ITAT Mumbai quashes Section 69A addition where cross-examination was denied and loan was fully evidenced
Background and Core Dispute
In Ratul Tex Private Limited v. Deputy Commissioner of Income Tax, the Mumbai Bench of the ITAT examined whether a loan transaction could be characterised as unexplained money under Section 69A merely on the strength of a third-party statement alleging accommodation entries, when the assessee had already produced complete supporting documents and was refused the right to cross-examine the person whose statement was used against it.
The dispute arose from an addition of ₹1,09,53,000 under Section 69A read with Section 115BBE of the Income Tax Act 1961, treating a loan as unexplained money allegedly received as an accommodation entry. The Tribunal had to determine whether such an addition could survive:
- when the assessee had furnished
- income-tax returns of the lender,
- audited financial statements,
- confirmation letters, and
- bank statements evidencing both receipt and repayment of the loan with interest,
- and when the Assessing Officer relied primarily on a third-party statement without granting cross-examination, despite a specific request.
The decision also involved interpretation and application of Section 147, Section 148, Section 148A, Section 133(6) and Section 250 as well as the overarching principles of natural justice, particularly the right to cross-examination.
Statutory Provisions in Focus
The controversy touched upon multiple provisions of the Income Tax Act 1961:
Section 69A– treatment of unexplained money found in the hands of an assessee.Section 115BBE– special rate of tax on income assessed underSection 69Aand similar deeming provisions.Section 147andSection 148– reopening of assessments on the basis of information suggesting escapement of income.Section 148A– procedural safeguards before issuing notice underSection 148.Section 133(6)– power to call for information from third parties.Section 250– appellate procedure before the CIT(A).
The Tribunal also relied on precedents that emphatically recognise that any order based on a statement of a third party, without granting cross-examination, suffers from violation of natural justice.
Facts in Brief
Return and Reopening of Assessment
- The assessee, Ratul Tex Private Limited, filed its return of income declaring ₹84,65,238 as total income.
- Subsequently, the Investigation Wing passed information to the Assessing Officer alleging that Deepak Jain was operating a network of concerns engaged in providing accommodation entries. It was reported that one such entity, Surya Diamonds Pvt. Ltd., had allegedly routed an accommodation entry to Ratul Tex Private Limited.
- Relying on this input, the Assessing Officer initiated reassessment proceedings under
Section 147and issued notice underSection 148.
Loan Transaction in Question
During the relevant previous year:
- The assessee had taken a loan of around ₹1 crore from Surya Diamonds Pvt. Ltd.
- An interest amount of ₹9,53,000 was also paid.
- The entire principal plus interest, totalling ₹1,09,53,000, was repaid within the same financial year through banking channels.
To substantiate the genuineness of this borrowing and repayment, the assessee provided:
- Copies of income-tax returns of Surya Diamonds Pvt. Ltd.
- Audited financial statements of the lender.
- Confirmation of account from the lender.
- Bank statements demonstrating:
- inflow of funds into the assessee’s bank account from Surya Diamonds Pvt. Ltd.; and
- outflow of funds back to the lender towards principal and interest.
Request for Cross-Examination
- The Assessing Officer placed heavy reliance on a statement given by Deepak Jain, who was stated to be involved in providing accommodation entries.
- The assessee made a specific written request to cross-examine Deepak Jain, since his statement was being used as the principal basis for the proposed addition.
- Despite this request, no opportunity of cross-examination was granted. The assessment was framed placing reliance on the untested statement.