Reassessment invalid when cross-examination denied despite efforts under Sections 147/148 and 68 additions deleted

ITAT Delhi held that reassessment proceedings under Sections 147/148 and additions under Section 68 for alleged bogus purchases and sales were invalid. The assessee requested cross-examination of a witness whose statement formed the basis for reopening assessment, but AO failed to provide this opportunity despite making efforts. The tribunal distinguished between making efforts versus ensuring compliance, noting the Section 148A(b) notice was vague and lacked application of mind. Following precedent, the tribunal ruled that additions made without providing cross-examination opportunity violated statutory provisions and natural justice principles, directing deletion of all additions and declaring both assessment and appellate orders invalid.

---

---

The core legal questions considered by the Tribunal in this matter are as follows:

1. Whether the reassessment proceedings initiated under Sections 147/148 of the Income Tax Act, 1961 ("the Act") were valid, specifically focusing on the procedural compliance with Section 148A and Section 151, including the supply of sanction and relied-upon materials to the assessee.

2. Whether the Assessing Officer (AO) complied with the principles of natural justice by providing the assessee an opportunity to cross-examine the witness whose statements formed the basis of the reassessment.

3. Whether the additions made by the AO on account of alleged bogus purchases and sales were correctly computed and whether the profit element or the entire amount should be added back.

4. Whether the appellate authority was justified in restricting the addition made by the AO.

5. Whether the assessment and appellate orders were passed with proper application of mind and valid jurisdiction, including the validity of notices issued under Sections 148, 148A, and 144B of the Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening under Sections 147/148 and Compliance with Section 148A and Section 151

Legal Framework and Precedents: The provisions of Sections 147, 148, 148A, and 151 of the Act regulate the reopening of assessments. Section 148A mandates that before issuing a notice under Section 148, the AO must conduct an enquiry and provide the assessee with the material on which the reopening is based, along with the prior approval of the specified authority under Section 151. The CBDT guidelines dated 01.08.2022 emphasize the requirement of supplying sanction and material along with the notice under Section 148.

Court's Interpretation and Reasoning: The Tribunal observed that the AO issued the notice under Section 148A(b) without supplying the sanction under Section 151 along with the notice under Section 148, contrary to the mandatory CBDT guidelines. The AO also failed to provide the material relied upon, such as the statement of Shri Ashok Kumar Gupta, to the assessee at the time of issuing the notice under Section 148A(b). The Tribunal relied on the coordinate bench's earlier decision in the assessee's own case for AY 2018-19 and the judgment of the Supreme Court in Ashish Agarwal's case, which mandates that the AO must supply the relied-upon material to the assessee to enable a meaningful response to the notice.

Key Evidence and Findings: The AO's reliance on information from the "insight portal" under the Risk Management Strategy without independent application of mind or enquiry was held to be arbitrary. The AO did not confront the assessee with relevant details such as the nexus between the assessee and the alleged entry operator, the particulars of transactions, or the statements of third parties. The AO's order under Section 148A(d) recorded satisfaction without adequate enquiry or material.

Application of Law to Facts: The Tribunal held that the reopening was invalid as the AO failed to comply with the statutory requirements of Section 148A and Section 151. The absence of sanction and non-supply of material violated the procedural safeguards intended by the legislature and CBDT guidelines.

Treatment of Competing Arguments: The Revenue contended that the AO had possession of material including statements and had made efforts to provide cross-examination opportunities. However, the Tribunal distinguished between "making efforts" and "ensuring" compliance, finding the AO's actions insufficient.

Conclusion: The reassessment proceedings were held to be invalid and bad in law due to non-compliance with procedural requirements and principles of natural justice.

2. Violation of Principles of Natural Justice: Non-Providing Opportunity for Cross-Examination

Legal Framework and Precedents: It is a settled legal principle that if the Revenue relies on statements of third parties in assessment proceedings, the assessee must be afforded an opportunity to cross-examine those witnesses. This principle was reiterated in the Supreme Court judgment in Adman Timber Products and various High Court decisions, including Best City Infrastructure Ltd. (upheld by Delhi High Court), PCIT vs. Pavitra Realcom Pvt. Ltd., PCIT vs. Esspal International Pvt. Ltd., and Dr. M. Malliya vs. ACIT.

