2025 (1) TMI 281 - AT - Income Tax

Reassessment proceedings initiated u/s 147 - violation of the principles of natural justice due to the lack of opportunity for cross-examination - unexplained investment u/s 69 - HELD THAT - Admittedly the materials that were relied on by the assessing officer to make addition in the hands of the assessee were not provided to the assessee and the statements of the persons that was recorded were not subjected to cross objection to the assessee. Subsequently for assessee obtains a retraction statement of those individuals who were subjected to search, will not lead to the presumption that assessee was already aware of the statement recorded. Rejection of deeply is totally untenable. It is a bounden duty of the assessing authority to provide the materials that has been used against assessee to make addition in the hands of such assessee. There is nothing other than the statement recorded of the partner and the accountant of methods evergreen Enterprises in the possession of the revenue to justify the addition made in the hands of the assessee it is also noted that no further enquiries has been carried out by the AO to unearth any other circumstantial evidence is to support the statements that was relied upon to make addition in the hands of the assessee. It is no doubt a settled rule that the CIT(A) or the assessing officer is not bound by the technical rules of the Law of Evidence and that, it is open to them to collect materials, record statements etc, to facilitate an assessment even through private enquiry. But if the assessing officer desires to use such materials/statements against the assessee, the assessee must be informed of the material and must be given adequate opportunity to explain the same. Reassessment order passed in the present facts of the case is in violation of principles of natural justice, and deserves to be quashed. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The judgment revolves around the following core legal questions:

Whether the reassessment proceedings initiated under Section 147 of the Income Tax Act were valid.
Whether the addition of Rs. 17,50,000 as unexplained investment under Section 69 of the Income Tax Act was justified.
Whether the addition of Rs. 2,10,000 as interest income under Section 69B of the Income Tax Act was justified.
Whether the assessment was completed in violation of the principles of natural justice due to the lack of opportunity for cross-examination.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reassessment Proceedings

Relevant Legal Framework and Precedents: The reassessment was conducted under Section 147 of the Income Tax Act, which allows for reopening assessments if the Assessing Officer has reason to believe that income has escaped assessment. The principles of natural justice, as outlined in precedents like Andaman Timber Industries vs CCE and H.R. Mehta vs CIT, require that the assessee be given an opportunity to be heard and to cross-examine witnesses.
Court's Interpretation and Reasoning: The court found that the reassessment proceedings were initiated without providing the assessee with the necessary materials and statements that formed the basis of the reassessment. This omission was deemed a violation of the principles of natural justice.
Key Evidence and Findings: The reassessment was based on statements from individuals associated with M/s. Evergreen Enterprises, which were not furnished to the assessee for cross-examination.
Application of Law to Facts: The court applied the principles of natural justice, emphasizing the need for the assessee to be informed and allowed to contest the evidence used against them.
Treatment of Competing Arguments: The court rejected the Revenue's argument that the assessee was aware of the statements, noting that the failure to provide these materials was a significant procedural flaw.
Conclusions: The reassessment proceedings were quashed due to the violation of natural justice principles.

Issue 2: Addition of Rs. 17,50,000 as Unexplained Investment

Relevant Legal Framework and Precedents: Section 69 of the Income Tax Act deals with unexplained investments. The burden of proof lies with the Revenue to substantiate such additions.
Court's Interpretation and Reasoning: The court found that the addition was based solely on statements not provided to the assessee, thus lacking corroborative evidence.
Key Evidence and Findings: The absence of direct evidence linking the assessee to the alleged cash loan was critical.
Application of Law to Facts: The court emphasized the need for concrete evidence beyond mere statements to justify such additions.
Treatment of Competing Arguments: The court dismissed the Revenue's reliance on unverified statements as insufficient for the addition.
Conclusions: The addition was deemed unjustified and was annulled.

Issue 3: Addition of Rs. 2,10,000 as Interest Income

Relevant Legal Framework and Precedents: Section 69B pertains to unexplained amounts of money, including interest income. The principles of evidence apply similarly as in Issue 2.
Court's Interpretation and Reasoning: The court found no substantive evidence to support the addition of interest income.
Key Evidence and Findings: The lack of documentary evidence or corroborative statements undermined the addition.
Application of Law to Facts: The court required a higher standard of proof for such financial additions.
Treatment of Competing Arguments: The court favored the assessee's argument due to the absence of evidence.
Conclusions: The addition was not upheld.

Issue 4: Violation of Principles of Natural Justice

Relevant Legal Framework and Precedents: The principles of natural justice demand fair hearing and the opportunity to cross-examine evidence used against an individual.
Court's Interpretation and Reasoning: The court highlighted the procedural lapses, particularly the denial of cross-examination rights.
Key Evidence and Findings: The court noted the procedural deficiencies in the assessment process.
Application of Law to Facts: The court applied natural justice principles to invalidate the reassessment.
Treatment of Competing Arguments: The court sided with the assessee, emphasizing procedural fairness.
Conclusions: The reassessment was quashed due to these violations.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "It is a bounden duty of the assessing authority to provide the materials that has been used against assessee to make addition in the hands of such assessee."
Core principles established: The necessity of adhering to natural justice principles in reassessment proceedings and the requirement for concrete evidence to support financial additions.
Final determinations on each issue: The reassessment order was quashed, and all additions were annulled due to procedural violations and lack of evidence.

The judgment underscores the importance of procedural fairness in tax assessments and the need for substantial evidence to support any financial implications against an assessee.

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