Section 68 and natural justice limits on additions based on share-sale proceeds and undisclosed third-party material

Section 68 applies only where a credit is found in the assessee's books of account; where no books were maintained, the provision could not be invoked to treat share-sale proceeds as unexplained cash credit. A bank statement or transaction data could not substitute for books, and sale consideration from share investments was not the kind of credit targeted by the deeming provision. The addition also failed because it relied on third-party material and statements not supplied to the assessee, while requested cross-examination was denied. That denial breached natural justice and could not be cured by section 292B.

---

---

Issues: (i) Whether section 68 of the Income-tax Act, 1961 could be invoked to treat share-sale proceeds as unexplained cash credit when no books of account maintained by the assessee were available and the transaction related to sale of shares; (ii) Whether the addition could survive when the assessment rested on third-party material and statements without supplying the underlying material or allowing cross-examination.

Issue (i): Whether section 68 of the Income-tax Act, 1961 could be invoked to treat share-sale proceeds as unexplained cash credit when no books of account maintained by the assessee were available and the transaction related to sale of shares.

Analysis: Section 68 applies only where a sum is found credited in the books of an assessee. The absence of books of account meant that the basic jurisdictional condition for invoking the provision was not satisfied. A bank statement or raw transaction data could not be equated with books of account within the statutory meaning. The share-sale receipt was also not a loan, deposit, share application money, or similar credit; it was sale consideration arising from investment transactions. On that footing, the deeming provision could not be used to make the impugned addition.

Conclusion: The invocation of section 68 was held to be unsustainable and the addition was deleted.

Issue (ii): Whether the addition could survive when the assessment rested on third-party material and statements without supplying the underlying material or allowing cross-examination.

Analysis: The addition was founded on investigation material and statements recorded behind the assessee's back. The assessee had repeatedly sought the back material and cross-examination, but no effective opportunity was granted. Since the adverse material was used against the assessee, denial of disclosure and cross-examination offended the principles of natural justice. The defect was treated as jurisdictional and not a mere curable irregularity, so section 292B could not save the assessment.

Conclusion: The addition was deleted for violation of natural justice and for want of a legally sustainable evidentiary basis.

Final Conclusion: The disputed additions were deleted, and the assessee's appeals succeeded on the substantive grounds, resulting in only a partial disposal of the overall appeals.

Ratio Decidendi: Section 68 can be invoked only against a credit found in the assessee's books of account, and an addition based on third-party material cannot stand unless the material is disclosed and tested by cross-examination when demanded.

---