Third-party information alone cannot justify disallowing expenditure without independent verification and cross-examination opportunity

The ITAT Amritsar ruled in favor of the assessee regarding disallowance of expenditure based on third-party information. The tribunal held that information collected from behind the assessee's back cannot justify disallowing purchases without independent verification by the AO. The three-member bench, with the third member concurring with the Judicial Member, deleted the addition confirmed by CIT(A). The tribunal emphasized that investigation wing information serves only to initiate assessment proceedings but cannot be treated as conclusive evidence without proper cross-verification and opportunity for cross-examination.

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Issues Involved:
1. Quantum addition made by the Assessing Officer (AO) and confirmed by CIT(A).
2. Divergent views of the Tribunal members.
3. Reliance on third-party information without independent verification.
4. Denial of cross-examination of witnesses.
5. Application of principles of natural justice and judicial discipline.

Detailed Analysis:

1. Quantum Addition Made by AO and Confirmed by CIT(A)
The primary issue revolves around the quantum addition made by the AO, which was confirmed by CIT(A)-2, Jalandhar. The AO had information from the DIT(Investigation) that certain entities, including M/s. Daksh Diamonds, M/s. Jewel Diamonds, and M/s. Nazar Impex (P) Ltd., were providing accommodation entries. The assessee had made purchases from these entities amounting to Rs. 36,13,365/-, Rs. 50,62,350/-, and Rs. 82,17,465/- for the assessment years 2007-08 and 2013-14 respectively. The AO doubted these purchases and made the addition.

2. Divergent Views of the Tribunal Members
The Tribunal members had divergent views on this issue. The Judicial Member favored deleting the addition, while the Accountant Member did not. Due to these divergent views, the case was referred to a third member under section 255(4) of the Act. The third member concurred with the Judicial Member, leading to the deletion of the addition.

3. Reliance on Third-Party Information Without Independent Verification
The third member noted that the AO's reliance on third-party information from the DIT(Investigation) without independent verification was not sufficient to disallow the assessee's claim. The Supreme Court's decision in the case of CIT vs. M/s. Odeon Builders Pvt. Ltd. was cited, which emphasized that disallowance based on third-party information without further scrutiny is not justified.

4. Denial of Cross-Examination of Witnesses
The third member also highlighted that the statements from Bhanwar Lal Jain and Sanjay Chaudhary, who managed the affairs of the suppliers, were not subjected to cross-examination. Citing the Supreme Court's decision in Andaman Timber Industries vs. Commissioner of Central Excise, it was emphasized that not allowing cross-examination of witnesses whose statements form the basis of an order is a violation of natural justice, making the order null and void.

5. Application of Principles of Natural Justice and Judicial Discipline
The third member stressed that the cumulative effect of all facts and evidence should be considered. The assessee had provided substantial evidence, including audited accounts, stock registers, and details of payments through banking channels. The purchases were less than 2.86% and 2.76% of the total purchases for the respective years, and payments were made through account payee cheques. The decision also underscored the importance of judicial discipline and consistency with previous Tribunal decisions, particularly those of the Amritsar Bench in similar cases.

Conclusion
Based on the majority view, the impugned orders of the CIT(A) dated 20.03.2017 and 04.07.2017 were set aside, and the additions were deleted. Consequently, the appeals filed by the appellant assessee were allowed. The order was pronounced in the open court on 03.07.2024.

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