Lady Sold Apartment, Took Rs 2.5 Lakh Cash, and Faced Tax Scrutiny

When cash transactions involved in Apartment deals – Taxman is always suspect!

Chennai Lady Fights Against Income Tax Department for Tax Evasion after Sale of Apartments in Chennai.

The Background

October 4, 2016, is the date on which she had sold her residential property located at Rajparis for Rs. 35,50,000/-. The same was duly registered and all the parties had executed a joint sale deed. However, as she had expected, her buyer had given her Rs. 2,50,000/- in cash only. Thereafter, she had sold some household articles and electronic goods collectively for Rs. 8,09,000/-. This too was given in cash. Later her husband and her daughter jointly had given her cash of Rs. 1,00,000/-. She had received cash of Rs. 20,400/- from sale proceeds of some of the household articles. Thus, all her cash was deposited in her bank account for total amount of Rs. 11,80,400/-.

On the same day i.e. 5th January 2017, Mrs. Swaminathan also bought an under construction apartment in Medavakkam for Rs. 35,000,000/-. This was purchased through a registered deed of sale. The property was transferred by Mr. Guruswami, son-in-law of Mrs. Swaminathan, through Power of Attorney given to Mr. Swaminathan, husband of Mrs. Swaminathan. The Stamp duty for the above transaction amounted to Rs. 2,800,000/-. In addition, interior decoration works to the tune of Rs. 12,000,000/– were also incurred for the same. Thus in all, she had spent Rs. 49,800,000/- for the said new property.

The Tax Department’s Intervention

The Income Tax Department seemed to get suspicious of the large cash transactions around the time the new house was purchased. They also wanted to know why the payments made for the new house and its interior were so different from what was recorded in the registered documents of the new house. The Assessing Officer (AO) therefore required an explanation for the large discrepancies in the payments made for the new house and for its interior.

Later when her statement of account for the period was collated with the bank it was found that the cheque issued for purchase consideration of the new property was encashed in the month of August 2017. And her further evidence revealed that the tenant of that property vacated the property around the same time in the year. She also produced the lease agreement for the new property in terms of which her son-in-law created a Power of Attorney in favor of her husband’s daughter’s husband Mr. Guruswami. Despite of all this evidence, the AO did not believe her version of facts and accordingly doubted the existence of the lease agreement produced by her before him.

Thus the Assessing Officer added the entire cash credited of Rs. 10.8 Lacs to her income under Section 69A of the Income Tax Act. Mrs. Swaminathan’s appeal to Commissioner of Income Tax (Appeals) – CIT(A) was also dismissed after due consideration and hearing both sides.

The Tribunal’s Favorable Ruling

Chennai ITAT Sets Aside Addition Of Rs. 10.8 lakhs U/s 69A Of The IT Act Reading With Rule 10BB Of The IT Rules, 1962 In Respect Of Cash Deposits Made By Appellant Of Rs. 10.8 lakhs In Her Bank Account.

ITAT held that though the registered sale deed was executed and registered on 5th January 2017, the same was encashed by the seller on 8th August 2017. Merely because the seller encashed the cheque later does not mean that assessee was involved with unexplained funds. Since all transactions were through banking channels and were properly documented, therefore, additions made by Assessing Officer under Section 69A of the Income-tax Act, 1961, were found to be unjustified and accordingly were annulled by the Tribunal.

Moreover, it is a well settled legal position that registered documents carry a strong presumption of validity and are held to be credible unless contravened by material and substantial evidence.

Conclusion

The ITAT hence held that Mrs. Swaminathan had fulfilled all the necessary conditions stipulated under Section 54 of the Act to claim exemption of long-term capital gain on the sale of her residential apartment which she had invested in another residential apartment. The cash credited into her bank accounts also were explained and found to be legitimate from the sale proceeds of the properties and other household articles, supported with the invoices and facts relating to the cash receipts.

Thus, the order of the ITAT is of significance. The ITAT reiterated the well established legal position that a registered document would carry a presumption of validity. At the same time, ITAT also reiterated the well established legal position that the burden of proof to establish the validity of a particular transaction would be on the taxpayer. Order of the ITAT also establishes that Mrs. Swaminathan was able to successfully establish the validity of her transactions with the requisite evidence, thus demonstrating the due process followed by the Income Tax Department and also the protection available to a Taxpayer in establishing his/her genuine transactions.