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ITAT Quashes ₹80 Lakh Addition, Cites Violation of Natural Justice and Reliance on Retracted Statement

Jaipur: The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, has dismissed an appeal by the Income Tax Department, upholding the deletion of an ₹80 lakh addition made against an assessee, Ms. Pooja Kedia. The Tribunal, comprising Dr. S. Seethalakshmi (Judicial Member) and Shri Rathod Kamlesh Jayantbhai (Accountant Member), ruled that additions made under Section 68 of the Income Tax Act, 1961, cannot be sustained when based on a third-party's retracted statement and without affording the assessee the right to cross-examination.

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Case Overview

The case originated when the Assessing Officer (AO) reopened the assessment for A.Y. 2019-20 based on information that Ms. Pooja Kedia had received ₹80,00,124 as a "bogus unsecured loan" from M/s. Everstrong Enclave Private Limited and M/s. Megapix Vintrade Private Limited. This information stemmed from a search operation on the "Banka Group," where the key person, Shri Mukesh Banka, had allegedly admitted to providing accommodation entries through various shell companies.

Consequently, the AO added the amount to Ms. Kedia's income as unexplained cash credit under Section 68 of the Act, treating the transaction as a sham to route unaccounted money.

Arguments of the Parties

The Revenue's Stance: The Income Tax Department argued that the two companies involved were shell entities controlled by Shri Mukesh Banka, who had admitted to facilitating bogus entries. The department contended that the transaction, though disguised as a share sale, was in substance an accommodation entry, and the onus was on the assessee to prove otherwise, which she failed to do.

The Assessee's Defense: Ms. Kedia vehemently denied taking any loan. She argued that the transaction was a genuine sale of shares in BPIP Infra Pvt. Ltd. to the two companies. To substantiate her claim, she produced a wealth of documentary evidence, including:

Invoices for the sale of shares.

Bank statements showing the consideration was received through banking channels.

Confirmation, ITRs, and audited financial statements of the purchasing companies.

MCA data proving the companies were "Active" and compliant.

Critically, the assessee's counsel argued that the entire case of the AO was built on the statement of Shri Mukesh Banka, who had later retracted it via affidavits. Furthermore, the AO had denied her request to cross-examine Shri Banka, a fundamental violation of the principles of natural justice.

Tribunal's Analysis and Legal Precedents

The ITAT upheld the findings of the Commissioner of Income Tax (Appeals) [CIT(A)], who had initially deleted the addition. The Tribunal's decision was anchored on several key legal principles.

On Natural Justice and Cross-Examination

The Tribunal affirmed the CIT(A)'s finding that denying the opportunity for cross-examination was a fatal flaw in the assessment. The judgment cited the Supreme Court's landmark ruling in Andaman Timber Industries v. CCE , which established that an order based on a witness's statement without allowing cross-examination is a nullity as it violates natural justice.

"Addition cannot be made u/s 68 simply on the basis of statement of third party, when evidences filed by Appellant clearly proves the fact that these transactions were genuine... it is the AO who is duty bound to provide opportunity of cross examination of the witness, if he relies on the statement of such witness to decide against the appellant." - Excerpt from CIT(A) order, endorsed by the ITAT.

On Retracted Statements

The Tribunal noted that Shri Mukesh Banka had retracted his incriminating statement. It relied on the precedent set by the Rajasthan High Court in PCIT Vs. Esspal International P. Ltd , which held that a retracted admission cannot be the sole basis for an addition without independent corroborative evidence, which the Revenue failed to produce.

On the Merits of the Transaction (Section 68)

The ITAT observed that Ms. Kedia had successfully discharged her initial burden under Section 68 by proving the identity, creditworthiness, and genuineness of the transaction with documentary evidence. The onus then shifted to the AO to disprove these documents with concrete evidence, not mere suspicion. The AO’s failure to conduct any independent inquiry and his sole reliance on flawed third-party information were deemed insufficient to reject the assessee's claims.

On the Faulty Premise for Reopening

The Tribunal also took note of the flawed premise for the reassessment. The proceedings were initiated for an alleged "bogus unsecured loan," but the actual transaction was a "sale of shares." This discrepancy, as highlighted by the assessee and noted by the CIT(A), further weakened the foundation of the Revenue's case.

Final Decision

Concluding that the assessment was based on "mere suspicion and surmises without any cogent material," the ITAT dismissed the Revenue's appeal. The Tribunal found no infirmity in the CIT(A)'s detailed order deleting the ₹80 lakh addition, thereby providing significant relief to the assessee.