The Supreme Court has issued comprehensive directions for implementing the ₹2 lakh cash transaction cap introduced through the Finance Act 2017. A bench of Justices JB Pardiwala and R Mahadevan directed that whenever courts receive suits claiming cash payments of ₹2 lakh and above for property transactions, they must intimate the jurisdictional Income Tax authority to verify the transaction and examine potential violations of Section 269ST of the Income Tax Act. The court emphasized that while the amendment came into effect from April 1, 2017, it has not brought the desired change, stating that when there is a law in place, it must be enforced. The bench noted that most transactions go unnoticed or remain unknown to income tax authorities, and ignorance of law is not excusable.
The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has established that the Income Tax Department cannot make tax additions for alleged cash payments in property purchases based solely on documents seized from third parties. According to reports from Mint, such additions must be backed by independent and corroborative evidence linking the buyer to the transaction. The tribunal deleted a ₹90 lakh addition made against property buyer Sanjeet Kumar Kedarnath Gupta, holding that loose papers and electronic records recovered from the developer without any corroborative evidence were insufficient to justify the addition under the Income-tax Act. In the latest ruling, the tribunal also deleted a ₹25 lakh addition for AY 2020-21, finding identical facts and no independent evidence supporting the allegation.
The case involved Gupta, who jointly purchased a commercial unit in GNP Galaxy Phase I with his brother for ₹50 lakh through an agreement dated 6 August 2020. As reported by Mint, the dispute arose after the Income Tax Department carried out a search on the GNP Group and its associated entities on 23 September 2021. During the search, officials recovered loose papers and electronic records allegedly containing details of payments received from buyers, which the department used to allege that Gupta had paid ₹90 lakh in cash as 'on-money' for the property and reopened his assessment for AY2019-20. The matter escalated further when the department alleged another ₹25 lakh cash payment in AY 2020-21, with Gupta's share being ₹22.5 lakh paid through banking channels.
The tribunal found that the tax department had failed to produce independent evidence establishing that Gupta had actually paid ₹90 lakh in cash for the property. According to Mint reports, no cash was found in the taxpayer's possession, there were no receipts acknowledging any cash payment, no corresponding bank withdrawals and no other evidence demonstrating the flow of unaccounted money. In the latest ruling, the tribunal noted that apart from the Excel sheet recovered from the builder and statements of the builder's employees, there was no direct evidence showing that Sanjeet had actually paid ₹25 lakh in cash. The bench also observed that the department relied on statements recorded from persons connected with the developer but did not provide Gupta an opportunity to cross-examine them before making the addition. The tribunal relied on the Supreme Court's decision in KP Varghese vs ITO to reiterate that the burden of proving undisclosed income rests with the Income Tax Department.
The tribunal cited Supreme Court rulings in Common Cause vs Union of India and CBI vs V.C. Shukla, observing that entries in loose papers or private records cannot, by themselves, establish liability unless supported by independent evidence. As reported by Mint, it also referred to the Bombay High Court's ruling in Ashok Commercial Enterprises vs ACIT, which held that additions cannot be based solely on third-party documents or statements. The tribunal held that Section 69A, which deals with unexplained money, was not applicable because the statutory conditions were absent, as no unexplained money was found with the taxpayer. In the latest ruling, the tribunal noted that it had already ruled in Sanjeet's favour in another case involving AY 2019-20, and since the facts for AY 2020-21 were identical, it followed its earlier decision and deleted the entire addition.
The decision reinforces important principles for taxpayers facing reassessment based on search operations, while the Supreme Court's latest directions establish clear enforcement mechanisms. According to Mint reports, while documents recovered during searches may justify further investigation, they cannot automatically be treated as proof that a property buyer paid 'on-money'. The ruling makes it clear that before alleging undisclosed income, the Income Tax Department must establish the transaction through credible, independent evidence, and third-party documents without corroboration are not sufficient to sustain a tax addition. The Supreme Court's new directions require courts and Sub-Registrars to notify jurisdictional Income Tax authorities whenever pleadings or registration documents claim cash consideration at or above the statutory ceiling, ensuring proper verification and examination of potential violations. As explained by Jignesh Shah, Partner at Bhuta Shah & Co. LLP, taxpayers are not required to prove they didn't make unaccounted payments simply because their names appear in third-party records, with the ruling highlighting that corroborative evidence could include cash trails, bank withdrawals, confirmations from parties, seized agreements, accounting records, digital evidence or other material establishing actual flow of unaccounted money.
