ITAT Delhi Sends Back ‘On-Money’ Jewellery Addition Over Cross-Examination Lapse
Background of the Dispute
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) examined a reassessment framed on Gyan Enterprises Private Limited Vs ACIT, where an addition of ₹70,00,000 was made under Section 69B of the Income Tax Act 1961 for Assessment Year (AY) 2012-13.
The controversy arose from alleged “on-money” cash payment for purchase of diamond jewellery (a 16 carat yellow centre stone diamond ring) from the Nirav Modi/Firestar Group. The Assessing Officer (AO) relied exclusively on:
- Statements recorded during search/survey on the Nirav Modi Group, and
- Electronic data (digital excel files) seized from their premises.
No incriminating document or admission was found directly from the assessee. Nonetheless, the AO concluded that the assessee had paid ₹70,00,000 in cash over and above ₹1,00,00,000 paid through banking channels and accordingly invoked Section 69B for alleged unexplained investment.
The ITAT ultimately held that the addition could not be sustained without first allowing the assessee an effective opportunity to cross-examine the third-party witnesses whose statements and digital data formed the sole basis of the addition. The matter was therefore remanded to the AO for fresh adjudication.
Procedural History
Original Assessment and Income Declared
- The assessee, a non-banking financial company, filed its return of income on 29.09.2012 declaring business income of ₹8,04,59,896.
- Assessment under
Section 143(3)was completed on 26.02.2015 at an assessed income of ₹9,27,97,110.
Information Triggering Reopening
Subsequently, the Investigation Wing, Mumbai, carried out search and survey operations on the Nirav Modi Group. Based on such proceedings, the AO later received information that the assessee had allegedly made cash payment for purchase of jewellery. Specifically:
- A letter dated 04.08.2017 from the Asst. Director of Income Tax (Inv.), Unit-4(2), Mumbai indicated that M/s Gyan Enterprises Pvt. Ltd. had paid cash against purchase of a 16 carat yellow centre stone diamond ring during FY 2011-12.
- On perusal of this information vis-à-vis the assessment records, the AO formed a belief that income had escaped assessment within the meaning of
Section 147read withSection 148.
Reopening of Assessment
- Notice under
Section 148was issued on 10.01.2019 after recording reasons and obtaining approval of the Principal Commissioner of Income Tax, Delhi-4. - In response, the assessee filed return of income on 17.06.2019 declaring the same income of ₹8,04,59,896 for AY 2012-13.
- Notice under
Section 143(2)was issued on 21.09.2019. - On request, the AO supplied the recorded reasons as well as copies of statements and documents relied upon, which contained details from the Nirav Modi/Firestar Group.
The AO alleged that despite requisitions, there was no meaningful compliance by the assessee.
Findings of the Assessing Officer
Search and Survey on Nirav Modi/Firestar Group
During the search and survey action on the Nirav Modi Group:
- Digital and physical evidences were gathered indicating practice of receiving “on-money” (unaccounted cash) from customers purchasing diamond/gold jewellery.
- Employees involved in maintaining digital cash records admitted on oath that cash was accepted over and above the amounts recorded in the books of account.
- The AO reproduced relevant extracts of such statements in the assessment order, which purportedly described the modus operandi of:
- Under-invoicing sales, and
- Recording differential amounts as cash in separate electronic records.
Digital Evidence – Excel File of Sales
A crucial piece of evidence relied upon was an excel file recovered from the laptop of one Mr. Saurabh Shah during survey:
- The file allegedly contained transactions of jewellery sold between April 2016 and 31.03.2017 at both Mumbai and Delhi showrooms.
- It also indicated the mode of payment – including cash components tagged as “on money”.
Within this data, an entry was identified showing: