ITAT Chennai Dismisses Revenue's Appeal: Third-Party Loose Papers Without Corroboration Cannot Sustain On-Money Additions Under Section 69A
Background of the Dispute
The Income Tax Appellate Tribunal (ITAT), Chennai Bench, adjudicated upon appeals filed by the Revenue challenging the orders of the Commissioner of Income Tax (Appeals)-19, Chennai. The dispute centered around additions made by the Deputy Commissioner of Income Tax, Central Circle-2(4), Chennai under Section 69A read with Section 115BBE of the Income Tax Act, 1961 for Assessment Year 2020-21.
The controversy arose from alleged unaccounted cash receipts ("on-money") purportedly received by assessees—Smt. Gnanaguru Lavanya and Shri Muthulakshmi Vellaisamy Gnanaguru—in connection with the sale of agricultural land situated at Rackiyapalayam Village, Tirupur. The assessing officer based the additions entirely on loose sheets and note pads seized during a search operation conducted at third-party premises, coupled with statements recorded from an individual who later retracted his testimony.
Facts Leading to Assessment Proceedings
The Land Transaction
The assessees jointly sold 13.851/2 acres of agricultural land located at Rackiyapalayam Village, Tirupur, to Shri V.P. Jayapradeep on 29.11.2019. The documented sale consideration was Rs.1,11,44,800/-, which was received entirely through banking channels via demand drafts. Both the sellers and the purchaser duly disclosed this transaction in their respective returns of income for AY 2020-21.
Smt. Gnanaguru Lavanya filed her return of income under Section 139(4) of the Act on 29.03.2021, declaring total income of Rs.17,95,560/-.
Search and Seizure at Third-Party Premises
On 11.03.2021, the Income Tax Department conducted search and seizure operations under Section 132 of the Income Tax Act, 1961 at the premises of the "Kallal Group," which included multiple entities and individuals. As part of this operation, the business premises of M/s. Sarnith Enterprises India Private Limited, located at Karpagam Complex, Saibaba Colony, Coimbatore, were also covered.
During the search, certain loose sheets and note pads were found and seized from these premises. The seized materials included:
- Loose sheets marked as pages 23 to 26 (Annexure: ANN/KP/GS/LS/S)
- Note pad pages 28, 30, 32, 37 (Annexure: ANN/SJ/GS/B&D/S-2)
- Note pad pages 28, 30, 32, 37, 39 (Annexure: ANN/SJ/GS/B&D/S-3)
These materials formed the sole foundation for the additions subsequently made in the assessees' cases.
Statements Recorded During and After Search
Initial Statements of Shri G. Saravanakumar
A sworn statement was recorded from Shri G. Saravanakumar under Section 132(4) of the Act on 11.03.2021. In his initial deposition, he stated that:
- The handwriting in the seized loose sheets belonged to Shri G. Gnanasekhar, a retired PWD Executive Engineer who assisted in registration works
- The title "T LAND" referred to the Tirupur land purchased by Shri V.P. Jayapradeep
- The entries under the heading "cash" represented cash paid over and above the registered sale value
- As per his understanding, cash payments totaled approximately Rs.25 crores
Another statement was recorded on 12.03.2021 regarding the note pads, wherein Shri Saravanakumar indicated that the entries represented cash receipts towards alleged on-money payments.
Retraction Statement
Subsequently, a statement under Section 131(1) of the Act was recorded from Shri G. Saravanakumar on 19.07.2021. In this crucial deposition, he completely retracted his earlier statements and clarified that:
- He is a real estate broker
- The entries in the seized note pad were only personal notings for reference purposes
- The transactions were not routed through him
- The concerned purchasers and owners were directly transferring money among themselves and only informed him over phone
- He recorded the information for follow-up action and commission purposes
- He did not actually receive or pay any cash as reflected in the notings
Statement of the Purchaser
Significantly, a statement was recorded from Shri V.P. Jayapradeep (the purchaser of the land) under Section 131 of the Act on 29.07.2021. He categorically:
- Denied any knowledge of the contents of the seized loose sheets
- Denied payment of any on-money
- Stated that no additional payment beyond the consideration recorded in the registered sale deed was made
- Denied any connection of Shri G. Saravanakumar with the purchase transaction
No Statement from Assessees During Search
Critically, neither during the search nor during the subsequent assessment proceedings was any statement recorded from the assessees themselves regarding the alleged on-money receipts.
