Unverified Third-Party Digital Evidence Insufficient to Sustain Additions for Alleged “On-Money” Payments

Unverified Third-Party Digital Evidence Insufficient to Sustain Additions for Alleged “On-Money” Payments

The Issue

Whether the Assessing Officer (AO) can make additions to a home buyer’s income under the head “unexplained investment” solely based on deleted-and-retrieved files from a laptop belonging to a third-party employee (of the developer), without independent corroboration or providing an opportunity for cross-examination.

The Facts

• The Search: A search and seizure operation under Section 132 was conducted on M/s Homeland Buildwell Pvt. Ltd. in February 2020.

• The Evidence: The Department retrieved deleted files from a laptop belonging to one Shri Monu, a former Customer Relationship Manager (CRM). These files contained charts suggesting that certain flats in “Homeland Heights,” Mohali, were sold with a cash component (allegedly labeled as “Discount”).

• The Addition: The AO alleged that the assessee paid Rs. 29,57,330 (AY 2016-17) and Rs. 28,50,000 (AY 2020-21) as “on-money” over and above the registered sale deed value.

• The Appeal: The assessee challenged the additions, arguing that the Department provided no bank trail, no cash was found with the assessee, and no opportunity to cross-examine Shri Monu was given.

The Decision

The ITAT Chandigarh Bench allowed the appeals and deleted the additions based on the following legal principles:

1. Hearsay vs. Legal Evidence: The Tribunal held that a chart or Excel sheet found on a third party’s computer is not “conclusive evidence.” Without corroborative proof (like a cash trail or admission by the buyer), such digital notes remain doubtful.

2. Right to Cross-Examination: Relying on the Supreme Court judgment in Andaman Timber Industries vs. Commissioner of Central Excise, the Tribunal emphasized that using a witness’s statement/document against an assessee without allowing cross-examination is a serious violation of the Principles of Natural Justice.

3. Lack of Substance: The AO relied entirely on an “Appraisal Report” from the Investigation Wing. The Tribunal noted that an Appraisal Report is merely an internal opinion and does not constitute “incriminating material” unless backed by the original documents found during the search.

4. Re-opening of Assessment: While the additions were deleted on merits, the Tribunal upheld the validity of re-opening the assessment (AY 2016-17). It ruled that information from the Investigation Wing is sufficient to form a “reasonable belief” for starting an inquiry, even if it eventually fails on merits.

5. Outcome: The additions were deleted for both years. In favour of assessee (on merits).

Key Takeaways for Property Buyers

• The “On-Money” Trap: The Department frequently uses “Seized Excel Sheets” from developers to target buyers. However, unless they find a corresponding cash trail from your bank or a signed statement, these additions are legally weak.

• Preserve Your Rights: If the AO relies on a third party’s statement or “loose papers,” always submit a formal written request for the cross-examination of that individual. Failure to provide this often makes the AO’s order a “nullity” in the eyes of higher courts.

• Search vs. Re-opening: Even if you were not the person searched, a search on your developer can trigger a “Re-opening” of your past 6 years’ assessments under Section 148.