ITAT Mumbai Rules Against Addition Under Section 69 Based Solely on Digital Evidence and Uncorroborated Third-Party Statements in Property Purchase Case

Case Overview

The Income Tax Appellate Tribunal (ITAT) Mumbai has delivered a significant ruling in the matter of Veena Hiralal Mehta Vs DCIT, wherein the Tribunal set aside an addition of ₹10 lakh made under Section 69 of the Income Tax Act, 1961. The addition was made on the allegation that the assessee had paid unaccounted cash for purchasing a shop in "Platinum Mall," based on search findings from the Rubberwala Group premises.

The core issue revolved around whether additions can be sustained when they rely exclusively on third-party digital records and statements without providing the assessee an opportunity for cross-examination or presenting direct incriminating evidence linking the assessee to the alleged transaction.

Factual Matrix of the Case

Search and Seizure Operation

On 17th March 2021, search and seizure proceedings were conducted under Section 132 of the Income Tax Act, 1961 at the premises of the Rubberwala group and its associates. During this operation, authorities visited the residence of Shri Imran Ashfaque Ansari, where his statement was recorded under oath. A 16 GB pen drive was also recovered from his possession.

In his statement, Mr. Ansari disclosed that he had been associated with the Rubberwala group since 2010, managing sales and registration activities for shops in the Platinum Mall project undertaken by M/s. Rubberwala Housing and Infrastructure Ltd. (RHIL). He explained that the total price for shops comprised two components: the official banking channel payment and an additional cash component. The pricing decisions were allegedly made by Shri Tabrez Shaikh, who served as Director of RHIL and promoter of the Rubberwala Group. Mr. Ansari further stated that he maintained comprehensive data related to shop sales in Excel spreadsheets stored on the pen drive.

Initiation of Proceedings Against the Assessee

Based on the search proceedings, the Assessing Officer (AO) issued a notice under Section 153(c) of the Income Tax Act to the assessee on 19th March 2023. In response, the assessee filed her return of income on 17th April 2023, declaring total income of ₹24,14,710/-.

Subsequently, the AO issued a show-cause notice to the assessee asking her to explain an alleged cash payment of ₹10,00,000/- purportedly made over and above the documented purchase price for Shop No. 176 in Platinum Mall. The shop, with a carpet area of 99 square feet located on the third floor, had a documented consideration of ₹23,90,850/- paid through banking channels. This transaction was evidenced by a sale deed dated 31st March 2021, which was registered on 6th April 2021 before the Registration Authority, Mumbai City-2.

Assessee's Response

The assessee categorically denied making any cash payment to RHIL or the Rubberwala Group in her response to the show-cause notice. Her written submission specifically stated: "Regarding the alleged cash payments made to RHIL/Rubberwala Group in the above said show cause notice, I submit that I have not made any cash payment to the said builder/developer."

Assessing Officer's Rationale for Addition

Despite the assessee's categorical denial, the AO rejected her explanation and proceeded to make the addition of ₹10 lakh under Section 69 of the Income Tax Act. The AO's decision was primarily based on the following grounds:

Primary Evidence Relied Upon

1. Statement and Records of Shri Imran Ansari

The AO placed significant reliance on the fact that Shri Imran Ansari, identified as a key employee of the Rubberwala Group responsible for handling sale and registration of shops in "Platinum Mall," had maintained Excel sheets containing detailed information about individuals who allegedly paid cash for shop purchases.

2. Admission by Shri Tabrez Shaikh

The Promoter and Director of RHIL Group, Shri Tabrez Shaikh, had reportedly accepted receipt of cash from individuals for the sale of shops in Platinum Mall. In his statement recorded under Section 131 of the Income Tax Act on 19th August 2021, he allegedly offered income at the rate of 8% of the said cash component as non-accounted receipts.

3. Digital Evidence

A 16 GB pen drive containing data related to shops, as maintained by Mr. Ansari in Excel sheets, was recovered during the search proceedings at his residence.

