Can builder's loose papers lead to an income tax notice? ITAT explains the law
AI Summary
The Mumbai ITAT ruled that the Income Tax Department cannot classify a cash payment for a property purchase as undisclosed income based solely on documents seized from a builder. The Tribunal found that the department failed to provide independent evidence linking the taxpayer to the alleged cash payment, emphasizing that tax additions must be substantiated with direct evidence. This ruling clarifies the burden of proof lies with the Revenue, potentially impacting future tax assessments related to property transactions.
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the Income Tax Department cannot treat an alleged cash payment made for a property purchase as undisclosed income merely because a taxpayer's name appears in documents seized from a builder during a search.
In a significant ruling in Sanjeet Kumar Kedarnath Gupta v. Income Tax Officer, the Tribunal deleted a ₹90 lakh addition made under Section 69A of the Income-tax Act after finding that the allegation was based solely on loose papers recovered from a third party.
The taxpayer had jointly purchased a commercial unit from M/s Roshni Enterprises through a registered agreement for ₹50 lakh. The payments were made through banking channels and the transaction was duly documented.
However, during a search on the GNP Group, the Income Tax Department recovered loose papers allegedly recording "on-money" received in various property transactions. Based on those papers, the Assessing Officer alleged that the taxpayer had paid ₹90 lakh in cash over and above the registered consideration and added the amount as unexplained money under Section 69A.
The Tribunal held that the Revenue had failed to produce any independent evidence linking the taxpayer to the alleged cash payment.
It observed that Section 69A applies only where a taxpayer is found to be the owner of unexplained money or valuable assets. In this case, none of the essential conditions for invoking the provision were satisfied.
The ITAT highlighted several shortcomings in the department's case:
The Tribunal also relied on the Supreme Court's ruling in K.P. Varghese v. ITO, reiterating that the burden of proving taxability lies on the Revenue. A taxpayer cannot be asked to prove a negative, namely that no cash payment was made.
Further, referring to the Supreme Court's decisions in the Common Cause (Sahara Diaries) case and CBI v. V.C. Shukla, the Tribunal noted that loose sheets, by themselves, do not constitute reliable evidence unless supported by independent corroboration.
The decision does not prevent the Income Tax Department from investigating alleged "on-money" transactions. However, it makes clear that a tax addition cannot rest solely on documents recovered from a builder or another third party.
If the department seeks to invoke Section 69A, it must establish a direct link between the taxpayer and the alleged undisclosed payment through independent evidence such as financial records, admissions, digital communications or other corroborative material.
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