Can the Department add undisclosed income to a taxpayer’s return merely because documents recovered during a search on a developer suggest an “on-money” payment? The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that it cannot. Unless the department can independently establish that the buyer actually paid unaccounted cash, additions based solely on third-party documents are unsustainable.
In a recent order, the tribunal deleted a ₹90 lakh addition made against a property buyer, holding that loose papers and electronic records recovered from the developer, without any corroborative evidence linking the taxpayer to the alleged payment, were insufficient to justify the addition under the Income-tax Act.
What was the case?
The case involved Sanjeet Kumar Kedarnath Gupta, who had jointly purchased a commercial unit in GNP Galaxy Phase I with his brother. The property was registered through an agreement dated 6 August 2020 for ₹50 lakh.
The dispute arose after the Income Tax Department carried out a search on the GNP Group and its associated entities on 23 September 2021. During the search, officials recovered loose papers and electronic records that allegedly contained details of payments received from buyers. Based on these records, the department alleged that Gupta had paid ₹90 lakh in cash as “on-money” for the property and reopened his assessment for AY2019-20.
Gupta denied making any cash payment, stating that the entire consideration was paid through banking channels. He also argued that the documents relied upon by the department belonged to the developer and could not, by themselves, be treated as evidence against him.
Why ITAT deleted the addition
The tribunal found that the tax department had failed to produce any independent evidence establishing that Gupta had actually paid ₹90 lakh in cash.
It noted that no cash was found in the taxpayer’s possession, there were no receipts acknowledging any cash payment, no corresponding bank withdrawals and no other evidence demonstrating the flow of unaccounted money. The seized documents had been recovered from a third party, and Gupta was neither their author nor their custodian.
The bench also observed that the department relied on statements recorded from persons connected with the developer but did not provide Gupta an opportunity to cross-examine them before making the addition.
In these circumstances, ITAT held that the ₹90 lakh addition could not be sustained and deleted it.
Burden of proof lies on the Revenue
The tribunal relied on the Supreme Court’s decision in KP Varghese vs ITO to reiterate that the burden of proving undisclosed income rests with the Income Tax Department. A taxpayer cannot be asked to prove a negative by demonstrating that no unaccounted payment was made.
It also held that Section 69A, which deals with unexplained money, was not applicable because the statutory conditions were absent. No unexplained money was found with the taxpayer, and there was no corroborative evidence connecting him with the alleged cash payment.
Referring to Supreme Court rulings in Common Cause vs Union of India and CBI vs V.C. Shukla, the tribunal observed that entries in loose papers or private records cannot, by themselves, establish liability unless supported by independent evidence. It also cited the Bombay High Court’s ruling in Ashok Commercial Enterprises vs ACIT, which held that additions cannot be based solely on third-party documents or statements.
Why the ruling matters
The decision reinforces an important principle for facing reassessment based on search operations. While documents recovered during searches may justify further investigation, they cannot automatically be treated as proof that a property buyer paid “on-money”.
The ruling makes it clear that before alleging undisclosed income, the Income Tax Department must establish the transaction through credible, independent evidence. Third-party documents, without corroboration, are not enough to sustain a tax addition.