The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted additions made under Section 69 of the Income Tax Act, 1961 against an individual assessee, holding that additions based solely on third-party statements and seized materials cannot survive where the assessee was denied the opportunity to cross-examine the persons whose statements were relied upon.

A Bench comprising Vice President Saktijit Dey and Accountant Member Prabhash Shankar allowed the appeals filed by Navin Shamji Vira for AYs 2014-15 and 2017-18 and quashed the reassessment proceedings for AY 2017-18 on the ground of invalid approval under Section 151 of the Act.

“When the Departmental Authorities were using adverse material belonging to third parties against the assessee, they were duty bound not only to confront such material to the assessee but also provide opportunity of cross examination.”

The reassessment proceedings were initiated following a search and seizure operation conducted in the case of M/s Evergreen Enterprises and its partner, Nilesh Bharani. During the search, the department allegedly found incriminating materials suggesting that cash loans had been received from various persons, including the assessee.

Based on the seized material and statements recorded under Section 132(4), the Assessing Officer (AO) alleged that the assessee had advanced cash loans of Rs.55 lakh in AY 2014-15 and Rs.56 lakh in AY 2017-18. Consequently, the assessments were reopened under Section 147 and additions were made under Section 69 of the Act.

Before the Tribunal, the assessee consistently denied having advanced any cash loans either to M/s Evergreen Enterprises or to Nilesh Bharani. The assessee also pointed out that Nilesh Bharani had subsequently filed an affidavit retracting his earlier statement and clarifying that the amounts reflected in the seized documents represented his own money and that the figures had been exaggerated.

The assessee repeatedly sought complete information relied upon by the department and requested an opportunity to cross-examine Nilesh Bharani and other persons whose statements formed the basis of the reassessment. However, no such opportunity was granted.

“The assessee certainly cannot be expected to prove the negative.”

The Tribunal observed that despite repeated replies and objections filed by the assessee, the AO incorrectly recorded in the assessment order that no proper submissions or documentary evidence had been furnished. It held that once the assessee denied the allegations, the burden shifted to the department to establish that cash loans had actually been advanced.

The Bench further held that the failure to provide cross-examination while relying on adverse third-party material amounted to violation of the principles of natural justice, rendering the additions unsustainable.

Relying on the decision of the Bombay High Court in Alag Property Construction (Pvt.) Ltd. vs. ACIT and the Supreme Court ruling in Union of India vs. Rajeev Bansal, the Tribunal held that the reassessment proceedings were without jurisdiction and liable to be quashed.

Thus, the ITAT deleted the additions for both assessment years and quashed the reassessment proceedings for AY 2017-18.

To Read Full Order, Download PDF Given Below.