2025 (9) TMI 1309 - AT - Income Tax

Addition to income for unexplained investment rejected where only unsigned draft agreement and no proof of payment or transfer

ITAT (Chandigarh) held that addition to income on account of unexplained investment based solely on an unsigned, unregistered draft agreement was ... Income from other sources on account of unexplained investment - Addition made merely on the basis of an unsigned or draft agreement to sell - HELD THAT:- Alleged agreement relied upon by AO is admittedly unsigned and unregistered and, therefore, cannot be regarded as a legally enforceable document in view of the settled position of law. No registry was ever executed pursuant thereto, nor was any corroborative evidence brought on record to establish transfer of ownership or actual flow of consideration. The property, as evidenced from the electricity bills and purchase invoices, including the latest bill continued to remain in the name of Shri Manish Kumar. AO neither conducted any independent inquiry from the said owner nor afforded any opportunity of cross-examination to the appellant. Considering the judgments of Krishan Kumar Jhamb [2008 (12) TMI 742 - PUNJAB AND HARYANA HIGH COURT] it is well settled that no addition can be made merely on the basis of an unsigned or draft agreement to sell, especially where no investigation has been conducted by the department. In the present case, the agreement to sell relied upon by the AO does not bear the signature of the appellant, and therefore its authenticity remains unsubstantiated. As undisputed that the property continues to be registered in the name of the seller, which further undermines the contention of any transfer. Addition made by the AO and sustained by the Ld. CIT(A) is without basis and is accordingly directed to be deleted, being unsustainable in law. Appeal of the Assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition to income can be sustained on the basis of an unsigned, unregistered and unexecuted 'agreement to sell' seized during search, in absence of corroborative evidence of payment or transfer of title. 2. Whether departmental reliance on an unsigned draft agreement without recording the statement of the alleged seller or affording the assessee opportunity for cross-examination is sufficient to treat the document as establishing income. 3. (Raised but not decided) Whether the assessment framed under the relevant provisions is invalid for want of a mandatory DIN-issue preserved but left open by the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework: Additions to income on account of unexplained investment or undisclosed receipt must be supported by admissible evidence establishing receipt of consideration or transfer of asset; registered sale deeds and corroborative documentary evidence of payment/transfer are relevant. Draft/unsigned agreements and unexecuted documents ordinarily do not constitute conclusive proof of transfer or receipt of consideration. Issue 1 - Precedent Treatment: The Tribunal follows the settled line of authority that additions cannot be sustained solely on the basis of unsigned or draft agreements to sell, in the absence of independent corroboration or investigative steps by the Revenue. Relevant High Court and Tribunal precedents (as relied upon in the record) are applied to the facts. Issue 1 - Interpretation and reasoning: The seized document was unsigned, unregistered and unexecuted; no sale deed or registry was executed in favour of the assessee; contemporaneous records (electricity bill and purchase invoices) continued to show title in the seller's name; no material was produced to demonstrate actual payment of consideration or transfer of ownership. The Assessing Officer did not procure the seller's statement nor conduct independent inquiries; cross-examination was not allowed despite specific request. On these facts, reliance on the unsigned draft to create an addition was held to be unsupportable. The Tribunal emphasized that a departmental addition requires probative material showing realisation/transfer, not mere possession of a draft agreement without signatures or corroboration. Issue 1 - Ratio vs. Obiter: Ratio - An addition based solely on an unsigned, unregistered and unexecuted agreement to sell, without corroborative evidence of payment/transfer and without departmental investigation or seller's statement, is unsustainable. Obiter - Observations concerning the evidentiary weight of stamp paper or specific procedural lapses are ancillary to the core holding. Issue 1 - Conclusion: The addition of Rs.1,300,000 made on the basis of the seized unsigned/unexecuted agreement is deleted as unsustainable in law. Issue 2 - Legal framework: Principles of natural justice and evidentiary procedure in assessment proceedings require that material adverse to the assessee be tested by enquiry, and that opportunity for cross-examination be afforded where appropriate; departmental fact-finding should include verification from third-party owners where documents implicate them. Issue 2 - Precedent Treatment: The Tribunal applies precedents holding that Revenue must make independent inquiries and record statements of relevant third parties (e.g., sellers) before making additions based on documents discovered during search; failure to do so weakens the probative value of the discovered document. Issue 2 - Interpretation and reasoning: The AO did not record statement of the alleged seller nor undertake independent verification of title transfer; the assessee's request for cross-examination was not granted. Given the absence of such investigative steps and the continued registration of the property in the seller's name, the Tribunal found the AO's reliance on the seized unsigned agreement to be procedurally and evidentially deficient. Issue 2 - Ratio vs. Obiter: Ratio - Departmental reliance on a seized document that has not been independently verified and which has not been subjected to cross-examination cannot, by itself, sustain an addition. Obiter - Specific procedural remedies or directions for future departmental enquiries are not prescribed beyond the deletion. Issue 2 - Conclusion: The addition is vitiated by failure to conduct independent inquiry and to afford cross-examination; therefore, it cannot stand. Issue 3 (DIN challenge) - Legal framework: Assessments made under statutory provisions require compliance with mandatory procedural formalities where applicable (e.g., inclusion of DIN), and validity may be questioned if such requirements are absent. Issue 3 - Precedent Treatment: The point was raised by the assessee but not adjudicated on merits by the Tribunal in the present order; existing judicial treatment of such defects varies and was not relied upon to decide the appeal. Issue 3 - Interpretation and reasoning: The Tribunal explicitly kept this and other grounds open and did not pronounce on the contention regarding the absence of DIN; no conclusions were drawn and no precedent was applied to this point in the operative decision. Issue 3 - Ratio vs. Obiter: Obiter - Preservation of the ground without decision; no ratio on validity of assessment for want of DIN is laid down. Issue 3 - Conclusion: The challenge to the assessment for omission of DIN is preserved but left undecided; no relief granted or denied on this ground in the present order. CROSS-REFERENCES AND RESULT The Tribunal's decision follows jurisdictional precedent that additions cannot be based solely on unsigned/unexecuted agreements discovered on search where title remains in the seller and no corroborative evidence of payment or transfer exists; it also relies on the principle that Revenue must conduct independent inquiries (including recording the seller's statement) and permit testing of adverse material (cross-examination) before making additions. The deletion of the addition is the operative result; other grounds (including the DIN challenge) remain open for later adjudication.