Assessment Order and Additions Made
Notice under Section 153C of the Income Tax Act, 1961 was issued to the assessee on 03.01.2022. In response, the assessee filed a return of income on 28.02.2022 declaring the same total income of Rs.17,95,560/- as originally returned. Subsequently, notice under Section 143(2) was issued on 18.06.2022, followed by multiple notices under Section 142(1).
Assessing Officer's Analysis and Conclusions
The assessing officer analyzed the seized loose sheets and note pads and arrived at the following conclusions:
- Extracted the figure of Rs.28,38,00,000/- from page 24 of the loose sheets
- Deducted the registered sale consideration of Rs.1,11,44,800/- (received by demand draft)
- Computed alleged unaccounted cash consideration of Rs.27,26,55,200/-
- Proceeded on the premise that Shri G. Saravanakumar acted as personal assistant of Shri V.P. Jayapradeep
- Held that the note pad entries represent cash payments made by Shri Jayapradeep
- Concluded that the assessees received the alleged cash component
Basis of Addition
The assessing officer's findings were primarily based on:
- Shri G. Saravanakumar being allegedly a cousin of Shri V.P. Jayapradeep and acting as his personal assistant
- Initial acceptance of alleged on-money payments in statements recorded under
Section 132(4) - Match between the sale consideration of Rs.1,11,44,800/- paid through demand draft and entries in seized papers
- Correlation of demand draft particulars with Shri V.P. Jayapradeep's bank statement
- Narrations such as "Guru", "Guru MTP Road", "Guru cash (PWD)" in note pads supposedly corresponding with loose sheets
Applying the principle of preponderance of probabilities, the assessing officer held that the total sale consideration was Rs.28,38,00,000/-, including alleged unaccounted cash consideration.
Quantum of Addition
The assessing officer made an addition of Rs.13,75,64,540/- on a pro-rata basis (50% share) in the hands of Smt. Gnanaguru Lavanya under Section 69A read with Section 115BBE of the Income Tax Act, 1961. The remaining portion of Rs.13,50,90,660/- was added in the hands of her spouse.
The assessment was completed on 24.03.2023 under Section 143(3) read with Section 153C, determining total income at Rs.13,93,60,100/-.
First Appellate Proceedings Before CIT(A)
Aggrieved by the additions, both assessees filed appeals before the Commissioner of Income Tax (Appeals)-19, Chennai.
Detailed Analysis by CIT(A)
The CIT(A) conducted an exhaustive examination of the facts, seized materials, statements, and applicable legal principles. The appellate authority identified multiple fatal flaws in the assessing officer's approach:
Defects in Seized Materials:
Authorship Not Established: The loose sheets were admittedly not authored by the assessees. Shri G. Saravanakumar himself stated in his
Section 132(4)statement that the handwriting belonged to Shri G. Gnanasekhar, a retired PWD Executive Engineer. Despite this admission, neither the authorized officer nor the assessing officer examined the actual author.Absence of Signatures: The seized documents bore neither the handwriting nor the signatures of the assessees or the purchaser.
Lack of Identifying Particulars: The documents did not contain clear identification of payer, payee, nature of transactions, or timing of cash flows.
Post-Registration Entries: Serial numbers 5 to 9 in the loose sheets, aggregating to Rs.21,50,00,000/- (over 80% of alleged cash payments), pertained to dates falling after the registration date of 29.11.2019. The CIT(A) held it improbable and contrary to human conduct that title would be transferred first and consideration paid thereafter, especially in cash.
Discrepancy in Land Extent: Pages 24 to 26 of the loose sheets mentioned 15 acres, whereas the actual transaction involved only 13.851/2 acres—a material discrepancy suggesting the documents did not relate to the assessees' transaction.
Evidentiary Shortcomings: