2025 (1) TMI 1653 - AT - Income Tax

Additions under section 69C struck down where third-party statements used without opportunity for cross-examination, violating natural justice

ITAT MUMBAI - AT held that additions under s.69C were unsustainable where the AO relied on third-party statements without allowing the assessee to ... Addition u/s 69C - assessee sought for cross-examination of the witnesses which was rejected by the Ld. AO - transactions related to transfer and posting of PWD engineers - Whether addition cannot be made by placing reliance on a statement of third party and on material found from the third party in the hands of the assessee? HELD THAT:- AO came to the conclusion without verifying and making any further efforts, and this approach by the Ld. AO is in clear violation of principles of natural justice. On this aspect, we refer to the decision of Andaman Timber Industries [2015 (10) TMI 442 - SUPREME COURT] wherein, held that, by not providing opportunity of cross-examining the witness whose statements were relied on by the assessing officer, amounts to violation of principles of natural justice. Once the assessee disputed the correctness of the statement and wanted to cross-examine the witness which was denied, the Ld. AO, cannot pass any orders based on such statements, as it is not sustainable in eyes of law. It is also noted that in the statement recorded of Avish Atal in question No. 13, it is recorded that, the collection of the amount were done by Sonu (Lalit) Mishra and Pavan Mishra along with Avish Atal and others. However, the persons referred to in the answer given to question 13, were also not subjected to examination in order to place any identification regarding the assessee’s having paid any alleged cash. As in case of Ms. Lata Mangeshkar [1973 (6) TMI 13 - BOMBAY HIGH COURT] wherein a similar situation arose and Hon’ble Bombay High Court observed that in the absence of corroborative evidence, seized material cannot be considered to be primary direct evidence. This Tribunal in similar circumstances in case of ACIT vs. Naganath Rajbhoj [2025 (1) TMI 1539 - ITAT MUMBAI] upheld the view of the Ld. CIT(A), wherein identical additions were deleted. No infirmities in the view adopted by the CIT(A) in case of both the assessees to delete the additions made by the Ld. AO u/s. 69C. ISSUES PRESENTED AND CONSIDERED 1. Whether additions under section 69C (unexplained expenditure) and section 69A (undisclosed cash) can be sustained against an assessee on the basis of documents and statements seized from third parties without independent evidence linking such material to the assessee. 2. Whether the Assessing Officer (AO) could rely on statements recorded under section 132(4) and digital material recovered from third parties (including mobile phone images/WhatsApp chats) to make additions where those statements were subsequently retracted and the assessee was denied opportunity to cross-examine the declarants. 3. Whether a transfer/posting order alone can be treated as independent corroborative evidence to link the assessee to alleged cash payments recorded in third-party seized materials. 4. Whether precedent authorities relied upon by the revenue (including decisions permitting reliance on third-party material in different factual matrices) are applicable or distinguishable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reliance on third-party seized documents/statements to make additions under sections 69C/69A Legal framework: Additions under section 69C (unexplained expenditure) and section 69A (undisclosed cash) require the AO to establish that the assessee incurred unexplained expenditure or received undisclosed money. Statutory and judicial principles recognise that presumption under section 132(4A) or similar provisions applies in respect of the person in whose possession the document/material is found, not automatically to third parties. Precedent treatment: The Tribunal relied on a body of authority (including coordinate tribunal and High Court decisions) holding that documents or statements seized from third parties cannot, by themselves, constitute sufficient evidence to make additions against an assessee unless independently corroborated. Cases cited (e.g., decisions upholding deletion where primary evidence against the assessee was absent, and where statements were retracted) were followed and earlier decisions invoked by the Revenue were distinguished on facts. Interpretation and reasoning: The Court examined the statements of various Rucha Group employees and the seized documents. It found that the seized material and statements described a general modus operandi of the third party's business but did not contain any direct reference to transactions with the assessees or to interactions specifically linking the assessees to the alleged payments. The transfer order showing posting as per choice was held not to implicate the assessee or to be an 'independent' corroborative link to cash payments. The Court emphasized that mere suspicion generated by third-party records is insufficient and requires further corroboration by independent evidence (for example, direct admissions by the assessee, recovery of cash from the assessee, independent departmental inquiry establishing link, or testimony of persons who collected the sums). Ratio vs. Obiter: Ratio - where documents and statements originate from third parties and there is no independent corroboration linking those materials to the assessee, additions under sections 69C/69A cannot be sustained. Obiter - observations on the need to examine certain named collectors (Sonu/Lalit/Pawan Mishra) more thoroughly were contextual but reinforce the