[ITAT – Jaipur] Deletes Additions Made on the Basis of Loose Sheets in the Absence of Corroborative Evidence

Introduction

In Srishti Associates v. ACIT[i], the assessing officer (‘AO’) made additions to Srishti Associates' (‘Assessee’) income based on loose sheets seized during a search operation on a third party. The ITAT held that the addition was not sustainable in the absence of corroborative evidence and also considered that the AO did not grant an opportunity for cross-examination of the witnesses.

Brief Facts

• The Assessee had entered into a joint development agreement with M/s URS Gehna, represented by its partner Upendra Kumar Soni (‘UKS’), to develop a building project. As per the agreement, URS Gehna provided the land, and the Assessee was to construct the building.

• During a search at UKS's premises, certain documents and loose sheets were seized, purportedly showing that UKS received on-money. Subsequently, the AO issued notices to the Assessee, assessing part of the on-money mentioned in the seized documents and loose sheets as the Assessee's undisclosed income.

• The AO added to the income on the grounds that UKS failed to provide documents during post-search proceedings to support his claim that the cash was returned to buyers. The AO inferred that both the Assessee and URS Gehna were attributable shares of the money received and accordingly added to the Assessee's income.

• Aggrieved by the AO’s order, the Assessee appealed to the Commissioner of Income Tax (Appeals)-2 [‘CIT(A)’], Udaipur, challenging the legality of the assessment order, which was dismissed by the CIT(A).

• Aggrieved by the CIT(A) order, the Assessee appealed before the Income Tax Appellate Tribunal (‘ITAT’).

Observations of ITAT

• The ITAT noted that the AO had failed to establish a clear nexus between the alleged amount and the seized incriminating documents. The ITAT further observed that the satisfaction note lacked clarity regarding the date or year to which the alleged cash receipts belonged. Thus, the ITAT observed insufficient material to initiate proceedings under s. 153C of the Income-tax Act, 1961.

• Initially, the AO sought to tax the alleged receipts for the assessment year (A.Y.) 2017-18 but later added them to A.Y. 2018-19 without corroborative evidence. The ITAT noted this inconsistency as a significant issue.

• The ITAT also observed that the right to cross-examination was essential for the Assessee, particularly when the evidence against them was based on statements or documents obtained during a third-party search. The ITAT noted that the AO failed to examine UKS regarding the seized cash and did not provide the Assessee with the opportunity to cross-examine UKS. As a result, the ITAT held that the additions to the Assessee’s income, which relied on this unchallenged evidence, were incorrect.

• The ITAT concluded that the loose sheets found during the search could not be considered evidence against the Assessee since they were found in a third party's possession and were not supported by corroborative evidence unearthed during the investigation. Therefore, such loose sheets cannot be relied on to sustain the addition.

Conclusion

In this case, the ITAT stressed the importance of corroborative evidence for sustaining tax demands. The ITAT reiterated an important legal position that the additions could not be sustained on the basis of certain loose sheets and documents recovered during the search without corroboration or independent evidence. The ITAT also noted the importance of granting cross-examination to the Assessee when the addition was largely based on the statement of witnesses recorded during the search.  Thus, to summarise, this decision of the ITAT reinforces the principle that tax assessments should strictly conform to procedural safeguards and natural justice principles.

End Note

[i] [2024] 165 taxmann.com 153 (Jaipur - Trib.) dated 16.07.2024.

To learn more about cross-examination, read our insight - Right of Cross-Examination Under GST - When Does It Accrue? by Maarij Ahmad.

Authored by Adhijeet Neogy of Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.