The Mumbai bench of the income tax appellate tribunal (ITAT) has delivered a strong rebuke to the tax department’s practice of making additions for alleged 'on-money' payments based solely on third-party statements, holding that taxpayers cannot be compelled to prove a negative in the absence of incriminating material found during their own search.
In an order, the tribunal allowed the appeals filed by Amit Jatia and his wife, Smita Jatia, for assessment years (AY)14–15 and AY17–18, deleting additions made under Section 69 of the Income-tax Act for alleged cash payments on jewellery purchases from Firestar International Pvt Ltd, part of the Nirav Modi group.
The additions stemmed from a search conducted under Section 132 in the case of Firestar International, during which tax authorities recorded a statement from an employee of the jewellery shop and recovered an Excel sheet allegedly detailing cash and cheque components of jewellery sales. Relying on this material, the assessing officer (AO) concluded that the Jatias had paid substantial amounts in cash over and above the invoice value of jewellery purchased.
However, ITAT noted that during the search carried out in the case of the Jatia group, no incriminating evidence whatsoever was found to suggest any cash payment beyond the recorded invoice amounts. In statements recorded under Section 132(4), Mr Jatia and, in one instance, his wife, had categorically denied any cash payments and had produced purchase bills showing that payments were made through banking channels.
The ITAT bench, comprising vice president Saktijit Dey and accountant member Padmavathy S, observed that the entire case of the tax department rested on a solitary third-party statement and documents seized from another entity, without any corroboration from material found in the Jatias' own search. Such an approach, the tribunal says, could not justify additions under Section 153A.
In pointed remarks, the tribunal rejected the AO’s expectation that Mr Jatia should produce documentary proof to establish that no cash was paid. The bench held that an assessee cannot be asked to prove a negative, particularly when the department itself has failed to unearth any incriminating evidence during a search.
The order also underlined that additions based on third-party material are impermissible unless the assessee is given a proper opportunity to rebut the evidence, including access to documents and the right to cross-examine. In the Jatias’ case, the tribunal found that the tax department had failed to establish any direct link between Mr Jatia and the alleged cash payments recorded in the third party’s records.
For Ms Jatia’s appeal relating to diamond bangles, the tribunal noted that the department had sought to rely not only on the third-party statement but also on a valuation difference flagged by the departmental valuer. The bench accepted Ms Jatia’s explanation that the valuation exercise was flawed and that independent valuation broadly matched the invoice value, further weakening the tax department’s claim of undisclosed cash payments.
Significantly, ITAT followed its own earlier rulings in identical matters arising from the Firestar or Nirav Modi group searches, including the cases of Avinash Nivrutti Bhosale and Rekha Ganesh, where similar additions were struck down for want of corroborative evidence.
Holding that the impugned additions are based on conjectures and surmises rather than hard evidence, the ITAT deleted the additions in both appeals. As the issues are decided on merits, the tribunal left the legal grounds open.
The ruling is expected to have wider implications for search assessments, particularly in cases where the tax department seeks to rely on third-party statements or seized documents without establishing a clear evidentiary trail linking the material to the assessee.
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