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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition of Rs. 4,63,40,539/-. The addition was made by the AO based on a WhatsApp Excel sheet recovered during a search, alleging unaccounted transactions between the assessee and a searched entity.
Held
The Tribunal held that the AO erred in relying on third-party evidence (WhatsApp chat) without allowing the assessee an opportunity for cross-examination. This violated principles of natural justice, rendering the assessment invalid.
Key Issues
Whether the addition made solely on the basis of unverified third-party evidence without granting cross-examination opportunity is valid and if denial of cross-examination violates natural justice.
Sections Cited
139(1), 143(3), 144B, 131(1A), 142(3), 68, 69, 694, 690, 132(4)
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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA & SHRI ANIKESH BANERJEE
The instant appeal of the revenue was filed against the order of the National Faceless Appeal Centre (NFAC), Delhi [for brevity, ‘Ld.CIT(A)’], order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) on dated 21/08/2024 for AY 2022-23. The impugned order was emanated from the order of the Assessment Unit, Income-tax department (in short, ‘the Ld.AO’) passed u/s 143(3) r.w.s. 144B of the Act, date of order 20/03/2024.
Master Chain Pvt Ltd 2. The revenue has taken the following grounds of appeal: -
1. "Whether on the facts and the circumstances of the case and in law, the Ld.CITA) was right in holding that non grant of cross examination of the witnesses render the income tax assessment proceedings as invalid, without appreciating the correct legal provision on this issue".
2. "Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting an addition of Rs. 4,63,40,539/-, holding that the Rules of Evidence and Indian Evidence Act contemplating grant of cross examination of the witnesses shall strictly apply to the facts of the present case".
3. "Whether on the facts and the circumstances of the case and in law, the Ld.CIT(A) was right in deleting an addition of Rs. 4,63,40,539/-, disregarding the factual findings made by the Assessing Officer, in the Assessment order".”
The brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing and wholesale trading of gold jewellery and ornaments. The assessee filed its return of income under section 139(1) of the Act, declaring a total income of Rs.15,04,83,700/-. The case of the assessee was selected for scrutiny under CASS. During the course of assessment proceedings, the Ld. AO noted that a search and seizure operation had been conducted on M/s Mohinder Singh Jewellers, Amritsar on 02/02/2022. The Ld. AO presumed that the assessee had entered into undisclosed transactions with the said searched person which were not recorded in the books of accounts. Based on a WhatsApp Excel sheet recovered during the course of search, the Ld. AO observed that the assessee had allegedly transacted a total of 9,380.676 grams of jewellery with the searched entity. Relying on the Investigation Report received, the Ld. AO concluded that unaccounted transactions had taken place between the assessee and M/s Mohinder Singh Jewellers & M/s Mohinder Singh Jewellers Pvt. Ltd. Further, on the Master Chain Pvt Ltd basis of the statement recorded during the search of one of the employees, Shri Sunil, the Ld. AO treated the entire transaction as an undisclosed sale of the assessee. He adopted a rate of Rs.4,940/- per gram on 9,380.676 grams, thereby determining unaccounted sales of Rs.4,63,40,539/- allegedly made by the assessee to M/s Mohinder Singh Jewellers. In response, the assessee furnished detailed explanations along with supporting documents such as transaction records, bank statements, ledgers, and invoices. With respect to the difference in weight, the assessee submitted a tabular reconciliation, reproduced below:
The assessee explained that the variation in weight was due to the fact that the actual sales were made on a gross weight basis, amounting to 12,533.92 grams. The difference arose on account of labour charges, approximately 2% of the gross weight, resulting in the fine weight being lower than the gross weight. Based on this, the assessee filed the corresponding GST returns and collected TCS @1% on the total transactions amounting to 12,533.92 grams. However, the authenticity of the excel sheet extracted from the WhatsApp chat was neither verified nor subjected to cross-examination by the assessee. Despite this, the Ld. AO treated the contents of the said Excel sheet as representing transactions over and above Master Chain Pvt Ltd those disclosed by the assessee, and consequently, added the entire amount to the assessee’s total income as undisclosed sales. Aggrieved by this addition, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) observed that the assessee was not afforded a reasonable opportunity to cross-examine the third-party evidence found during the search. It was further noted that the virtual hearing provided by the AO was not granted within a reasonable time frame, resulting in a gross violation of the principles of natural justice. After considering the facts and submissions, the Ld. CIT(A) passed a detailed and speaking order, deleting the entire addition solely on the ground of violation of natural justice, as the assessee was denied the opportunity to cross-examine the third-party evidence. Being aggrieved, the revenue has preferred the present appeal before us.
