2024 (6) TMI 1496 - AT - Income Tax

Addition under s.69 set aside for lack of cross-examination and bank proof; remand for fresh adjudication

ITAT (Ahmedabad) set aside addition under s.69 treating the proprietor's statement as sole basis and remanded to CIT(A) for fresh adjudication because the ... Addition u/s 69 - Unexplained source of the investment and purchase price of machinery in his books of accounts - statement of the Proprietor relied upon - reassessment was based primarily on the supplier’s denial of the machinery supply and the alleged forgery of the invoice - denial of principles of natural justice HELD THAT:- The statement of the Proprietor is the only basis for addition and, the Assessee was not given an opportunity to cross-examine the supplier, which is a fundamental right under the principles of natural justice. Assessee has not raised its contention before CIT(A). When the assessee is explaining the source of funds and that too of bogus purchase, it is also necessary to bring on record the statement of bank’s representative. If the bank has made payment to the supplier after satisfying the genuineness of supplier and after due inspection as per the terms of sanction of loan, it is very important and dependable source from the point of view assessee. When the AO has made enquiry with the bank of supplier for the KYC documents and address of the supplier, as mentioned in the assessment order, it was also necessary to check and establish the genuineness of source of funds used to purchase such machinery before making an addition u/s. 69 of the Act. Matter requires a thorough examination with due adherence to the principles of natural justice - We remand the matter back to the file of the Ld.CIT(A) to provide the Assessee an opportunity of being heard and allow the Assessee to cross-examine the supplier and get the statement of the bank officer recorded regarding the loan sanctioned against the machinery with respect to its claim of bogus purchase. Appeals of assessee are treated as allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the reassessment additions made u/s.69 (unexplained investment) by relying primarily on the supplier's denial and alleged forgery of invoice, without affording the assessee an opportunity to cross-examine the supplier, violated principles of natural justice and required fresh adjudication. 2. Whether the reassessment additions treating recorded purchase of plant and machinery as bogus (and consequent disallowance of depreciation u/s.32) were sustainable on the material on record, including bank documents evidencing loan sanction and payment. 3. Whether the notice issued u/s.148 based on information/borrowed opinion (as contended) vitiated the reassessment proceedings (raised by the assessee and considered insofar as it related to procedural fairness and the need for further fact-finding). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Natural justice: Opportunity to cross-examine supplier whose statement formed sole basis for additions Legal framework: Principles of natural justice require audi alteram partem - an affected party must be given a reasonable opportunity to meet adverse material and to test the veracity of evidence, including oral statements relied upon by the revenue. Precedent treatment: No specific precedents were cited or applied in the judgment; the Tribunal proceeded on established principles of natural justice and procedural fairness. Interpretation and reasoning: The Tribunal observed that the AO's additions were founded primarily on the proprietor's statement denying supply and alleging forgery of invoice. Because that statement was the principal basis for additions u/s.69, the assessee's right to cross-examine the supplier was a fundamental element of a fair inquiry. The Tribunal also noted that the assessee had not been afforded that opportunity before the CIT(A) who dismissed the appeal ex-parte. Given the centrality of the supplier's statement, failure to permit cross-examination rendered the impugned appellate disposal procedurally defective. Ratio vs. Obiter: Ratio - where additions are based substantially on the statement of a third-party supplier, the assessee must be given an opportunity to cross-examine that supplier before sustaining additions; failure to do so is a breach of natural justice warranting remand. Obiter - observations on the strength of other documentary evidence were ancillary. Conclusion: The Tribunal held that the matter required fresh adjudication with the assessee afforded an opportunity to cross-examine the supplier; the CIT(A) order was set aside and remanded for compliance with natural justice. Issue 2 - Sustainability of additions u/s.69 and disallowance of depreciation u/s.32 in light of books and bank documents Legal framework: Section 69 permits treating investments as unexplained where the assessee fails to satisfactorily explain the nature and source of investment; section 32 governs allowance of depreciation on plant and machinery legitimately purchased and used for business. Precedent treatment: The judgment did not invoke or distinguish specific case law; it applied statutory tests requiring evaluation of evidentiary material adduced by the assessee (invoices, bank sanction and disbursement records, valuation) against the revenue's assertions. Interpretation and reasoning: The Tribunal noted that the assessee had produced invoices, a sale confirmation from the supplier, bank sanction letter, loan account statements and disbursement letter, and valuation report. It held that when the assessee offers documentary explanation of source and records the transaction in books, the AO cannot sustain additions based solely on the supplier's denial without further verification. The Tribunal emphasized that the bank's role - having sanctioned and disbursed loan after its own checks - was an important and dependable source corroborating the purchase, and thus the statement of a bank officer should be recorded during fresh adjudication. Regarding depreciation, since the addition hinged on the finding of a bogus purchase, the correctness of disallowing depreciation must await re-examination of genuineness of purchase on remand. Ratio vs. Obiter: Ratio - where documentary and bank evidence supports the assessee's claim of purchase and source of funds, the AO must test such evidence (including questioning bank officials) before invoking s.69 additions or disallowing depreciation; remand is warranted if such testing was not done. Obiter - suggested weight to be accorded to bank procedures and KYC checks. Conclusion: The Tribunal directed fresh adjudication by the CIT(A), including obtaining the bank officer's statement and reassessing the additions and depreciation claim on merits after full evidentiary opportunity; no final finding on the correctness of the additions or depreciation was made at this stage. Issue 3 - Validity of notice u/s.148 alleged to be based on borrowed opinion Legal framework: Validity of reopening proceedings under section 147/148 depends on the sufficiency and propriety of recorded reasons; information received from another authority must be evaluated, but the present judgment focused on consequences for fairness rather than resolving legality of reopening in the first instance. Precedent treatment: The judgment did not overrule or follow specific authority on borrowed opinion; it treated the objection as part of the broader contention of procedural impropriety to be addressed on remand. Interpretation and reasoning: The Tribunal recorded the assessee's contention that the notice was issued on the basis of borrowed opinion, but rather than adjudicating the legal validity of reopening, it observed that substantive and procedural infirmities in the subsequent proceedings (lack of opportunity to cross-examine and failure to test bank records) necessitated remand. The Tribunal implicitly treated the reopening challenge as intertwined with the need for fuller fact-finding and hearing before concluding on merits or on the validity of the reopening. Ratio vs. Obiter: Obiter - the observation that a challenge to the validity of the s.148 notice exists but was not finally adjudicated; the operative remedy granted was remand for fresh adjudication where such issues can be examined after giving opportunity to the assessee. Conclusion: The Tribunal did not decide the legality of the s.148 notice on the borrowed-opinion ground but remanded the matter so that the CIT(A) could re-examine all issues (including procedural ones) after affording requisite opportunities and verifying bank records. Relief and Directions (Operative Outcome) Because of procedural defects and insufficiency of fact-finding, the Tribunal set aside the impugned appellate orders and remanded both assessment years to the CIT(A) with specific directions: (i) afford the assessee an opportunity of being heard; (ii) permit cross-examination of the supplier whose statement formed the basis for additions; (iii) obtain and record the statement of the bank officer regarding sanction and disbursement of the loan used to purchase machinery; and (iv) decide the matter afresh on merits considering all relevant evidence. The appeals were allowed for statistical purposes pending fresh adjudication.