2021 (11) TMI 567 - AT - Income Tax

Tribunal emphasizes cross-examination in appeal decision under section 153A.

The tribunal allowed the appeal, emphasizing the importance of cross-examination and the necessity of incriminating material for additions under section ... Principle of audi alteram partem - Cross-examination of witnesses whose statements are relied upon - Reliance on ex-parte statements/secondary material recorded by investigation wing - Admissibility and evidentiary value of statements in assessment proceedings - Use of section 133(6) enquiries to verify lender's documents - Application of section 68 - identity, genuineness and creditworthiness of creditorsCross-examination of witnesses whose statements are relied upon - Principle of audi alteram partem - Reliance on ex-parte statements/secondary material recorded by investigation wing - Whether additions/disallowance based primarily on statements recorded by investigation officers, which were not made available for cross-examination, could be sustained against the assessee. - HELD THAT: - The Tribunal found that the addition of interest was made by the Assessing Officer relying principally on statements recorded by officers of the investigation wing and not on any incriminating material discovered during the search. The assessee had produced documentary evidence supporting the genuineness, identity and creditworthiness of the lender and the Assessing Officer had himself issued notices under section 133(6) and received consistent replies and documents from the lender without finding discrepancies. The assessee requested opportunity to cross-examine the departmental witnesses whose statements were relied upon; summons were issued but the witnesses did not appear and the Assessing Officer proceeded without ensuring their presence. The CIT(A) held that mere confrontation of statements sufficed and declined to require cross-examination. The Tribunal, applying the principle of audi alteram partem and following Supreme Court authority (Andaman Timber Industries) and its own precedents, held that where an adverse inference is sought to be drawn from unilateral statements recorded behind the assessee, the assessee must be afforded effective opportunity to test that material; mere confrontation with the statements, without permitting cross-examination of the deponents, renders such statements unsustainable as the sole basis for additions. Given that the other documentary material (including replies obtained under section 133(6) and accepted assessments of the lender) supported the assessee's claim, the reliance on untested ex parte statements could not be sustained. [Paras 4, 5]Addition/disallowance based primarily on unexamined statements was held unsustainable and deleted insofar as it rested on those statements; grounds contesting the disallowance were allowed.Application of section 133(6) enquiries - Application of section 68 - identity, genuineness and creditworthiness of creditors - Whether, after discounting the untested statements, the documentary evidence (including replies obtained under section 133(6) and the lender's own assessment) supported the assessee's case under section 68. - HELD THAT: - The Tribunal recorded that the assessee had filed confirmations, bank statements, ITRs and other documents in support of the unsecured loan and that the Assessing Officer had himself obtained corresponding documents from the lender under section 133(6) which did not disclose discrepancies. The lender's assessment accepted the interest as income. The Tribunal held that absent the impugned untested statements, the documentary record supported the assessee on the three ingredients relevant to section 68 - identity, genuineness and creditworthiness - and there being no incriminating material found during search to the contrary, the addition could not be sustained on the remaining material. [Paras 4, 5]Documentary evidence and section 133(6) replies supported the assessee; in consequence the addition was not sustainable once the untested statements were excluded.Final Conclusion: The Tribunal partly allowed the appeal: it held that additions/disallowance premised on ex parte statements which were not made available for cross-examination could not be sustained, and having excluded those statements the documentary evidence (including replies obtained under section 133(6) and the lender's assessment) supported the assessee; the impugned addition was therefore deleted and the appeal was partly allowed. Issues Involved:1. Legality of the assessment order under section 153A in absence of incriminating material.2. Reliance on investigation reports without confronting the assessee.3. Validity of additions based on interest paid on unsecured loans.4. Discharge of onus under section 68 regarding identity, genuineness, and creditworthiness of lenders.5. Opportunity for cross-examination of witnesses.6. Consideration of documentary evidence and adherence to principles of natural justice.Issue-Wise Detailed Analysis:1. Legality of the assessment order under section 153A in absence of incriminating material:The assessee contended that the assessment under section 153A was not in consonance with the settled law as no incriminating material was found during the search. The tribunal noted that the addition was made based on entries in the books of account and not on any incriminating material found during the search. This aligns with the legal position that in the absence of incriminating material, additions under section 153A are not justified.2. Reliance on investigation reports without confronting the assessee:The assessee argued that reliance on investigation reports without proper confrontation vitiates the assessment. The tribunal observed that the Assessing Officer (AO) relied on statements of certain persons without providing the assessee an opportunity to cross-examine them. The tribunal emphasized the importance of cross-examination, citing the case of Balaji Betal Nuts (P) Ltd., and held that the absence of such an opportunity invalidates the reliance on these statements.3. Validity of additions based on interest paid on unsecured loans:The AO disallowed the interest paid on unsecured loans from Neil Industries Pvt. Ltd., labeling the creditor as bogus. The assessee provided complete documentation, including confirmed account copies, bank statements, and ITRs of Neil Industries Pvt. Ltd. The tribunal found that the AO had obtained information directly from the loan creditor without finding discrepancies, thus supporting the genuineness of the transactions.4. Discharge of onus under section 68 regarding identity, genuineness, and creditworthiness of lenders:The assessee claimed to have discharged the onus of proving the identity, genuineness, and creditworthiness of the lenders. The tribunal noted that the assessee had provided comprehensive documentation and that the AO had verified these details through notices under section 133(6). The absence of discrepancies in these documents further supported the assessee's claim.5. Opportunity for cross-examination of witnesses:The tribunal highlighted the assessee's repeated requests for cross-examination of witnesses whose statements were used against them. The AO's failure to enforce the presence of these witnesses and the CIT(A)'s dismissal of the need for cross-examination were deemed contrary to the principles of natural justice. The tribunal referenced the Supreme Court's judgment in Andman Timber Industries, underscoring the necessity of cross-examination to uphold the integrity of the assessment process.6. Consideration of documentary evidence and adherence to principles of natural justice:The tribunal criticized the lower authorities for ignoring the documentary evidence provided by the assessee and the loan creditor. It reiterated that the rejection of the right to cross-examine and the reliance on unverified statements were not in accordance with the law. The tribunal's decision in favor of the assessee was based on the comprehensive documentation and the procedural lapses by the AO and CIT(A).Conclusion:The tribunal allowed the appeal, emphasizing the importance of cross-examination and the necessity of incriminating material for additions under section 153A. The decision underscored adherence to principles of natural justice and the proper evaluation of documentary evidence.