ITAT deletes ₹25 lakh tax addition over alleged flat cash payment; says taxpayer must get a chance to challenge evidence

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has deleted a ₹ 25 lakh addition made to a taxpayer’s income over an alleged cash payment for a flat, holding that the Income Tax Department cannot rely on statements of third parties without giving the taxpayer access to those statements and an opportunity to cross-examine the persons concerned. The ruling was delivered in the case of Shivaji Tukaram Pawale vs Income Tax Officer, Ward 3(1), Kalyan, for assessment year 2017-18.

The dispute arose after the tax department relied on information gathered during a survey of partners of M/s Lakshmi Builders and Developers. A statement recorded under Section 131 of the Income Tax Act indicated that the builder had received cash, or “on-money”, from flat buyers over and above the declared sale consideration.

The department alleged that Pawale had paid ₹ 25 lakh in cash in addition to the declared consideration of ₹ 49 lakh for his flat. Pawale denied making any such payment. The Assessing Officer, however, relied heavily on the statements of the builder’s partners and added ₹ 25 lakh to his income under Section 69. The first appellate authority subsequently upheld the addition.

During the assessment proceedings, Pawale specifically asked the Assessing Officer to provide him with copies of the statements being relied upon and sought an opportunity to cross-examine the builder’s partners.

According to the tribunal, neither request was granted. The ITAT noted that the addition was primarily based on statements recorded from two partners of the builder. Yet, the statements were not supplied to Pawale, nor was he allowed to question the persons whose statements were being used against him.

The tribunal said that when the taxpayer specifically denied making the cash payment, the Assessing Officer was required to provide the adverse material and allow cross-examination of the persons whose statements were relied upon.

The ITAT consequently held that denial of such an opportunity made the addition vulnerable and deleted the ₹ 25 lakh addition under Section 69.

The ruling does not establish that an alleged cash or “on-money” payment for a property cannot be taxed. Instead, it highlights the evidentiary and procedural requirements when the tax department relies on third-party material to make an addition.

In this case, the department's assessment was founded primarily on the builder partners’ statements. Since Pawale denied the alleged cash payment and was not given the statements or an opportunity to cross-examine the persons who made them, the tribunal found that the addition could not be sustained on that basis.

The ITAT also dealt with a separate claim for deduction under Section 80TTA relating to interest income. It directed the Assessing Officer to verify the claim and allow the deduction if Pawale was found eligible under the law.