Investment of undisclosed income as 'on money' and entitlement to cross-examine witnesses before reliance on third-party electronic records

Investment of undisclosed income was contested where departmental case relied on admissions and records maintained by a third-party group alleging 'on money' payments. ITAT emphasised that admissions must be clear and are admissible only against the maker; statements of third-party employees lacking specific deposition on payments cannot substitute direct evidence. The tribunal stressed the right to cross-examine witnesses, particularly where electronic records of others are relied upon, and directed reassessment to permit cross-examination and allow the assessee to establish valuation of the asset to rebut alleged undisclosed income.

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Issues: (i) Whether the reassessment/re-opening under section 147/148 leading to addition u/s 69B on account of alleged cash payment ("on money") is sustainable where the departmental case relies on third-party statements and seized electronic records; (ii) Whether the assessee was entitled to opportunity to cross-examine the witnesses and to lead valuation evidence to rebut the departmental material.

Issue (i): Whether addition of Rs. 70,00,000 made u/s 69B based on seized records and third-party statements is sustainable.

Analysis: The Tribunal examined the material relied upon by the A.O., which primarily comprised statements and electronic data seized from the seller (Nirav Modi/Firestar Group) indicating receipt of "on money" and an excel sheet showing a cash component. There was no direct admission or documentary corroboration found with the assessee. The Tribunal noted that the A.O. did not obtain an independent valuation of the jewellery to establish that the cheque payment was inadequate relative to the ring's value; the departmental case therefore depended on third-party records and statements rather than material found with the assessee. The Tribunal held that when additions are founded on such third-party electronic/seized material, the assessee must be afforded a fair opportunity to meet and rebut that material.

Conclusion: In favour of the Assessee the addition u/s 69B based solely on the seized third-party records and statements could not be sustained without giving the assessee an opportunity to rebut by valuation and other evidence.

Issue (ii): Whether the assessee was entitled to cross-examine the declarants/witnesses and to have an opportunity to establish valuation to rebut the "on money" allegation.

Analysis: The Tribunal considered the principles governing the right to cross-examination in the context of revenue proceedings and electronic/seized evidence. While recognizing that cross-examination is not an absolute right in every administrative or revenue inquiry, the Tribunal found that fairness required that where the department's case rests on statements and electronic records of third parties and no corroborative material exists with the assessee, the assessee should be given an opportunity to cross-examine relevant declarants and to lead valuation evidence to rebut the inference of undisclosed cash payment. The Tribunal observed that the CIT(A) had not appreciated this aspect adequately and therefore directed that the matter be restored to the file of the A.O. for fresh adjudication with opportunities to the assessee to cross-examine and to produce valuation evidence.

Conclusion: In favour of the Assessee the assessee is entitled to opportunity to cross-examine the relevant witnesses and to file valuation or other rebuttal evidence; matter to be remanded to AO for fresh assessment proceedings.

Final Conclusion: The appeal is allowed for statistical purposes and the assessment is set aside and restored to the file of the A.O. for de novo consideration permitting the assessee to cross-examine witnesses and to produce valuation and other rebuttal evidence; resultant proceedings to be completed afresh in accordance with law.

Ratio Decidendi: Where additions in a reassessment are founded principally on third-party statements and seized electronic records without corroborative material with the assessee, natural justice requires that the assessee be given an opportunity to rebut through cross-examination of relevant declarants and by adducing valuation or other evidence before sustaining additions under section 69B.

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