizure action under Section 132 was conducted at the premises of the assessee on 4 February 2015. During the search, the assessee’s statement was recorded under Section 132(4).
The dispute concerned the construction of Sindhur Convention Hall. In his statement, the assessee stated that proper records relating to the construction had not been maintained. He estimated the total investment in the convention hall at approximately ₹3.5 crore and declared ₹1.5 crore as additional income in his individual capacity for Assessment Year 2014-15.
The Assessing Officer subsequently completed the assessment under Section 143(3) read with Section 153A and made an addition of ₹1.5 crore under Section 69 as unexplained investment.
The Commissioner of Income Tax (Appeals) deleted the addition on the ground that the admission made during the search had subsequently been retracted and explained. On appeal by the Revenue, the Income Tax Appellate Tribunal restored the addition. The assessee thereafter approached the Karnataka High Court under Section 260A.
Whether Filing the Income Tax Return Amounted to Retraction
The assessee argued that the statement recorded under Section 132(4) had been retracted through the return of income filed on 31 March 2015. It was also contended that the statement was subsequently explained in response to the show-cause notice issued by the Assessing Officer.
The High Court rejected the argument that filing a return of income could, by itself, amount to a retraction of a statement made during search proceedings.
According to the Court, filing a return merely declares income for the relevant assessment year. It does not automatically withdraw or contradict an earlier statement recorded under Section 132(4). A retraction must be made expressly and must explain why the earlier statement was incorrect.
Retraction Must Be Made at the Earliest Opportunity
The High Court observed that a statement recorded under Section 132(4) ordinarily binds the person making it and carries evidentiary value.
Such a statement may be withdrawn only where the assessee establishes that it was made under a mistaken understanding of facts or law, or that it was obtained through coercion, threat or duress.
The Court held that a valid retraction should be made at the earliest available opportunity. It should ordinarily be supported by credible material, such as an affidavit explaining the circumstances in which the statement was made and evidence demonstrating that the admission was incorrect.
Where coercion or duress is alleged, the assessee may also be expected to raise a complaint before the higher departmental authorities.
In the present case, the alleged retraction before the Assessing Officer was made approximately one and a half years after the original statement. The Court therefore treated it as a belated retraction unsupported by satisfactory evidence.
Admission Is Important Though Not Conclusive
The High Court recognised the settled principle that an admission is relevant and important evidence, although it is not conclusive.
A person who has made an admission remains entitled to demonstrate that it was factually incorrect. However, the burden lies upon that person to produce cogent evidence disproving the admission.
The Court relied upon the legal principles discussed in CIT v. MAC Public Charitable Trust, including the proposition that statements recorded under Section 132(4) possess legal force and cannot be treated as withdrawn merely because the assessee subsequently adopts a different position.
Corroboration of the Unexplained Investment
The assessee also contended that the addition was based solely on the statement recorded during the search and that no independent corroborative evidence had been discovered by the Assessing Officer.
The High Court noted that the Tribunal, as the final fact-finding authority, had found that the admission was corroborated by the physical existence of the convention hall and the absence of material establishing that the additional investment had been made by the other partners of the partnership firm.
The assessee had specifically declared the amount of ₹1.5 crore as additional income in his individual capacity. In the absence of convincing evidence to the contrary, the Court found no reason to interfere with the Tribunal’s conclusion.
Decision of the Karnataka High Court
The Karnataka High Court dismissed the assessee’s appeal and answered the substantial questions of law in favour of the Revenue.
The Court upheld the addition of ₹1.5 crore under Section 69 as unexplained investment and confirmed the order of the Income Tax Appellate Tribunal.
The judgment establishes that an assessee seeking to retract a statement recorded under Section 132(4) must act promptly and substantiate the retraction with reliable evidence. A delayed explanation, without an affidavit, contemporaneous protest or supporting documentation, may not be sufficient to displace an unequivocal admission made during a search.
Why This Judgment Is Important
The ruling is relevant for advocates, Chartered Accountants, tax consultants, corporate tax teams and taxpayers dealing with search assessments and additions based on statements recorded under Section 132(4).
It highlights the distinction between a regular income-tax return and a legally effective retraction. It also confirms that while an admission is not conclusive, the burden of disproving it lies on the assessee, particularly where the admission is clear and is supported by surrounding circumstances.
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