Court's Interpretation and Reasoning: The Tribunal noted that despite repeated requests by the assessee for cross-examination of Shri Ashok Kumar Gupta, whose statements formed the basis of reopening and additions, no such opportunity was granted. The Tribunal emphasized that the AO's failure to allow cross-examination amounted to a gross violation of the principles of natural justice, rendering the assessment order null and void.

Key Evidence and Findings: The assessee had filed requests dated 16.03.2023 and 19.03.2023 seeking cross-examination, which were not honored. The AO's reliance on uncrossed statements was held to be legally impermissible.

Application of Law to Facts: The Tribunal applied the legal principle that denial of cross-examination where statements of third parties are relied upon vitiates the assessment. The AO's failure to provide this opportunity was fatal to the validity of the reassessment.

Treatment of Competing Arguments: The Revenue's argument that efforts were made to provide cross-examination was found inadequate. The Tribunal distinguished between efforts and actual provision of the opportunity.

Conclusion: The assessment order was invalidated on the ground of violation of natural justice due to denial of cross-examination.

3. Computation and Extent of Addition on Account of Bogus Purchases and Sales

Legal Framework and Precedents: The Revenue challenged the CIT(A)'s order restricting the addition from Rs. 4,25,31,727/- to Rs. 3,23,241/-, contending that the entire amount or a higher percentage of bogus purchases should be added back, relying on precedents where disallowance was computed at 12.5% or 25% of bogus purchases.

Court's Interpretation and Reasoning: Since the Tribunal held the reassessment order invalid on procedural and natural justice grounds, it did not delve into the merits of the quantum of addition or the correctness of the CIT(A)'s restriction. The Tribunal explicitly stated that having decided the legal issue in favour of the assessee, the remaining grounds of appeal and cross-objection need not be adjudicated.

Application of Law to Facts: The Tribunal refrained from adjudicating on this issue due to the invalidity of the reassessment itself.

Conclusion: The issue of quantum of addition was left undecided as the reassessment order was quashed on procedural grounds.

4. Validity of Notices and Jurisdictional Issues

Legal Framework and Precedents: The assessee contended invalidity of notices issued under Sections 148, 148A(b), 144B, and 143(2) for lack of application of mind, vagueness, and non-compliance with statutory requirements.

Court's Interpretation and Reasoning: The Tribunal found merit in the assessee's submissions regarding the invalidity of notices, particularly the failure to supply sanction and relied-upon material, and the vagueness of the show cause notice. The Tribunal observed that the AO's changing and fleeting basis for reopening vitiated the proceedings.

Application of Law to Facts: The Tribunal's findings on procedural lapses and non-application of mind led to the conclusion that the notices and consequent assessment orders were invalid.

Conclusion: The notices were held to be invalid, contributing to the quashing of the reassessment.

5. Treatment of Books of Accounts and Application of Section 145(3)

Legal Framework and Precedents: Section 145(3) provides for rejection of books of account if the AO has reason to believe they are not reliable. The assessee argued that the AO did not reject the books under Section 145(3) but still made additions based on alleged bogus purchases, amounting to impermissible approbate and reprobate.

Court's Interpretation and Reasoning: The Tribunal noted this inconsistency but did not explicitly rule on it, as the fundamental procedural infirmities led to the quashing of the reassessment.

Significant Holdings:

"The addition made without providing an opportunity for cross examination is invalid in the eyes of law."

"The AO not only proceeded to issue notice u/s 148A(a) without making verification of the vague and insufficient information available with him to satisfy himself that income chargeable to tax has escaped assessment but at the same time also failed to provide the material relied upon to the assessee along with the notice u/s 148A(b) of the Act. This action of AO is highly arbitrary."

"The reassessment order dated 29.03.2024 passed under Section 147/144B and the first appellate order dated 30.08.2024 are held to be invalid and bad in law, having been passed in violation of statutory provisions and principles of natural justice."

"Not allowing the assessee to cross-examine the witnesses by the adjudicating authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice."

Core principles established include the mandatory requirement for the AO to supply all relied-upon material along with the notice under Section 148A(b), the necessity of prior sanction under Section 151 being supplied with the notice, and the fundamental right of the assessee to cross-examine third-party witnesses whose statements are used against it. The Tribunal reaffirmed that failure to comply with these procedural safeguards vitiates the reassessment proceedings and renders the additions invalid.

Final determinations: The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, quashing the reassessment order and deleting the additions made thereunder on grounds of procedural non-compliance and violation of natural justice, without adjudicating on the quantum of addition or merits of the case.

---