Buying property is a significant financial undertaking.
But in one such case, a buyer found themselves facing income tax notice alleging they paid “on-money” in cash, based entirely on documents recovered during a search on the builder or developer.
However, in a significant ruling, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that such third-party documents, by themselves, cannot justify an addition under Section 69A of the Income-tax Act unless they are supported by independent corroborative evidence.
The Tribunal also observed that the Revenue cannot ask taxpayers to prove that they did not make an undisclosed cash payment. Instead, it is for the tax department to establish the conditions necessary to levy tax.
What was the case?
The case involved a taxpayer who had jointly purchased a commercial unit from M/s Roshni Enterprises.
During a search conducted on the GNP Group in September 2021, the Income Tax Department recovered loose papers that allegedly recorded cash payments relating to various property transactions. M/s Roshni Enterprises is a partnership firm associated with the GNP Group and was among the entities covered during the Income Tax Department’s search.
Based on those documents, the Assessing Officer alleged that the taxpayer had paid ₹90 lakh as unaccounted “on-money” during Assessment Year 2019-20 and added the amount to his income under Section 69A.
“On-Money” payment refers an unaccounted cash payment allegedly made over and above the amount recorded in the registered sale agreement.
The taxpayer denied making any cash payment, submitted copies of the registered sale documents, explained that payments had been made through banking channels, and also filed an affidavit denying the allegation. Despite this, both the Assessing Officer and the first appellate authority upheld the addition.
The matter eventually reached the ITAT.
Why did the ITAT rule in favour of the taxpayer?
The Tribunal noted that the addition rested almost entirely on loose sheets recovered from a third party during the search.
It observed that there was no evidence showing that any unexplained money had been found with the taxpayer, that the taxpayer had authored or maintained the seized documents, or that any actual cash transfer had taken place.
The ITAT also criticised the approach adopted by the tax authorities.
Referring to the Supreme Court’s decision in K.P. Varghese v. ITO, the Tribunal observed that the burden of proving taxability lies on the Revenue.
“The Revenue cannot compel the assessee to prove a negative fact, namely that no on-money was paid. The burden to establish taxability lies on the Revenue. Loose sheets recovered from a third party, without corroborative evidence, cannot form the sole basis for an addition,” explains CA Aniket Kulkarni, Aniket Kulkarni & Associates.
Accordingly, the Tribunal deleted the ₹90 lakh addition.
When can Section 69A actually be invoked?
Section 69A is a deeming provision that applies where the taxpayer is shown to be the owner of identifiable money, bullion, jewellery or another valuable article which is not recorded in the books, says Pallav Pradyumn Narang, Partner, CNK.
Tax officers sometimes invoke Section 69A merely because a taxpayer’s name appears in documents recovered from a third party, such as a builder or business associate, explains Sharanya Tripathi, Advocate at Jotwani Associates.
However, ownership must be established through independent and corroborative evidence.
“Where any books or documents are found during a search, the contents of such books and documents are considered as true. However, no such presumption can be drawn for third parties specifically where these transactions are denied by the third parties,” says Rohit Ahuja, Partner, Ved Jain and Associates.
In this case, “the essential requirements of Section 69A were absent since no money was found from the assessee, the assessee was neither author nor custodian of the documents, and there was no evidence of actual cash transfer, says Kulkarni.
What should you do if you receive such a notice?
Experts say the first response should not be panic.
“In such cases, the taxpayer should immediately seek copies of all the documents and statements relied upon by the department, including the material seized which forms the basis of allegation,” says Dinkar Sharma, Company Secretary & Partner, Jotwani Associates.
The taxpayer should collect all contemporaneous evidence relating to the transaction, including the registered sale deed, allotment letter, payment receipts, bank statements, loan sanction letters, income-tax returns, ledger accounts and correspondence exchanged with the seller or builder. Documentary evidence generated during the normal course of business usually carries much greater evidentiary value than unverified third-party notings, he adds.
Taxpayers should submit all available evidence supporting the declared transaction, including registered sale agreements, payment receipts and banking records, along with a clear written denial where the allegation is incorrect, advises Tripathi.
Why is cross-examination important?
The right to cross-examination forms an important part of natural justice whenever the department relies on statements made by third parties, says Kulkarni.
Taxpayers should ordinarily seek cross-examination during the assessment proceedings as soon as the statement is relied upon by the Assessing Officer, according to him.
If that opportunity is denied, the issue can subsequently be raised before the Commissioner (Appeals). Where the matter is remanded, taxpayers may again request cross-examination during the remand proceedings.
The ITAT also noted that no opportunity to cross-examine had been provided in this case even though the addition was based on statements recorded during the search proceedings.
Does this ruling apply only to property buyers?
Not necessarily.
Tripathi says the reasoning extends beyond real estate transactions.
The ruling reinforces a broader legal principle that additions cannot ordinarily be sustained solely on the basis of documents recovered from someone else unless the Revenue establishes a direct and corroborated link between those documents and the taxpayer.
This principle could therefore become relevant in reassessment proceedings arising from searches conducted on builders, suppliers, business associates or other third parties.
Can the Income Tax Department still make additions based on third-party documents?
Yes but not automatically.
If third-party documents are supported by independent evidence, such as WhatsApp messages confirming the transaction, matching banking records, admissions by the parties involved or other corroborative material, the department can still rely on those documents while making an addition, points out Ahuja.
The Tribunal’s ruling does not prohibit the use of third-party evidence altogether.
Instead, it reiterates that such evidence, standing alone, is generally insufficient.
The Mumbai ITAT’s ruling serves as an important reminder that tax additions must be supported by evidence rather than suspicion.
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