necessity of further inquiry. Conclusions: The Court affirmed that the AO's additions under section 69C (Rs.1.25 crore and Rs.2.50 crore in the respective matters) and the section 69A addition (Rs.5 lakh) were unsustainable when based solely on third-party seized material and statements, particularly where those statements were retracted and no independent linking evidence was produced. Issue 2 - Effect of retraction of statements and denial of cross-examination on admissibility/value of evidence Legal framework: Principles of natural justice and evidentiary law require that adverse reliance on oral statements used to incriminate an assessee calls for providing the assessee an opportunity to test that evidence, including cross-examination. Retraction of statements reduces their probative value and heightens the need for corroboration. Precedent treatment: The Court applied Supreme Court and tribunal authorities recognizing that denial of cross-examination of witnesses whose statements are the basis of adverse findings amounts to procedural infirmity and undermines the reliability of such statements. Decisions (e.g., Andaman Timber Industries principle and earlier Bombay High Court decisions) were followed to conclude that AO's refusal to permit cross-examination was a material flaw. Interpretation and reasoning: The Court found that the assessee sought a complete set of statements and opportunity to cross-examine declarants (not granted by the AO), and that several declarants subsequently retracted. Given retraction and denial of cross-examination, the Court held the AO's sole reliance on those statements without independent corroboration violated fairness and rendered the additions unsustainable. Ratio vs. Obiter: Ratio - retracted third-party statements and denial of cross-examination materially undermine the basis for additions; such statements cannot be the sole foundation for taxing adjustments absent independent corroboration. Obiter - specific procedural recommendations for further investigation were ancillary. Conclusions: Statements retracted after the search and not subject to cross-examination cannot by themselves ground additions; the AO's failure to allow testing of testimony was a breach of natural justice and contributed to the deletion of additions. Issue 3 - Sufficiency of transfer/posting order as corroborative evidence Legal framework: Independent corroboration is required to link third-party materials to the assessee. Administrative or transfer orders may be relevant facts but do not, by themselves, prove that cash payments were made to achieve those transfers. Precedent treatment: Courts have held that documents indicating occurrence of an event (e.g., transfer order) are not ipso facto evidence of corrupt payment; seized third-party notings need corroboration that ties entries specifically to the assessee. Interpretation and reasoning: The Court concluded that the transfer order only established that the assessee was transferred as requested; it did not establish payment. The transfer order therefore could not be treated as independent corroboration of the seized entries claiming cash receipt. The Court emphasized that without a direct link-such as contemporaneous receipts showing assessee's name, admission by collectors, recovery of cash, or reliable direct evidence-the transfer order cannot substitute for proof of payment. Ratio vs. Obiter: Ratio - administrative transfer orders do not constitute independent corroborative proof of cash payments recorded in third-party seized materials. Obiter - suggestions that departmental enquiries into collectors could supply necessary corroboration. Conclusions: The transfer/posting order was insufficient to corroborate third-party material and could not validate additions under sections 69C/69A. Issue 4 - Applicability and distinction of precedents relied upon by Revenue Legal framework: Application of precedent requires assessment of factual parity; reliance on cases permitting additions based on third-party material is permissible only where those cases featured closer or direct linkage or independent inquiries. Precedent treatment: The Court distinguished decisions cited by the Revenue (including B. Kishore Kumar and Madhav Gems), finding them factually inapposite because those cases either involved direct evidence against the assessee, searches on the assessee, corroborative entries, or independent departmental action absent here. Interpretation and reasoning: The Court compared factual matrices and concluded that the present matters lacked direct evidence or independent investigations that were present in the cases relied upon by Revenue; therefore those authorities were not applicable. Ratio vs. Obiter: Ratio - precedents are distinguishable where the factual foundation (presence of direct or corroborative evidence linking the seized material to the assessee) is absent. Obiter - general comments on prudence of commencing broader departmental inquiries when third-party material surfaces. Conclusions: Revenue's cited authorities were distinguishable on facts and could not sustain the additions in the present cases. OVERALL CONCLUSION The Court upheld the learned appellate authority's deletion of additions under sections 69C and 69A, concluding that (i) third-party seized documents and statements absent independent corroboration do not warrant additions against the assessee; (ii) subsequent retraction of statements and the denial of cross-examination further vitiate reliance on such statements; and (iii) administrative transfer orders alone do not constitute independent corroboration of alleged cash payments. Accordingly, the revenue's appeals were dismissed.