DCIT Vs Pinnathevar Palanichamy (ITAT Chennai)
Summary: The Income Tax Appellate Tribunal (ITAT), Chennai ‘A’ Bench, dismissed the Revenue’s appeal against the order of the Commissioner of Income Tax (Appeals), Chennai-18, dated 27 September 2024, deleting an addition of ₹20 crore made in the assessment of Pinnathevar Palanichamy for Assessment Year 2021-22. The Assessing Officer had treated the amount as undisclosed on-money received on the sale of immovable property at Madurai and assessed it as long-term capital gains. The Tribunal held that the addition was unsupported by reliable corroborative evidence and that neither the unexplained entries in a third-party pocket diary nor the subsequently retracted statement of the purchaser could establish the alleged cash receipt.
The dispute originated from a search conducted under Section 132 search and seizure of the Income-tax Act, 1961, on 1 December 2021 in the Saravana Stores group. A pocket diary seized from Antony Francis Julian, an employee associated with the group, contained numerical entries which were subsequently explained by the group’s Managing Director, R. Sabapathy, as relating to loans of ₹25 crore obtained from Swarna Shilpi. In his statement recorded under Section 132(4), Sabapathy initially claimed that ₹20 crore had been paid towards the purchase of land at Madurai and ₹5 crore towards another property transaction at Perambur. Relying on these statements and the seized diary, the Assessing Officer alleged that the assessee had received ₹20 crore in unaccounted cash.
The assessee denied receiving any cash consideration and explained that the property measuring 249 cents had been sold jointly by four co-owners on 22 January 2021 for ₹49,70,04,000, entirely through demand drafts recorded in the registered sale deed and books of account. The sale consideration was approximately 2.28 times the property’s guideline value. Including stamp duty and registration charges of ₹5,46,78,440, the purchaser’s total acquisition cost was ₹55,16,82,440. The assessee further relied upon Sabapathy’s retraction dated 21 March 2022 and subsequent notarised affidavit dated 5 December 2022, in which he denied making any cash payment beyond the registered consideration and explained that his earlier statement had been made under pressure during the search.
The Revenue contended that the numerical entries in the seized diary, read with the original statement of Sabapathy and the surrounding circumstances, sufficiently established the cash transaction. It argued that the dates appearing in the diary corresponded with the property purchases and that the CIT(A) had incorrectly disregarded the incriminating material. The assessee responded that the diary contained only unexplained additions and subtractions, without mentioning his name, the Madurai property, any sale transaction or even the word ‘cash’. The entries did not specify years, and the suggested correlation with the actual dates of property purchases was disputed. The assessee also relied on the earlier ITAT decision in Rajagopal Saravanan, involving the same seized diary and the alleged ₹5 crore payment.
Examining the diary, the Tribunal found that the figures and abbreviated notings were incapable of establishing any transaction involving the assessee without independent supporting material. The page began with the figure 25.00 and ended with 18, rather than reflecting the alleged utilisation of ₹25 crore towards the two property transactions. The Tribunal rejected the Assessing Officer’s attempt to connect the entries with the assessee merely by assigning dates and drawing inferences. Referring to Section 292C and presumptions regarding seized documents and Section 132(4A), it observed that material seized from a searched person ordinarily carries presumptions concerning that person. An adverse inference against an unrelated third party requires tangible material establishing a connection with that party.
The Tribunal further held that a statement recorded during a search may have evidentiary significance against its maker, but an allegation concerning another person cannot automatically establish undisclosed income in that person’s hands. Such an allegation requires reliable corroboration, particularly when the statement has been retracted and the contemporaneous documentary evidence contradicts it. The registered sale documents demonstrated that the agreed consideration of approximately ₹50 crore had been paid through demand drafts, whereas Sabapathy’s original statement alleged a cash component within that consideration. The Tribunal also considered the decisions in Pullangode Rubber Produce Co. Ltd., Motors & General Stores (P.) Ltd. and Addl. CIT v. Miss Lata Mangeshkar while evaluating admissions, documentary evidence and the insufficiency of suspicion as proof.
The Tribunal concluded that the Assessing Officer had failed to establish that the assessee received any on-money. The seized diary had no demonstrated connection with the assessee, the purchaser’s original statement was inconsistent with the documented transaction and had been retracted, and no independent corroborative evidence supported the proposed addition. Accordingly, the CIT(A)’s deletion of ₹20 crore was upheld and all grounds raised by the Revenue were dismissed. The assessee’s cross-objection, filed in support of the CIT(A)’s order, was treated as infructuous and was also dismissed. Thus, both the Revenue’s appeal and the assessee’s cross-objection stood dismissed.
Cases Discussed
The following cases are mentioned in the supplied judgment. Exact TaxGuru case links are used where verified; other references remain unlinked rather than using unrelated pages.
1. Rajagopal Saravanan Vs ACIT (ITAT Chennai), ITA No. 119/Chny/2024, order dated 10 July 2024 — The Tribunal rejected a ₹5 crore on-money addition arising from the same seized diary and the statement of R. Sabapathy.
2. Pullangode Rubber Produce Co. Ltd. v. State of Kerala, (1973) 91 ITR 18 (SC) — An admission is relevant evidence but is not conclusive, and its maker may establish that it was incorrect.
3. CIT v. Motors & General Stores (P.) Ltd., (1967) 66 ITR 692 (SC) — Considered regarding the legal character of documentary transactions and the limits on disregarding their terms.
4. CIT v. P.V. Kalyanasundaram, (2006) 282 ITR 259 (Madras HC) — Considered regarding additions for alleged on-money without sufficient independent investigation or corroboration.
5. Addl. CIT v. Miss Lata Mangeshkar, (1974) 97 ITR 696 (Bombay HC) — Relied upon regarding the insufficiency of third-party diary entries and statements to establish undisclosed income merely on suspicion.
6. M.M. Financers (P.) Ltd. v. DCIT, 17 SOT 5 (ITAT Chennai) — Considered regarding unsigned documents, third-party statements, retractions and the requirement for evidence supporting alleged unaccounted consideration.
7. V. Kunhambu & Sons — Referred to in the reproduced reasoning of M.M. Financers concerning the evidentiary treatment of retracted statements.
8. Surjit Singh Chhabra — Referred to in the same reproduced reasoning concerning the effect of retraction of an earlier statement.
9. Kutty alias Lakshmi Narasimhan — Also referred to in the reproduced reasoning concerning retracted statements.
