ITAT Was Wrong in Disregarding Statements Under Oath, But Additions Unsustainable Without Corroborative Evidence: Madras High Court

“Section 131 Confers Power to Examine on Oath – Tribunal’s View to the Contrary Is Erroneous in Law” — In a significant tax law ruling on November 28, 2025, a Division Bench of the Madras High Court, comprising Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan, adjudicated a series of Income Tax Appeals (TCA Nos. 14 to 16 of 2020) filed by the Revenue against Lalitha Jewellery Mart Pvt. Ltd., Chennai. The Court delivered a mixed verdict—upholding certain principles in favour of the Revenue while ultimately declining to interfere with ITAT’s deletion of major additions under Sections 68 and 56(2)(viib) of the Income Tax Act, 1961, due to lack of concrete evidence.

While holding that the Income Tax Appellate Tribunal (ITAT) committed a clear error of law in declaring statements recorded under Section 131 of the Act as inadmissible, the High Court clarified that the statements did not possess sufficient evidentiary value in the absence of corroborative material. The Court thus affirmed the ITAT’s conclusion—albeit on different reasoning—and answered four out of six substantial questions of law in favour of the Assessee.

“Suspicion, However Strong, Is No Substitute for Proof” – No Concrete Evidence Linking Assessee to Alleged Accommodation Entries

Additions Based on Vague Statements Set Aside — Identity, Creditworthiness and Genuineness Not Rebutted by Revenue

The genesis of the dispute was a search and seizure operation under Section 132 of the Act conducted on September 2, 2014, at the business premises of the respondent-assesee, part of the larger Lalitha Jewellery Group. Based on statements recorded under Sections 132(4) and 131 from one Mahendra Kumar Sethia, the Assessing Officer made additions under Section 68 totaling ₹38 crores, treating share application money and premium received from Kothari Credit India Pvt Ltd as unexplained cash credit.

However, the Tribunal held the statements unreliable, observing that Sethia’s statement did not confirm cash transactions with the assessee, and amounted to speculative remarks. The Court concurred:

“It is not a categorical statement of Shri Mahendra Sethia that M/s. Kothari Credit India Pvt. Ltd. received money from the assessee. It is only a presumption,” the Bench observed (para 7.1), adding that no documentary evidence was furnished to link the assessee to the cash trail.

The Court noted that identity, creditworthiness and genuineness of investors remained uncontroverted, and once these were established through banking transactions and proper documentation, the burden shifted to the Department, which failed to discharge it.

Statements Under Section 131 Are Legally Admissible – Tribunal’s Legal Error Does Not Alter Ultimate Outcome

One of the key legal controversies was whether the ITAT was right in excluding the statement of Mahendra Kumar Sethia on the ground that authorities under Section 131 have no power to administer oath, and hence such statements lack evidentiary value.

The High Court unequivocally rejected this view:

“This finding is directly against the specific provision contained in Section 131(1)(b) of the Act… which explicitly provides for examining any person on oath,” the Bench held (para 4.11).

However, the Court clarified that merely correcting the legal error on admissibility would not revive the addition, as the ITAT had independently evaluated the evidentiary weight of the statements and found them too vague to form the basis for additions.

Thus, while Question 1 (TCA 14-16/2020) was answered in favour of the Revenue, the additions under Section 68 were still set aside, and Questions 3 and 4 (re: reliance on precedent and reappreciation of evidence) were decided in favour of the assessee.

Section 56(2)(viib): AO Cannot Reject Share Valuation Without Recording Dissatisfaction Under Rule 11UA

Another key issue revolved around the addition made under Section 56(2)(viib) for alleged over-valuation of shares. The ITAT had set aside the addition, noting that the Assessing Officer never recorded judicially justifiable dissatisfaction with the assessee’s valuation as required under Rule 11UA.

The High Court agreed with this reasoning:

“If the Assessing Officer finds any specific point for rejecting the valuation, recourse may be had to the procedure prescribed… However, in the case on hand, no such reasoned dissatisfaction was recorded,” the Court held (para 8.4).

Accordingly, Question 2 was also answered in favour of the Assessee.

Lease Payments to Director and Employee Contributions: Remanded for Proper Scrutiny

Lease to Director Requires Market Comparison; Employee Contribution Delay Must Be Justified

Regarding the lease rent paid by the assessee to its Managing Director, the Court upheld the ITAT’s direction for fresh determination based on the prevailing market rate, considering the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960, and the property's prime location.

“Unless a categoric finding is recorded... that the expenditure is excessive or unreasonable, disallowance should not be made under Section 40A(2),” the Court stated (para 9.4), holding that no substantial question of law arose in TCA No.14/2020 on this point.

In contrast, for AYs 2014–15 and 2015–16 (TCA 15 & 16/2020), the Court found fault with ITAT's remand orders on Sections 36(1)(iii) and 36(1)(va) (interest on diverted lease advance and delayed employee contributions), as ITAT failed to consider statutory limits and due dates.

These were answered in favour of Revenue, with a direction to ITAT to re-examine the issues on factual and legal parameters.

Mixed Verdict, But Additions Under Sections 68 and 56(2)(viib) Fall

The Madras High Court delivered a nuanced verdict, balancing legal correctness with factual sufficiency, and emphasized that mere suspicion or unverified statements cannot override the burden of proof in taxation matters.

“Suspicion, however strong, is not proof,” the Court reminded, reaffirming the principle laid down in CIT v. Lovely Exports Pvt Ltd and NRA Iron & Steel Pvt Ltd — unless the identity, creditworthiness, or genuineness of investors are rebutted with concrete evidence, the onus does not shift back to the assessee.

Date of Decision: November 28, 2025