2025 (10) TMI 473 - AT - Income Tax

Additions for alleged capitation fees and unsecured loans deleted where seized third party documents lacked corroboration and books supported loans

ITAT (DELHI - AT) held that additions for alleged capitation fees were unwarranted because incriminating documents were seized from a third party and, ... Additions of alleged capitation fee made u/s 69A - Addition towards cash loan made u/s 69C - alleged documents were seized from the custody of third party - HELD THAT:- Admittedly all the alleged incriminating material was found and seized from the possession of third party/Sh. V. Mathiyalgan during the search conducted u/s 132 of the Act at his residence. Those incriminating documents are written in the hand writing of Sh. V. Mathiyalgan and signed by him. Therefore, as per Section 292C of the Act, the Assessing Officer has compulsion to presume that those incriminating documents belonged to Sh. V. Mathiyalgan and the AO cannot presume or infer that those incriminating documents which are in the hand writing of Sh. V. Mathiyalgan are of the Assessee. AO has come to the conclusion that, the capitation fees collected by Sh. V. Mathiyalgan had been handed over to the Assessee trust and made addition based on the entries found recorded in the said which includes diary and loose papers seized from the possession of Sh. V. Mathiyalgan at his premises. However, the fact remains that the Revenue did not find any document/material/evidence with the Assessee to corroborate the allegation of receipt of capitation fees from the students by the Assessee trust. The co-ordinate Mumbai Bench of the Tribunal in the case of Startex (India)(P) Ltd [2002 (4) TMI 217 - ITAT BOMBAY-E] examined the presumption Sec. 132(4A) and section 292CC of the Act, wherein it was held that the presumption shall apply to the person from whom possession the alleged documents were seized. AO cannot invoke the presumption given in sec. 132(4A) of the Act on the Assessee in respect of materials seized from Sh. V. Mathiyalgan, who was the VC of SIMS which is a unit of Assessee trust, particularly, when the Revenue has not found any material evidence from the assessee to corroborate the same. It is not the case that Assessee Trust has owned up the contents of documents/materials seized from the said Sh. V. Mathiyalgan to be true. On the contrary, the Assessee right from the beginning of proceedings categorically denied the receipt of capitation fees and stated that there was no option to collect the capitation fees, as all the seats are merit seats filled though open examination. Department has not carried out any search operation in the case of any of the trustees of the Assessee to collect any corroborative material. Further as observed earlier, even in the statement recorded on oath of Sh. V. Mathiyalgan, nowhere admitted handing over of the alleged capitation fees to the Assessee and even the students/parents/guardians never named the Assessee or its trustees of receiving any money from them. The addition has been made in the hands of Assessee based on the documents seized from the custody of third person. Therefore, in our considered opinion, case of Assessee trust is on a better footing than that of the Assessee in the case of Padmashree D.Y. Patil University [2024 (1) TMI 357 - ITAT MUMBAI]. Therefore, the contention of the Ld. DR. is hereby negated. Addition made on account of capitation fees in the hands of the Assessee trust is unwarranted and we thus allow Grounds of appeal of assessee. Addition on account of cash loan and interest paid - From the said tables it is clear that Loans taken by the Assessee Trust from the parties have been reflected in the audited books and the Interest paid on the above Loans has also been reflected in the audited books. Therefore, the addition made on account of unsecured loan based on the documents found from the custody of Sh. V. Mathiyalgan is not called for. The Ld. AR contended that for Assessment Year 2017-18, the A.O. has not even provided the details of the Loans. AO has made addition to the total income for Assessment Year 2017-18 by way of Interest on Loans by mere extrapolating. In the light of the above, addition made to the income by way of Interest paid on Loans in the hands of the Assessee is totally erroneous. ISSUES PRESENTED AND CONSIDERED 1. Whether documents and loose papers seized from a third party (an employee/vice-chancellor) during search/survey can give rise to a presumption under sections 132(4A)/292C and support additions in the hands of the trust where no corroborative material was found at the trust's premises. 2. Whether alleged capitation fees reflected in documents seized from a third party can be taxed in the hands of the trust where (a) the trust denies authority to collect such fees, (b) no cash or incriminating material was recovered from the trust, and (c) statements of students/parents do not name the trust. 3. Whether alleged unaccounted cash loans and interest (section 69C) based on documents seized from the third party can be added to the income of the trust where the seized documents are in the handwriting/possession of the third party and no corroborative evidence links the trust to such loans or interest payments. 