Karnataka High Court Refuses Revenue’s Appeal: No Addition Based Solely on Unsigned Loose Sheets and Uncorroborated Statements

The Karnataka High Court has once again reiterated an important principle in search and seizure assessments: additions cannot rest solely on unsigned loose sheets and uncorroborated statements recorded under Section 132(4). In PCIT Vs Income Tax Appeal, the Court upheld the relief granted by the Income Tax Appellate Tribunal (ITAT) to an educational trust for Assessment Year 2021–22, thereby dismissing the Revenue’s Section 260A appeal.

The dispute revolved around an addition of ₹6.61 crore, alleged to be unaccounted cash received from students for admissions, supported primarily by loose, unsigned documents and certain statements obtained during search proceedings. The High Court affirmed the ITAT’s view that in the absence of credible corroboration, such material is inadequate to sustain additions.

Background of the Case

Search Action and Addition of ₹6.61 Crore

A search and seizure operation under Section 132 of the Income Tax Act 1961 was carried out in the case of an educational trust. During this exercise, the department claimed to have discovered:

  • Loose, unsigned sheets and slips
  • Certain electronic records
  • Statements recorded from individuals under Section 132(4)

On this basis, the Assessing Officer concluded that the assessee-institution had collected unaccounted cash from students for medical seats, and made an addition of Rs. 6,61,00,000/- as unrecorded capitation fees for AY 2021–22.

The assessee challenged this addition before the ITAT, which deleted the entire amount. The Revenue then carried the matter to the Karnataka High Court under Section 260A, alleging that substantial questions of law arose from the Tribunal’s decision.

Revenue’s Stand Before the High Court

The Revenue argued that the ITAT had erred in ignoring incriminating material gathered during the search. Its core propositions were:

  • Loose slips and electronic records seized during search showed collection of cash that was not recorded in the regular books.
  • Statements recorded under Section 132(4) implicated the assessee in collection of unaccounted fees.
  • Certain employees and other persons connected to the trust had, according to the department, confirmed the practice of collecting such cash.
  • Based on the above, the Tribunal was not justified in discarding the evidence and deleting the additions.
  • Thus, substantial questions of law arose on:
    1. Whether additions based on loose slips/electronic documents found under Section 132 could be deleted.
    2. Whether statements recorded under Section 132(4), allegedly corroborated by the employees’ version, could be brushed aside.

The Revenue’s Senior Standing Counsel did, however, concede during hearing that unsigned loose sheets by themselves cannot form the basis of an addition unless corroborated by other evidence. His contention was that in this case such corroboration existed.

Assessee’s Position in Defence of ITAT’s Decision

The assessee institution supported the ITAT’s findings, emphasizing the following factual and legal aspects: