Assessee's appeal allowed as additions under sections 69A and 69C based on third party statements without cross-examination violate natural justice

The ITAT Delhi allowed the assessee's appeal against additions made under sections 69A and 69C based on entries found in seized documents from a third party. The court held that the statement of a third party witness recorded during search could not be used adversely against the assessee without providing an opportunity for cross-examination, violating principles of natural justice. The HC precedent in SMC Share Brokers Ltd. supported this position. The additions were deemed unsustainable as they were based on mere suspicion and conjecture rather than legally sound evidence, with no corroborative documentation like bills or invoices to support the alleged transactions.

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Issues Involved:
1. Legality of additions under section 69A of the Income Tax Act, 1961.
2. Adequacy of evidence and cross-examination rights.
3. Applicability of sections 69A and 69C for unexplained cash transactions.

Summary:

Issue 1: Legality of Additions under Section 69A of the Income Tax Act, 1961

The common issue in both appeals relates to the addition of Rs. 11,45,348/- and Rs. 10,88,000/- under section 69A of the Income Tax Act, 1961, made by the Assessing Officer (AO) for AY 2016-17 and 2017-18, respectively. The AO based these additions on entries found in the "Hajir Johri" software of M/s. Jindal Bullion Ltd. (JBL), which allegedly recorded cash transactions with the assessee. The AO treated these amounts as unexplained expenditure under section 69C of the Act.

Issue 2: Adequacy of Evidence and Cross-Examination Rights

The assessee argued that mere entries in the Hajir Johri software, maintained by JBL, do not constitute actual transactions without corroborative evidence such as bills, invoices, or challans. The assessee was not confronted with the statement of Ms. Parul Ahluwalia, Director of JBL, during the assessment, and thus, was denied the opportunity to cross-examine her. The Tribunal noted that the Revenue did not provide any supporting evidence to substantiate the alleged cash transactions and relied solely on conjectures and surmises.

Issue 3: Applicability of Sections 69A and 69C for Unexplained Cash Transactions

The CIT(A) confirmed the additions but under different sections: section 69C for AY 2016-17 and section 69A for AY 2017-18. The Tribunal found that the AO's application of section 69C was based on mere suspicion without legal grounding. The CIT(A) also failed to provide a sound basis for confirming the additions. The Tribunal emphasized that the statement of Ms. Parul Ahluwalia could not be used adversely against the assessee without allowing cross-examination, as per principles of natural justice and supported by the decision of the Delhi High Court in CIT vs. SMC Share Brokers Ltd.

Conclusion:

The Tribunal allowed the appeals of the assessee for both AY 2016-17 and AY 2017-18, directing the AO to delete the impugned additions. The Tribunal concluded that the additions were not sustainable as they were based on suspicion and lacked corroborative evidence. The order was pronounced in the open court on 7th March, 2024.

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