4. Whether statements or documents obtained from a third party, including a letter by the third party's CA, have evidentiary value against the trust when not confronted to the trust and when cross-examination of third-party witnesses was not afforded. 5. Whether the doctrine of telescoping or set-off can be invoked to avoid double additions where multiple years and types of additions overlap (issue raised in cross/Revenue appeals and considered insofar as applied by lower authorities). ISSUE-WISE DETAILED ANALYSIS Issue 1: Application of statutory presumptions (Sections 132(4A)/292C) to documents seized from third parties Legal framework: Sections 132(4)/(4A) and 292C enact a rebuttable presumption that books, documents and assets found in the possession of a person during search/survey belong to that person and their contents are true; such presumptions are directed to the person from whose possession the material was seized. Precedent treatment: Tribunal and High Court authorities (considered by the Court) hold that the statutory presumption attaches to the person in whose possession the material was found; materials seized from third parties cannot, without further corroboration, be extended to another person. Authorities emphasized include decisions that additions based solely on third-party seized material are unsustainable absent independent corroboration and tested evidence. Interpretation and reasoning: The Court applied the textual scope of the presumptions and the line of precedent to conclude that presumptions under sections 132(4A)/292C cannot be indiscriminately applied against the trust when all incriminating material was found with the third party (the vice-chancellor) and not at the trust's premises; further, the trust consistently denied ownership and the Revenue failed to collect corroborative material from the trust. The Court examined seized documents (handwritten by the third party), oral statements, lack of cash seizure at trust premises, and absence of investigation of persons named in those documents to determine absence of linkage. Ratio vs. Obiter: Ratio - presumption under sections 132(4A)/292C is confined to the person in whose possession the material was found and cannot be extended to others without independent corroboration. Obiter - observations on best investigative steps for Revenue in such scenarios. Conclusion: The statutory presumption could not be invoked against the trust based solely on materials seized from the third party; additions premised on such presumptions in the trust's hands are unsustainable without additional corroborative evidence. Issue 2: Taxability of alleged capitation fees in the hands of the trust where documents seized from third party record such receipts Legal framework: Income tax additions require proof that income accrued or arose to the assessee; where search/seized materials are from a third party, linkages to the assessee must be independently established. Principles of vicarious liability are relevant to determine whether an employee's unauthorized act can be imputed to employer/ principal. Precedent treatment: Decisions relied upon establish that (a) uncorroborated loose papers found with third parties are insufficient to make additions in the assessee's hands; (b) statements of third parties cannot bind a third party unless corroborated and tested by cross-examination; and (c) employer is not vicariously liable for acts by employees outside scope of employment. Interpretation and reasoning: The Court found that (i) the trust had no mechanism/authority to collect capitation fees (admissions were via merit systems), (ii) no cash or incriminating material was seized from the trust, (iii) seized materials were handwritten by the third party and unsigned by the trust, (iv) students/parents who gave statements stated payments to the third party and did not implicate the trust, and (v) the CA's letter relied on by Revenue was not confronted to the trust and lacked particulars (dates, recipients). The Court thus treated the alleged receipts as belonging to the third party and not the trust, and held that employer liability does not extend where the employee acted beyond the scope of employment or without authorization. Ratio vs. Obiter: Ratio - additions for capitation fees cannot be sustained in the trust's hands where documents evidencing such collections were seized from a third party, there is no corroborative material at the trust, and the trust denies authority/receipt; third-party statements/documents alone are insufficient. Obiter - commentary on investigatory deficiencies (failure to cross-examine, failure to examine recipients). Conclusion: Additions on account of capitation fees in the hands of the trust are deleted; amount could, at most, be relevant to the third party's tax liability, not the trust's, absent corroboration. Issue 3: Additions under section 69C for alleged cash loans and interest where supporting documents were seized from a third party