DCIT Vs K.Rethinam (ITAT Chennai)
Loose sheets not corroborated; Partner’s Remuneration Beyond 40(b) not taxable again u/s 28(v); Alleged cash property investments fail due to retraction & lack of evidence: ITAT Chennai
A search under Section 132 was conducted on 08.12.2016 in the SRS Group (including SRS Mining, a partnership firm) and on partners including Shri K. R., Shri S. R., & Shri J. S. Certain loose sheets were found in the office of SRS Mining, purportedly recording huge cash remuneration to partners and alleged cash investments in immovable property. Assessments under Section 143(3) read with Section 153A were completed for AYs 2015-16 to 2017-18, making substantial additions in the partners’ hands towards:
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Unaccounted partner’s remuneration – ₹28.33 crore (AY 2015-16), ₹6.66 crore (AY 2016-17) & ₹16.50 crore (AY 2017-18)
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Unaccounted property investments – ₹1.10 crore (AY 2016-17) & ₹3.83 crore (AY 2017-18)
On appeal, the CIT(A) deleted both categories of additions, holding that the seized loose sheets were not corroborated and that remuneration not deductible in the firm’s hands u/s 40(b) could not be taxed again in the partners’ hands u/s 28(v). Revenue appealed before the ITAT.
Department’s Arguments:
The department argued that the seized material clearly showed cash remuneration received by partners and cash payments for property purchase. It contended that CIT(A) erred in deleting additions despite seized evidence and that retraction affidavits of counterparties (like Shri Gopu Rajagopal of Kara Property Ventures LLP) were afterthoughts. Reliance was placed on presumptions under Sections 132(4A) & 292C regarding seized material.
Assessees’ Arguments:
Assessees contended that loose sheets were found in SRS Mining’s office, not in their personal possession, and therefore could not be used against them without corroboration. They had already disclosed and admitted remuneration in their returns as per the partnership deed; no evidence showed receipt of further cash. Even assuming higher remuneration, the proviso to Section 28(v) read with Section 40(b) bars taxing amounts not allowable in the firm’s hands.
For property investment, only cheque advances were paid; the flat booking was later cancelled, and Kara Property Ventures LLP confirmed cancellation & refund. The only evidence of cash was the retracted statement of Shri Gopu Rajagopal, unsupported by any corroboration.
Tribunal’s Findings:
On Partner’s Remuneration:
Loose sheets from SRS Mining office recorded alleged remuneration of ₹85 crore, ₹20 crore & ₹49.5 crore across partners. AO divided them equally among partners. Tribunal noted that under the proviso to Section 28(v) read with Section 40(b), remuneration not deductible in the firm’s hands cannot be taxed in the partners’ hands. Since books of SRS Mining already reflected remuneration as per deed and no further payment was evidenced, additions could not survive. Loose sheets alone, without corroboration or a cash trail, could not justify additions.
On Unaccounted Property Investment:
Tribunal emphasised Supreme Court precedents (K.P. Varghese 131 ITR 597; Dhakeswari Cotton Mills 26 ITR 775; CBI v. V.C. Shukla; Common Cause) holding that seized third-party papers cannot be the sole basis without corroborative evidence. The only evidence was the statement of Shri Gopu Rajagopal admitting cash receipts, but he retracted by affidavit. Moreover, he disclosed ₹3.3 crore under PMGKY scheme, showing inconsistencies. Tribunal found no evidence linking assessees to alleged cash payments; cancellation letter from Kara Property Ventures confirmed only cheque payments. Hence, additions were unsustainable.
Conclusion:
ITAT Chennai dismissed all nine Revenue appeals. It upheld CIT(A)’s deletion of additions towards alleged unaccounted remuneration & cash property investments, reiterating that:
