ITAT Overturns Tax Addition in Ahmedabad On-Money Dispute, Emphasizes Need for Direct Evidence
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has provided substantial relief to a taxpayer in Ahmedabad by setting aside an income addition related to alleged cash "on-money" payments for a property purchase. The tribunal concluded that the tax department's case was built solely on general third-party materials, lacking any direct evidence to substantiate the claims.
Background of the Tax Dispute and Reassessment Proceedings
The case originated with the taxpayer filing a return for the 2016-17 assessment year, declaring an income of Rs 4,87,98,100. Initially, a scrutiny assessment under Section 143(3) of the Income Tax Act was completed on October 4, 2018, accepting the returned income without modifications. However, the matter was reopened after the assessing authority received information from a search conducted under Section 132 on April 4, 2017, targeting a real estate group.
During that search, the group admitted to receiving on-money in certain transactions and later made disclosures as part of settlement proceedings. Based on this third-party information, the taxpayer's case was reopened under Section 147, despite the taxpayer's firm denial of paying any cash component for the property.
Nevertheless, the assessing authority proceeded to make an addition of Rs 19,62,500 as proportionate on-money allegedly paid in cash, treating it as unexplained money under Section 69A. This led to a reassessment order dated March 25, 2022, which recomputed the total income at Rs 5,07,60,600.
Appeals and Tribunal's Critical Examination of Evidence
The taxpayer first appealed to the National Faceless Appeal Centre, but the appeal was dismissed by order dated April 21, 2025, prompting a second appeal before the ITAT. During the tribunal proceedings, the taxpayer argued vigorously that no evidence of cash payment was uncovered during the search operation. The addition was based exclusively on a general statement from an accountant and a list of purchasers submitted by the developer during post-search proceedings.
Furthermore, the taxpayer highlighted an inconsistency in the department's approach, noting that other co-owners who faced case reopenings on identical grounds were not subjected to any such additions. This raised questions about fairness and procedural equity in the tax assessment process.
The ITAT meticulously examined the recorded reasons for reopening the case and observed a critical absence of any specific entry or document directly linking the taxpayer to the alleged cash payment. The tribunal found that the reopening was primarily initiated based on third-party statements and purchaser lists, without any corroborating material to tie the taxpayer to an on-money transaction.
Procedural Lapses and Precedents Influencing the Decision
Relying on earlier tribunal findings in a similar matter involving the same developer, the ITAT order underscored several procedural lapses. Notably, the failure to supply the third-party statement to the taxpayer raised significant natural justice concerns, as it deprived the taxpayer of a fair opportunity to contest the evidence.
The tribunal also cited a high court view that an unsigned Excel sheet or third-party disclosure, without corroborating material and without establishing actual payment by the purchaser, cannot justify an income addition. This precedent reinforced the tribunal's stance that tax assessments must be grounded in direct and verifiable evidence rather than speculative or generalized information.
Expert Commentary and Broader Implications for Taxpayers
CA Sulabh Padshah commented on the decision, emphasizing that it will benefit a large number of assessees embroiled in tax litigation based solely on third-party confessions, without any direct evidence against them. This ruling sets a crucial precedent for ensuring that tax authorities adhere to rigorous evidentiary standards, protecting taxpayers from arbitrary additions.
The case highlights the importance of procedural fairness and the need for concrete proof in tax disputes, particularly in scenarios involving alleged unaccounted transactions. It serves as a reminder for the tax department to avoid over-reliance on indirect materials and to prioritize direct evidence when making assessments.
This decision is expected to influence future tax litigation, encouraging a more evidence-based approach in reassessment proceedings and providing relief to taxpayers facing similar challenges across the country.
