Addition under Section 68 – Evidentiary Value of Statements under Section 131 – Scope of Provisos to Section 68 – Valuation under Section 56(2)(viib)

Madras High Court – PCIT, Central–1, Chennai v. Lalitha Jewellery Mart Pvt. Ltd.

TCA Nos. 14–16 of 2020 | Judgment dated 28 November 2025

 

1. Background:-These appeals arose from assessments framed under section 153A pursuant to a search conducted on 2 September 2014 in the Lalithaa Jewellery group. For AYs 2013-14, 2014-15 and 2015-16, the Assessing Officer made substantial additions on three counts:

(i) unexplained share capital/share premium under section 68,

(ii) excess share premium under section 56(2)(viib), and

(iii) certain routine disallowances under sections 14A and 36(1)(iii).

 

The core controversy related to large receipts of share application money from Kothari Credit India Pvt. Ltd, which the Revenue treated as the assessee’s unaccounted money routed back through accommodation entry operators. The AO placed heavy reliance on the statements of one Mahendra Kumar Sethia, recorded under sections 132(4) and 131, and on certain broad observations about “layers of transactions” and inability of the assessee to produce investors.

 

The CIT(A) affirmed the additions. The ITAT, however, set aside the additions, principally on the grounds that (a) the statement under section 131 had no evidentiary value, and (b) even otherwise, the statements were vague, uncorroborated and did not establish receipt of cash from the assessee. The Revenue carried the matter to the High Court raising, inter alia, the question whether authorities under section 131 are empowered to administer oath, and whether the ITAT acted perversely in deleting the additions made under sections 68 and 56(2)(viib).

 

2. Whether statement recorded under Section 131 lacks evidentiary value

 

The ITAT accepted the assessee’s argument that statements under section 131 have “no evidentiary value” because income-tax authorities cannot administer oath. The High Court found this reasoning legally unsustainable. Section 131(1)(b) clearly confers upon the prescribed authorities the same powers as a civil court, including the power to enforce attendance and examine a person on oath. Therefore, the proposition that a statement recorded under section 131 is inadmissible as evidence is contrary to the statute.

 

The substantial question of law on this issue was thus answered in favour of the Revenue.

 

However—and critically—the Court also held that this answer did not affect the final outcome, because the ITAT had not merely rejected the statement on technical grounds; it had re-appreciated the content of the statement and found it vague, presumptive and unsupported by any corroborative material. Hence, the correctness of the ultimate deletion depended not on the admissibility of the statement but on evaluation of third and fourth substantial questions of law.

 

3. Addition under Section 68 – Application of Principles from Lovely Exports, NRA Iron & Steel and the Assessee’s own AY 2007-08 case

 

The Revenue urged that after insertion of the 2012 provisos to section 68, the assessee had a heavier onus to prove source of source. The Court rejected this interpretation.

 

The Court revisited its earlier decision in the assessee’s own case for AY 2007-08, where it had held that suspicion cannot substitute legal proof, and that once identity of investors and receipt through banking channels is established, the assessee cannot be compelled to prove the business wisdom or exhaustive financial capacity of investors. What the provisos introduced in 2012 do is merely clarify that the AO may scrutinise the explanation furnished and need not accept it at face value; they do not overturn the core principle that the real onus to investigate dubious investors lies with the Department, as emphasised in Lovely Exports (SC).

 

The Court further relied on NRA Iron & Steel (SC), which affirms that the assessee must establish identity, genuineness and creditworthiness, but once basic onus is discharged and no concrete material emerges to show money actually emanated from the assessee, the addition cannot rest upon suspicion, assumptions or conjecture.

 

In the present case, the AO relied mainly on the vague statement of Mahendra Kumar Sethia. The statement did not assert that cash was received from the assessee; rather, it indicated lack of recollection and only an assumption that “cash might have been received by one of the group companies.” There was no evidence that Lalitha Jewellery Mart had provided cash which was then routed through Kothari Credit India Pvt. Ltd. to the assessee as share premium. Even the AO conceded the genuineness of the investor for purposes of section 56(2)(viib).

 

The High Court held that the ITAT, being the final fact-finding authority, was entitled to assess the credibility of this evidence, and its conclusion was neither perverse nor unsupported by record. No incriminating material overlooked by the ITAT was brought to the Court’s notice.

 

Accordingly, the Court upheld the ITAT’s deletion of addition under section 68.

 

Third and fourth substantial questions of law were answered in favour of the assessee.

 

4. Addition under Section 56(2)(viib) – Requirement of Proper Valuation and AO’s Judicial Satisfaction

 

The Revenue also challenged the Tribunal’s deletion of additions under section 56(2)(viib), arguing that the premium was excessive. The Court emphasised:

                •              Section 56(2)(viib) read with Rule 11UA prescribes specific valuation mechanisms.

                •              The AO must record specific dissatisfaction with the valuation and must demonstrate why the assessee’s method or inputs are unacceptable.

                •              “Satisfaction” in the Explanation to section 56(2)(viib) is judicial satisfaction, not arbitrary opinion.

 

In the present case, the AO had not undertaken any valuation exercise, nor identified defects in the assessee’s valuation. Thus, the ITAT was justified in deleting the addition. The High Court found no error in the Tribunal’s reasoning.

 

Thus, the second substantial question of law was also answered in favour of the assessee.