2025 (11) TMI 909 - AT - Income Tax

Addition under section 69A deleted where income tax addition rested on uncorroborated third-party information and conjecture

ITAT Delhi deleted an addition under section 69A, allowing the assessee's appeal. The Tribunal held the AO's action was based on uncorroborated ... Unexplained money u/s 69A - inflation of purchase on cash and the assessee had failed to furnish - HELD THAT:- It is settled law that proceedings based on third party information, without any independent examination or corroboration, are not sustainable. However, AO failed to provide the documents purportedly relied upon to substantiate the allegations of profit suppression. No enquiry has been conducted regarding the assessee’s purchases from its own vendors, thus the basis for linking the alleged cash generation to the assessee remains unclear. Assessee time and again asked the AO to provide the evidence of incriminating material on the basis of inflated purchases, but nothing has been provided to the assessee. CIT(A) rejected the submissions of the Assessee and upheld the action of the AO. Addition was based on conjectures and surmises, as the department has failed to establish that any incriminating material is related to the assessee for the inflated purchases. Therefore, the addition in dispute is hereby deleted. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition under section 69A (unexplained money) can be sustained where the assessment is initiated and sustained solely on third-party information obtained from search records/CRIU data without any independent inquiry or corroborative evidence. 2. Whether the assessee's right to fair hearing/natural justice is violated if the assessee is not furnished the documents/incriminating material upon which the Assessing Officer relies in making additions. 3. Whether additions based on allegations of 'inflated purchases' can be sustained where the Department fails to demonstrate a nexus between the alleged incriminating material seized from searched parties and the assessee's books/transactions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of additions founded solely on third-party information without independent verification Legal framework: Proceedings under the Act require that material relied upon to make additions be supported by evidence and, where based on third-party information (search/seizure material, CRIU/VRU data, or communications from other units), the Assessing Officer must conduct independent verification or corroboration before making additions to the assessee's income. Precedent treatment: The Court applied the well-established principle that conclusions drawn purely from third-party material, without any independent enquiry, corroboration, or linking evidence, are not sustainable. (The judgment treats this as settled law and follows it; no attempt to distinguish or overrule any authority is found in the text.) Interpretation and reasoning: The AO initiated proceedings and made the addition on the basis of information from search/seizure operations at third parties and communication from JCIT(OSD)/CRIU data alleging inflation of purchases. The AO admitted that no independent enquiry or verification was conducted to connect the incriminating material to the assessee. The AO also failed to produce or furnish to the assessee the documents on which it purportedly relied. Given these facts, the Court found the AO's reliance on third-party material without independent corroboration and without establishing nexus to the assessee to be legally insufficient. Ratio vs. Obiter: Ratio - Additions based solely on third-party information are unsustainable without independent inquiry/corroboration and demonstrable nexus to the assessee. Obiter - Observations about the source being CRIU/VRU data as a trigger for enquiry and the requirement to follow up with verification. Conclusion: The addition could not stand because it lacked the requisite independent verification and corroborative evidence tying the seized material to the assessee's transactions; therefore the addition was deleted on this ground. Issue 2 - Violation of natural justice by non-furnishing of relied-upon documents to the assessee Legal framework: Principles of natural justice and fair hearing require that an assessee be given access to, or at least a proper opportunity to examine, material relied upon by the Department that forms the basis of adverse findings and additions. Precedent treatment: The Court reaffirmed that reliance on material not disclosed to the assessee undermines the fairness of the proceedings; where AO relies on such material, it must be furnished or made available to the assessee so that a meaningful response can be filed. The judgment follows this principle and does not distinguish prior authorities. Interpretation and reasoning: The assessee repeatedly requested the AO to provide the incriminating material/evidence of inflated purchases and the AO did not supply such documents. The CIT(A) rejected the assessee's contention, but the Tribunal found that absence of disclosure rendered the AO's action procedurally unfair and that the assessee was deprived of an opportunity to rebut the allegations effectively. Ratio vs. Obiter: Ratio - Non-furnishing of relied-upon documents that are material to the addition violates the principles of natural justice and vitiates the addition unless the Department can justify non-disclosure and demonstrate alternative means by which the assessee could meaningfully respond. Obiter - Remarks on the necessity of giving access even where material originates from search operations, to enable defence. Conclusion: Since the AO did not provide the referenced material to the assessee and no independent verification was carried out, the procedural infirmity contributed to the unsustainability of the addition; this supports deletion of the addition. Issue 3 - Requirement of nexus between seized third-party incriminating material and assessee's books/transactions for sustaining additions on account of 'inflated purchases' Legal framework: For an addition on account of unexplained money or unaccounted transactions (such as inflated purchases) the Department must establish that the impugned amounts are attributable to the assessee by establishing a clear nexus between seized evidence and the assessee's own transactions or cash flows. Precedent treatment: The Court applied established standards requiring linkage/connection between seized material and the taxpayer's own accounts; absent such linkage, speculative attribution is impermissible. The Court followed precedent requiring concrete evidence to connect third-party incriminating entries to the assessee. Interpretation and reasoning: The AO asserted that the assessee made inflated purchases of a specified amount out of total purchases, but there was no enquiry into the assessee's transactions with its vendors, no corroborative investigation, and no evidence showing that cash generated from third-party suppression was returned to or used by the assessee. The Tribunal characterized the AO's conclusion as conjecture and surmise because the department failed to establish that seized incriminating material related to the assessee's purchases or finances. Ratio vs. Obiter: Ratio - Additions for alleged inflated purchases require demonstrable proof linking the seized third-party material to the assessee's own accounts; absent such nexus, additions amount to conjecture and cannot be sustained. Obiter - A quantified allegation (e.g., specific rupee amount) does not cure the absence of nexus if based solely on extraneous material. Conclusion: The alleged addition for inflated purchases was not substantiated by evidence linking the seized material to the assessee's books; therefore the addition constituted conjecture and was deleted. Overall Conclusion / Disposition Collectively applying the above principles, the Court concluded that the addition under section 69A was founded on third-party information without independent verification, the assessee was not furnished the relied-upon material (implicating natural justice), and no nexus between seized material and the assessee's transactions was demonstrated; accordingly, the addition was deleted and the appeal allowed.