2025 (6) TMI 212 - AT - Income Tax

Addition u/s. 69A - basis of information obtained from third-party survey proceedings - onus to prove - as alleged that the assessee had received unexplained cash loans through hundis during the relevant previous year - HELD THAT - It is settled law that for invoking the provisions of section 69A of the Act the Revenue must establish that the assessee is the owner or possessor of the alleged unexplained money and that such money has not been recorded in the books of account. In the present case there is no material brought on record by the Assessing Officer to prove the existence of any actual transaction between the assessee and Shri Pravin S. Shah. No copy of the alleged hundi no date-wise loan record no signature of the assessee and no statement of Shri Pravin S. Shah relied upon by the AO has been brought on record or confronted to the assessee. There is also no evidence to show that any money was found in possession of the assessee or routed through its books. The entire addition is based on generalized information received from a third-party survey and lacks any evidentiary value in the absence of corroboration. It is trite law that documents found in possession of a third party cannot be used against an assessee unless the material is confronted and opportunity of rebuttal including cross-examination is granted. We also note that the CIT(A) relied upon the CBDT Circular No. 20 dated 07.07.1964 which clarifies that for invoking section 69A of the Act ownership must be clearly established and the explanation of the assessee must be found unsatisfactory after due inquiry. None of these preconditions were satisfied by the AO in the present case. The addition was made in a mechanical and arbitrary manner without discharging the burden of proof which squarely lay upon the Revenue. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the addition of Rs. 2,65,00,000/- made under section 69A of the Income-tax Act, 1961 ("the Act") based on information obtained from a third-party survey without direct evidence or corroboration against the assessee is sustainable in law.

(b) Whether the Assessing Officer ("AO") complied with the principles of natural justice by providing the assessee an opportunity to cross-examine the third party whose statements and documents were relied upon.

(c) Whether the AO was justified in making an ex parte assessment under section 144 read with section 147 and 144B of the Act without adequately verifying the assessee's reply filed during the course of assessment proceedings.

(d) Whether the reliance on third-party documents and uncorroborated information without furnishing copies or allowing rebuttal violates settled legal principles and procedural safeguards.

(e) Whether the provisions of Rule 46A of the Income Tax Rules, 1962, relating to acceptance of additional evidence before the Commissioner of Income Tax (Appeals) ("CIT(A)") were violated by the CIT(A) in admitting the assessee's submissions without remanding the matter to the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of addition under section 69A of the Act based on third-party information

The legal framework under section 69A requires the Revenue to establish that the assessee is the owner or possessor of unexplained money or property which has not been recorded in the books of account. Mere suspicion or information from a third party without corroboration is insufficient to invoke this provision.

Precedents relied upon include the CBDT Circular No. 20 dated 07.07.1964, which clarifies that ownership must be clearly established and the assessee's explanation found unsatisfactory after due inquiry before making additions under section 69A. The Tribunal also referred to judicial pronouncements emphasizing that documents found in possession of third parties cannot be used against an assessee without corroboration and opportunity of rebuttal.

The AO's addition was based solely on information obtained during a survey under section 133A in the case of a third party, Shri Pravin S. Shah, who was alleged to have provided cash loans through hundis. The AO did not produce any direct evidence such as copies of hundis, transaction dates, signatures, or statements linking the assessee with the alleged cash loan. No money was found in possession of the assessee nor routed through its books.

The CIT(A) found that the addition was made mechanically without independent verification or inquiry at the level of the assessee. The AO failed to discharge the burden of proof to establish ownership or possession of the alleged unexplained money. The Tribunal agreed with the CIT(A) that the addition was arbitrary and unsustainable in law.

Issue (b): Compliance with principles of natural justice and opportunity to cross-examine

The assessee contended that the AO did not furnish copies of the alleged hundis or statements recorded under section 131 of the Act of Shri Pravin S. Shah, nor allowed the assessee to cross-examine him. This denial of opportunity to confront and rebut evidence violates the principles of natural justice.

The Tribunal noted reliance on Supreme Court decisions which hold that documents found in possession of third parties cannot be used as evidence against an assessee unless corroborated and unless the assessee is given an opportunity to cross-examine the third party. The CIT(A) held that the AO's failure to furnish material and permit cross-examination rendered the addition invalid.

The Tribunal concurred that the principles of natural justice were violated and that the addition could not be sustained on such a basis.

Issue (c): Legitimacy of ex parte assessment and treatment of assessee's reply

The AO completed the assessment ex parte under section 144 read with section 147 and 144B of the Act after the assessee filed a reply on 19.03.2022 denying the alleged transaction and requesting that the original return be treated as filed in compliance with section 148 notice.

The Revenue argued that the reply was filed at the fag end of the time barring period and was accepted by the CIT(A) without remand to the AO for verification, violating Rule 46A. The AO contended that the assessee was non-compliant and the ex parte assessment was justified.

The Tribunal observed that the reply was filed during the course of assessment proceedings and formed part of the assessment record, not fresh evidence filed before the CIT(A). Therefore, Rule 46A, which regulates acceptance of additional evidence before the appellate authority, was not applicable. The AO failed to consider or rebut the reply before making the addition.

The Tribunal held that the ex parte assessment without due consideration of the assessee's reply was improper and that the CIT(A) rightly deleted the addition on this ground as well.

Issue (d): Reliance on third-party documents without corroboration or confrontation

The AO's addition was premised on documents and statements seized from a third party during survey proceedings. The assessee challenged the use of such third-party material without corroborative evidence or opportunity of cross-examination.

The Tribunal emphasized settled legal principles that third-party documents cannot be used against an assessee unless corroborated and the assessee is given an opportunity to rebut. This principle was affirmed by the Gujarat High Court in a recent decision cited by the assessee.

The Tribunal found that the AO's reliance on unverified third-party information without corroboration or confrontation was legally untenable and that the CIT(A) correctly applied this principle in deleting the addition.

Issue (e): Applicability of Rule 46A of the Income Tax Rules

The Revenue contended that the CIT(A) erred in accepting the assessee's submissions without remanding the matter to the AO for verification, thereby violating Rule 46A which mandates that additional evidence filed before the appellate authority should be forwarded to the AO for comments.

The Tribunal held that the reply dated 19.03.2022 was filed during assessment proceedings in response to a show-cause notice and was part of the record considered by the AO. It was not "additional evidence" filed for the first time before the CIT(A). Therefore, Rule 46A was not applicable, and the CIT(A) did not err in relying on the reply without remand.

3. SIGNIFICANT HOLDINGS

"It is settled law that for invoking the provisions of section 69A of the Act, the Revenue must establish that the assessee is the owner or possessor of the alleged unexplained money and that such money has not been recorded in the books of account."

"Documents found in possession of a third party cannot be used against an assessee unless the material is confronted and opportunity of rebuttal, including cross-examination, is granted."

"The addition was made in a mechanical and arbitrary manner without discharging the burden of proof which squarely lay upon the Revenue."

"The reply filed by the assessee during the course of assessment proceedings cannot be treated as additional evidence before the CIT(A) and Rule 46A of the Income Tax Rules, 1962, has no application."

"Suspicion, however strong, cannot take the place of evidence."

The Tribunal affirmed the deletion of the addition of Rs. 2,65,00,000/- made under section 69A of the Act, holding that the AO failed to bring any independent corroborative material on record, did not allow cross-examination of the third party, and proceeded on the basis of unverified third-party information. The principles of natural justice were violated, and the burden of proof was not discharged by the Revenue. The ex parte assessment was also found improper in light of the assessee's timely reply. Consequently, the Tribunal dismissed the Revenue's appeal and upheld the order of the CIT(A).