The Ld. DR argued that the Ld. CIT(A) erred in deleting the entire addition merely on the ground of lack of cross-examination, without appreciating the merits of the case. The Ld. DR contended that such deletion was unjustified and liable to be reversed. He further invited our attention to pages 22 to 24 of the impugned appellate order, wherein the relevant paragraphs are extracted below: - “OBSERVATION AND DECISION: In this connection, in the entirety of the matter, after careful examination of the facts of the case, arguments of the AO particularly the allegation that the Appellant has unaccounted Sales amounting to RS 4.63 Crores, based on the statement recorded of Mr Parvinder Singh of M/s Mohinder Singh Jewellers and Mis Mohinder Singh Jewellers Pvt Ltd u/s 131(1A) of the Income Tax Act, 1961 on 21.06.2022 I am of the considered view that: (A) The Assessee is a Private Limited Company and is subject to Audit under the Companies Act 2013 as also subject to filing of returns under the prevailing GST laws wherein details of all Sales/ Master Chain Pvt Ltd Purchases are to be submitted. The assessee has filed all GST returns and the data aligns with the return of income filed. The AO seems to have ignored the point was seems to have been totally swayed by a third-party Statement which is dealt by me in the below paras; (B) An addition in assessment carried out pursuant to statement recorded u/s 131(1A) of the Act has to be related to cogent and positive materials found which prove conclusively that the assessee has either earned an income or made an investment which has not been recorded in his regular books of account or that his case is covered under any of the deeming provisions contained in sections 68, 69. 694 to 690 of the Act. The Hon'ble Supreme Court in the case of CIT vs. Odeon Builders Private Limited [2019] 418 ITR 315 (SC) has held that Addition or disallowance cannot be made solely on third-party information without independently subjecting it to further verification by the Assessing Officer. We note that the compliance of provisions of Sec. 142(3) is a mandatory statutory requirement in completing the assessment proceedings failing which may vitiate the entire assessment itself since this sub- sec uses the word "shall. The AO has relied on the statement of Shri Parvinder Sing dated 21.06.20226. Neither statement of Shri Parvinder Singh dated 21.06.2022 was provided to the assessee nor it was allowed to cross-examine the deponent. The Hon'ble Supreme Court in the case of Andaman Timber Industries vs. commissioner of Central Excise reported in [2016] 38 GSTR 117 (SC) has held that the adjudicating authority's denial of the assessee's claim to cross- examine the witnesses though the statements of those witnesses were made the basis of the order, was a serious flaw which nullified the order since it was a violation of the principles of natural justice Also, in the case of Principal Commissioner of Income. Tax (Central) vs Oriental Power Cables Ltd reported in [2022] 143 com 371 (SC) has held that failure to give the assessee the right to cross-examine witnesses whose statements are relied on, results in a breach of principles of natural justice. It is a serious flaw which renders the order a nullity.
In the case of Kishinchand Chellaram (AIR 1980 14 SC 2117) the Hon'ble Supreme Court of India on the aspect of cross-examination held as follows "It is true that the proceedings under the Income Tax law are not governed by the strict rules of evidence and therefore it might be said that even without calling the Manager of the Barik in evidence to prove this letter, it could be taken into account as evidence. But before the Income Tax Authorities could rely upon it, they were bound to produce it Master Chain Pvt Ltd before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross examine the Manager of the Bank with reference to the statements made by him." Hon'ble Apex Court in Pullangode Rubber Produce Co., Ltd V. State of Kerala (1973) 91 ITR 18 (SC) held that the admission is an extremely important piece of evidence, has held that, it cannot be said to be conclusive and the maker can show that it was incorrect. The statement is factually incorrect for the detailed reasons stated above and in the instant case sole reliance is place on such factually incorrect statement.6.22 The Hon'ble Supreme Courts in the case of CT Vs Khader Khan And Son 25 taxmann.com 413 (SC) wherein Hon’ble Apex Court held that a statement recorded during survey proceedings do not have any evidentiary value. Thus, the sole evidence relied upon issue of show cause notice do not have any evidentiary value in the eyes of law. The Hon'ble Calcutta High Court in Eastern Commercial Enterprise (1994) (Cal) [210 (TR 103] page-11 Held under: “Cross-examination is the sine qua non of due process of taking evidence and the adverse inference can be drawn against a party unless the party is put on notice of the case made out agent He must be supplied with the contents of all such evidence both oral and documentary so that he can prepare to meet the case against him. This necessary to should cross- examine the witness hostiles to him. A similar view was also taken by the Hon'ble High Court of Rajasthan in the case of CIT vs. Smt. Sunita Dhadda reported in [2018] 406 ITR 220(Raj) when Hon'ble Court has considered the judgment of the Hon'ble Supreme Court in te case of Mis Andaman timber Industries vs CCE (sure) and confirmed the www taken by the Tribunal holding that if the assessee is not provided any opportunity to cross-examine the person who started to have received on-money invitation of principles of natural justice which, thus called for the deletion of addition as made by the Ld. Assessing Officer So the AO in this case erred in relying on the statement of a person who were not willowed to be cross-examined as held by the Hon'ble Apex Court in Andaman Timber (supra) and Odeon Builders Pvt. Ltd. (supra). So from any angle one looks, the statement of Shi Parvinder Singh M/s Mohinder Singh Jewellers and M/s Mohinder Singh Jewellers Pvt Ltd cannot be used against the assesses Master Chain Pvt Ltd And when we remove the statement with the legal infirmities discussed supra, there is no material tactually or technically at all against the assessee and the AO having talked to find any infirmity / with the documents Med by the assessee/lenders to prove the transactions as discussed supra no adverse view was legally tenable.”