Legal framework: Section 69C permits treating unexplained expenditure/interest as income where loans/advances are unexplained; however, the foundational evidence must establish that such loans/interest concern the assessee. Precedent treatment: Authorities require that seized material relied upon to make additions be traceable to the assessee; uncorroborated loose papers in third-party custody do not justify additions in another person's hands. Telescoping/ set-off principles may be applied where overlapping findings exist, but cannot substitute for absence of evidence linking seized material to the assessee. Interpretation and reasoning: The Court applied the same analysis as to capitation fees: documents evidencing loans/interest were handwritten and seized from the third party; the trust's audited books recorded unsecured loans and interest with counterparties and satisfaction notes; Revenue did not investigate recipients named in the seized documents; no corroborative material existed at trust premises. Given the lack of link and the trust's denial, additions based on third-party papers could not be sustained. The Tribunal also noted that where the trust's books reflect loans/interest and relevant parties were not examined, Revenue failed its burden. Ratio vs. Obiter: Ratio - additions under section 69C cannot be sustained in the trust's hands where evidentiary basis consists solely of documents seized from a third party and no independent corroboration links the trust to the alleged cash loans/interest. Obiter - remarks on necessity to investigate recipients and test third-party statements by cross-examination. Conclusion: Additions for unaccounted interest/cash loans in the trust's hands are deleted; reliance on seized third-party documents without corroboration is impermissible. Issue 4: Evidentiary value of third-party statements and CA-letters not confronted or tested by cross-examination Legal framework: Principles of evidence require that statements or declarations relied upon against an assessee be tested; untested admissions of third parties have limited or no binding effect on the assessee absent corroboration. Precedent treatment: Courts have held that statements of third parties cannot be read against a third party without corroborative evidence and that failure to allow cross-examination undermines the reliability of such statements. Interpretation and reasoning: The Court reviewed the record and found that (i) statements of students/parents were few and did not name the trust; (ii) cross-examination of those witnesses was not permitted despite requests; and (iii) the CA's letter for the third party was not confronted to the trust and lacked specifics. Consequently, such material could not constitute reliable evidence against the trust. Ratio vs. Obiter: Ratio - uncorroborated third-party statements and documents (including CA letters) not confronted or tested cannot be the sole basis for additions in another's hands. Obiter - procedural fairness and natural justice require opportunity to test third-party evidence. Conclusion: Third-party statements and unchallenged CA-letters lacked evidentiary value to sustain additions against the trust; reliance on such material was disallowed. Issue 5: Application (and limits) of telescoping/set-off where overlapping additions exist Legal framework: The doctrine of telescoping or set-off permits adjusting overlapping additions across assessment years where the same receipt is sought to be taxed repeatedly; however, telescoping cannot create additions where no foundation exists. Precedent treatment: Telescoping may be available when two additions relate to the same underlying receipt and proper assessment facts support allocation; it cannot be used to manufacture a linkage absent evidentiary basis. Interpretation and reasoning: The Tribunal noted an instance where an appellate authority invoked telescoping without a corresponding second addition; it allowed Revenue's challenge in that narrow respect. Otherwise, telescoping/set-off analysis was moot because the primary additions themselves were deleted for lack of evidence. Ratio vs. Obiter: Ratio - telescoping cannot be applied where there is no second addition or where underlying additions lack evidentiary basis. Obiter - procedural caution in applying telescoping. Conclusion: Telescoping was not permitted to sustain additions where underlying findings were lacking; isolated misapplication of telescoping by lower authority was corrected. Overall Disposition The Court deleted additions of alleged capitation fees and unaccounted cash loans/interest made in the hands of the trust because the material relied upon was seized from a third party, bore that third party's handwriting, lacked corroboration at the trust's premises, and third-party statements/documents were not confronted or tested; statutory presumptions under sections 132(4A)/292C did not extend to the trust absent independent evidence. Revenue appeals challenging deletion were dismissed (subject to narrow telescoping correction), and remaining technical grounds became academic in view of deletions.