Relief for Lalitha Jewellery: Madras HC Quashes ₹51 Crore Unexplained Cash Credits Addition due to Uncorroborated Search Statements [Read Order]

The Madras High Court quashed Rs. 51 crore addition under Section 68 of the IncomeTax Act, 1961, determining that uncorroborated search statements cannot be treated as evidence to brand genuine share capital as unexplained income against the respondent.

The appeal was filed by the Commissioner of Income Tax, Chennai, against Lalitha Jewellery Mart Pvt. Ltd., which is engaged in retail trading of gold jewellery. The dispute arose from a search conducted under Section 132 of the Income Tax Act, 1961 in the premises of one Shrish Chandrakanth Shah in Ahmedabad, whose statements and those of his associates indicated that he allegedly operated multiple shell entities providing accommodation entries in the form of share capital and premium.

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Consequent to this search, notice under Section 153A of the Income Tax Act, 1961 was issued to Lalitha Jewellery Mart Pvt. Ltd., and the Assessing Officer (AO) scrutinised share capital and premium received from several companies during earlier years. The AO assessed that the assessee received accommodation entries amounting to ₹51 crore from companies allegedly controlled by Shrish Chandrakanth Shah, treating the receipts as unexplained cash credits under Section 68 of the Income Tax Act, 1961.

The assessee appealed before the Commissioner of Income Tax (Appeals), rendering the addition under Section 68 as unsustainable. The Revenue then appealed before the Tribunal, which dismissed the appeal. This resulted in the present appeal before the High Court.

Represented by Karthik Ranganathan, the Revenue argued that the Tribunal erred in deleting the addition under Section 68 of the Income Tax Act, 1961 as statements recorded under Section 132(4) from Shrish Chandrakanth Shah and others revealed a clear modus operandi of providing accommodation entries through paper companies.

He contended that the assessee did not discharge its onus to prove that investors were genuine or that the share premium was justified, and that the assessee failed to cross-examine persons whose statements implicated the transaction structure. Further, urged that the Tribunal wrongly relied on earlier judgments in the assessee’s favour without distinguishing the present case, despite the availability of new and credible evidentiary material from the investigation wing.

Represented by N. Murali Kumaran, the assessee submitted that the AO acted solely on third-party statements recorded during the search in the case of another person. It was argued that complete documentary evidence was placed before the authority, demonstrating identity, creditworthiness, and genuineness of all investors. Further, submitted that earlier rulings involving the same assessee for a previous year, which were upheld up to the Supreme Court, applied squarely to the present controversy.

The Bench of Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan dismissed the Revenue’s appeal, holding that the Tribunal had correctly appreciated the evidence and applied the settled legal principles governing Section 68 of the Income Tax Act, 1961.

The Court held that the AO committed a fundamental error by placing exclusive reliance on the statements recorded during a search involving another person without examining the documentary evidence submitted by the assessee. The Bench observed that the assessee had produced complete evidence proving identity, creditworthiness, and genuineness of the share applicants through bank records, among other evidences, thereby discharging the onus under Section 68.

The Bench approved the Tribunal’s reasoning that the Revenue failed to investigate investor companies independently and could not ignore documentary evidence while proceeding on mere conjecture. Aligning with the principle in CIT v. Lovely Exports and assessee’s own case of 2017, the Court held that if the identity of investors is established, the Department is free to examine them independently but cannot tax the share capital in the hands of the assessee.

Accordingly, the appeal was dismissed, and the deletion of the ₹51 crore addition was upheld.