The Ld.DR in argument stated that the Ld.AO, on the basis of the report from investigation department of Income tax, considered the transaction in excel sheet in the WhatsApp chart is over and above the normal sale transactions. She stands fully in favour of the order of Ld.AO. the relevant paragraph of the impugned assessment order are reproduced as below:- “4.6.1.3. In the above statement, Sh. Parvinder Singh has submitted that entries in the above table pertain to the purchases made by him with M/s Master Chains Pvt Ltd. The entries against which "BANK" is written can be found in the ledger account of M/s Master Chains Pvt Ltd in the books of both M/s Mohinder Singh Jewellers and M/s Mohinder Singh Jewellers Pvt Ltd. However, other entries will not match because these entries have not been booked on the day when the purchase has been made. Rather Sh. Parvinder Singh has engaged into speculation transaction with M/s Master Chains Pvt Ltd and he is booking the entry after few days time on a different rate. 4.6.1.4. In order to verify that whether what is stated by Sh. Parvinder Singh is true or not, the ledger account of M/s Master Chains Pvt Ltd was looked into the books of both M/s Mohinder Singh Jewellers and M/s Mohinder Singh Jewellers Pvt Ltd. The entries against which "BANK" is written were found on the same date as has been mentioned on the sheet as above. However, the further explanation given by Sh. Parvinder Singh regarding the grams of gold which is entered in the sheets is speculative in nature appears to be a justification which suits the assessee. There is no other corresponding evidence available or provided by the assessee which corroborates with the explanation given by Sh. Parvinder Singh that these are speculative transactions. It is already proven in other Issues pertaining to the assessees that they are involved in unaccounted purchases and unaccounted sales. Hence, the transactions written in the above sheets which does not matches with the ledger account as is maintained in the Books of M/s Mohinder Singh 4.6.1.5 Based on the discussion above, the above entries listed in the PDF sheets does not match with the ledger account of the assessees and hence the same shat be treated as unaccounted purchases. On converting the same into the monetary terms by taking the rate per gram @ Rs 4940) (the rate taken by the Government approved valuer in his valuation report during the search), the total amount determined is of Rs. 4,63,40 539/- and which is unaccounted purchases in the hands of Mis Mohinder Singh Jewellers in AY 2022-23 and unaccounted sales in the hand of Master chain Pvt. Ltd.”
The Ld.AR argued and filed the paper book containing pages 1 to 191 which is kept in record. The Ld.AR stated that the assessee has discharged its onus by submitting the ledger, bank statement, invoices, GST return and the TCS was also deducted related to these transactions. He further stated that the Ld.CIT(A) during passing order considered the fact of the case and the transactions of the assessee with the party. The assessee never denied the transaction with the parties whereas he submitted the statement related to the transaction with contain sales total of Master Chain Pvt Ltd 12533.92 gms. He further stated that the assessee has requested for personal hearing through video conferencing (VC) to present the oral arguments in support of the claim. On assessee’s request, a personal hearing through VC was scheduled on 12/03/2024 on 11.30 AM and the notice was duly issued for VC on 11/03/2024 evening. Even for less than a day the hearing was fixed hurriedly and the reasonable opportunity for the assessee was denied. The assessee was not allowed any advance intimation to prepare for the same. In clause (xxiv) of section 144B of the Act requires that the assessment shall be completed only after taking into account the response furnished by the assessee, which was not done and, therefore, the assessment order violates the principle of natural justice.