Based on these factors, the AO concluded that the investment of ₹10,00,000/- was not recorded in the books of accounts maintained by the assessee and that the assessee had offered no satisfactory explanation for the nature and source of this investment. Accordingly, the amount was added to the assessee's income under Section 69 of the Income Tax Act vide assessment order dated 6th March 2024 passed under Section 153C of the Income Tax Act.

Proceedings Before the Commissioner of Income Tax (Appeals)

Aggrieved by the AO's decision, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], raising multiple grounds including:

Jurisdictional Challenge

The assessee challenged the validity of the notice issued under Section 153C of the Income Tax Act, contending that proceedings should have been initiated under Section 147 read with Section 148 of the Income Tax Act instead.

The CIT(A) rejected this ground by relying on the judgment of the Hon'ble jurisdictional High Court in the case of Sejal Jewellary v. Union of India [[2025] 171 com 846 (Bombay)], wherein it was held that once a search action under Section 132 of the Income Tax Act forms the foundation of the case, assessment can only be initiated under Section 153A/Section 153C of the Income Tax Act.

Natural Justice Violation

The assessee argued that she was not provided an opportunity for cross-examination of the individuals whose statements formed the basis of the assessment order, thereby violating principles of natural justice and rendering the assessment invalid.

The CIT(A) declined to accept this argument, referring to the judgment in Andaman Timber Industries vs. Commissioner of Central Excise, Kolkata-II (2015) 62 taxmann.com 3 (SC), wherein it was held that denial of cross-examination vitiates proceedings only when the evidence sought to be cross-examined is the sole basis of the order and no opportunity is provided at any stage. The CIT(A) observed that adequate opportunity was provided through the show-cause notice dated 17th January 2024 and the assessee was granted sufficient opportunity to submit a response.

Timing of Transaction

The assessee contended that during the assessment year under consideration, no shop purchase had actually taken place. The shops were purchased during the financial year 2020–21 through a registered agreement dated 31st March 2021, registered on 6th April 2021.

The CIT(A) rejected this argument, noting that the first payment for purchase of the shops was made on 7th January 2019 through cheque. The CIT(A) observed that according to accounting principles, cash should be taxable in the year when the unrecorded/unaccounted transaction takes place, and therefore the registration date was irrelevant to the applicability of Section 69 of the Income Tax Act.

Merits of Addition

On the merits, the assessee argued that the addition was based solely on third-party statements and excel sheets saved on a pen drive recovered from third-party premises, without any direct documentary evidence or proof of cash transaction relating to the assessee. The assessee emphasized that no statement of the assessee was recorded and the entire exercise was conducted without her participation, thereby violating principles of natural justice.

The CIT(A), after considering the pen drive recovered from Mr. Ansari's premises containing Excel sheets titled "consolidated 1 2 3 balance" with detailed information about shop sales in the Platinum Mall project, the statement of Mr. Ansari, and the fact that Mr. Tabrez Shaikh had accepted the Excel Sheets and Mr. Ansari's statement as true and offered income at 8% of the cash component as unaccounted receipts, ultimately affirmed the addition on merits as well.

Proceedings Before the Income Tax Appellate Tribunal

Dissatisfied with the order of the CIT(A), the assessee approached the ITAT Mumbai. Both parties presented their arguments comprehensively.

Assessee's Submissions Before ITAT

The assessee's counsel emphasized several critical aspects:

1. Lack of Specific Identification of Incriminating Material

The assessment order failed to specify which particular material or which Excel sheet formed the basis of the addition. The AO made the addition without confronting the specific incriminating material with the assessee.

2. Denial of Cross-Examination

No opportunity was provided to cross-examine the witnesses whose statements were primarily relied upon by the AO. This constituted a fundamental violation of principles of natural justice.

3. Absence of Independent Corroboration

There was no independent material available on record to substantiate the addition made and affirmed by the authorities below.

4. Direct Denial

The assessee had categorically denied making any cash payment, and this denial was not rebutted by any direct evidence linking her to the alleged cash transaction.