In a recent decision, the Income Tax Appellate Tribunal ( ITAT ) of Bangalore quashed an addition made under Section 40A(3) the Income Tax Act, 1961 ( ITA ) against a real estate development firm based in Mangaluru. The case revolved around the firm’s alleged cash payments and unaccounted income based on rough notings found during a search and survey operation at their premises.
The matter arose after the residential premises of the assessee/ appellant, Ace Developers’ partners, Gregory D’silva and Premi D’silva, were subjected to a search under Section 132 of the tax statute on June 24, 2016. Simultaneously, a survey was conducted at the firm’s premises under Section 133A of ITA. During these operations, numerous documents were impounded, particularly loose sheets labeled Annexure A/133A/AD/1 to 21. These documents purportedly contained information regarding cash payments made by the firm to subcontractors, suppliers, laborers, and others, exceeding the threshold set under Section 40A(3) of the tax legislature, which restricts cash payments over ₹20,000.
The Assessing Officer (AO) scrutinized these documents and concluded that the assessee- firm had made cash payments via bearer cheques that violated the provisions of Section 40A(3) of ITA. The AO disallowed cash payments amounting to ₹89,65,559 and bearer cheque payments totaling ₹39,65,087, leading to an income addition of ₹1,29,30,646. Additionally, the AO found that the assessee had allegedly received “on-money” in cash from the sale of flats. This conclusion was drawn from loose sheets (pages 57-60 of Annexure A/133A/AD/16), which contained a calculation of flat prices that included an additional amount of ₹1,100 per square foot as a cash element, unaccounted for in the firm’s official records.
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The AO also relied on the statements of Merlyn Menezes, a receptionist, and Savitha Sripathy, the manager of the assessee, who allegedly confirmed that the ₹1,100 per square foot represented cash payments received from buyers. The Revenue further backed its claim by referencing another impounded document, which indicated a discrepancy between the sale price recorded in the firm’s books and the actual amount received for a flat sold to one Clifford D’silva. According to this document, the flat was sold for ₹56 lakh, but only ₹46.94 lakh was accounted for, with the remaining ₹9.06 lakh received in cash.
On appeal, the assessee contested the findings, arguing that the loose sheets were merely rough estimates or proposed calculations and did not reflect actual transactions. The assessee also denied any wrongdoing, claiming that the statements made by its employees during the survey were given under pressure and could not be relied upon. Moreover, the company pointed out that the flats referred to in the loose sheets had not been sold during the period in question, and the recorded figures were speculative projections rather than actual sale prices.
The bench of Mr Waseem Ahmed and Mr Soundararajan carefully examined the case, including the impounded documents, statements, and the firm’s arguments. In its ruling, the Tribunal highlighted several key points. First, it observed that the documents relied upon by the AO were “loose sheets” containing rough notations and calculations, which lacked corroboration through other independent evidence. The Tribunal emphasized that rough notings or projections cannot be the sole basis for making substantial additions to income unless backed by concrete, verifiable data.
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The Tribunal also noted that the AO had failed to conduct any inquiries with the buyers of the flats to verify whether the alleged cash payments had indeed been made. Without such an inquiry, the Revenue’s conclusions were based on assumptions and could not be justified.
The Tribunal drew attention to Section 132(4A) and 292C of the tax statute, which allow a presumption that documents found during a search belong to the taxpayer and that the contents are true. However, it clarified that this presumption is rebuttable, and in this case, the assessee had provided a plausible explanation, effectively challenging the authenticity of the loose sheets as evidence of real transactions.
Moreover, the ITAT pointed out that in an earlier ruling involving the assessee for the assessment years 2011-12 to 2013-14, a similar issue had arisen, and the Tribunal had ruled in favor of the firm. In that case, the Tribunal had deleted additions made under Section 40A(3) of ITA on the grounds that the payments were made due to business exigencies and involved genuine transactions. The ITAT reiterated that these prior findings applied to the current case as well, given the identical facts and circumstances.
Ultimately, the ITAT ruled that the additions made by the AO were not justified, as they were based on unverified and rough notings without any substantial corroborative evidence. It quashed the disallowance of ₹1,29,30,646 under Section 40A(3) of ITA and the addition of ₹4,47,67,800 on account of alleged “on-money” received from flat sales.
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In its concluding remarks, the Tribunal noted that the Revenue had failed to produce any material to prove that the loose sheets reflected actual transactions. The Tribunal also highlighted that no higher judicial authority had overturned or stayed the previous favorable ruling in the firm’s case.
In result, the appeal was allowed.
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