The Ld.AR strongly relied on the order of the Ld.CIT(A) and the relevant paragraphs of the impugned appeal order on pages 26 to 27 are extracted below:- “ Perusal of the transactions with M/s Mohinder Singh Jeweler's and M/s Mohinder Singh Jeweler's Pvt Ltd. indicate a Joint sale of 12533.52 gms GROSS WEIGHT. Summary of all the invoice copy have been submitted which were not controverted by the A.O. This was further corroborated by the assessee with Ledger Confirmations from M/s Mohinder Singh Jeweler's and M/s Mohinder Singh Jeweler's Pvt Ltd. The excel sheet found contains a weight of 9380.6765gms only and the statement recorded under oath u/s Section 132(4) of Mr. Parminder Singh clearly states that all the sales entries maintained in excel sheet by him are also recorded in his books of accounts;
Furthermore, the Statement also explains the calculation of the sheet maintained by Mr. Parvinder Singh, of a transaction done by Mr. Mohinder Singh on 30th June 200 [Ref Inv. No SG 512) and recorded by them on 02.07.2021 (date of receipt of goods). The gross weight of the 22- carat jewellery is 393.670 grams when converted to pure gold weight along with labour charges (2%) becomes 372.502 grams. As per our calculations, the pure weight is 370.05 grams, so the only deviation is of 2.45 grams (372.502-370.05). The above Invoice is already recorded in appellant books of accounts as Invoice No. SG-512 and the payment of same is also received vide RTGS in Assessee's bank account. Hence the manner of recording transactions being different in both entities cannot be attributed as Unrecorded SALES.
Hence, looking at the totality and the precedents highlighted by the Assessee, I am inclined to accept the assessee's view and allowed the grounds no 4 and 5 which are the main issue of this appeal. The other issues are consequential in nature and hence not adjudicated upon.
In the result, Appeal of the appellant is partly allowed.”
The Ld.AR submitted a chart mentioning the copy of invoice which are duly annexed in ABP pages 147 to 188 which is containing copy of ledger account and the copy of sale invoices to M/s Mohinder Singh Jewellers. The tabulated chart is duly annexed here below:-
Master Chain Pvt Ltd 9. We have carefully considered the rival submissions, perused the materials available on record, and examined the orders of the authorities below. The primary issue for adjudication in this appeal is whether the Ld. CIT(A) was justified in deleting the addition of Rs.4,63,40,539/- made by the Ld. AO on account of alleged undisclosed sales, on the ground that the assessee was denied the opportunity to cross-examine the third-party evidence relied upon in the assessment proceedings. It is an undisputed fact that the addition in question was made solely on the basis of an Excel sheet retrieved from a WhatsApp chat during the course of search conducted on M/s Mohinder Singh Jewellers, Amritsar, and the statement recorded from one of its employees, Shri Sunil. The said statement was neither provided to the assessee nor was the assessee allowed to cross-examine the deponent, despite repeated requests. The Ld. AO relied on these third-party materials without any independent verification or corroboration from the assessee’s own books of accounts, which admittedly contained corresponding sales duly supported by invoices, ledgers, bank statements, GST returns, and TCS compliance. The Ld. CIT(A), after detailed examination, found that there was a clear violation of the principles of natural justice. The right to cross-examine witnesses whose statements are relied upon by the revenue is a fundamental safeguard recognized in several judicial pronouncements, including: Andaman Timber Industries v. CCE [(2016) 38 GSTR 117 (SC)], CIT v. Odeon Builders Pvt. Ltd. [(2019) 418 ITR 315 (SC)], and PCIT (Central) v. Oriental Power Cables Ltd. [(2022) 143 taxmann.com 371 (SC)]. These judgments categorically hold that any order passed without granting an opportunity for cross-examination of third-party witnesses constitutes a serious breach of natural justice, rendering the assessment invalid.
Master Chain Pvt Ltd The Ld. CIT(A) has also observed that the virtual hearing scheduled by the AO on 12/03/2024 was fixed at an unreasonably short notice, thereby denying the assessee a fair opportunity to present its case. We further note that the assessee had duly disclosed the transactions with M/s Mohinder Singh Jewellers and M/s Mohinder Singh Jewellers Pvt. Ltd. in its books of accounts, supported by sales invoices aggregating to 12,533.92 grams of gold jewellery, which were duly recorded and subjected to GST and TCS. The weight difference pointed out by the Ld. AO is fully explained by the assessee as attributable to labour charges and fine weight adjustment, which is a normal commercial practice in the jewellery trade. No discrepancy was found in the assessee’s books, nor has the Ld. AO brought any independent material evidence on record to establish that the alleged 9,380.676 grams of jewellery represented unaccounted transactions. In view of the above and considering the settled legal position that no addition can be sustained solely on the basis of unverified third-party statements or documents without granting an opportunity for cross-examination, we find no infirmity in the order of the Ld. CIT(A) deleting the impugned addition. The deletion was rightly made as the assessment suffered from a gross violation of natural justice, and the revenue has failed to bring any contrary evidence or material to dislodge the findings of the Ld. CIT(A). Accordingly, we uphold the order of the Ld. CIT(A) deleting the addition of Rs.4,63,40,539/-. In the result, the appeal filed by the revenue stands dismissed.
Order pronounced in the open court on 13th October 2025