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Facts
The appellant, a diamond trader, filed its return of income for AY 2019-20. The case was reopened, and the Assessing Officer (AO) made an addition of Rs. 6,65,045/- based on information from a search on M/s. Ratnakala Exports Private Limited (REPL), indicating unaccounted cash purchases. The appellant claimed to have made purchases of Rs. 3,66,451/- from REPL, supported by bills and confirmations, and offered the income from subsequent exports. However, the AO's addition was solely based on the software recovered from REPL.
Held
The Tribunal held that the impugned addition was made solely on the basis of software recovered from M/s. REPL, which allegedly indicated unaccounted transactions. The material from the search was not supplied to the appellant, nor was an opportunity for cross-examination granted, despite the appellant requesting it. This breach of natural justice led to the addition not being sustainable.
Key Issues
Whether the impugned addition based on undisclosed material recovered from a third party, without providing the material to the assessee or granting an opportunity for cross-examination, is sustainable in law.
Sections Cited
147, 142(1), 69C, 148
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Income Tax Appellate Tribunal, MUMBAI BENCH “G ”, MUMBAI
Before: JUSTICE (RETD.) C.V. BHADANG & SHRI ARUN KHODPIA
PER JUSTICE (RETD.) C.V. BHADANG, PRESIDENT :
By this appeal, the appellant assessee is challenging the order dated 11.06.2025 passed by Commissioner of Income Tax (Appeals)-47, Mumbai (‘CIT(A)’ for short) which in turn arose out of the order dated 08.02.2024 passed by DCIT Central Circle 1(1), Mumbai (‘AO’ for short) under Section 147 of the Income Tax Act, 1961 (‘Act’ for short) for A.Y.2019-20.
The brief facts are that the appellant is in the business of trading of diamonds. The appellant filed its Return of Income (RoI) for the assessment year in question on 15.09.2019 declaring total income of Rs.1,32,20,680/-. The appellant’s case was reopened u/s.148 vide notice dated 27.02.2023. In response to the said notice, the assessee filed its RoI on 03.03.2023 maintaining the same income as declared earlier.
S. Sagar Enterprise Subsequently, notices u/s.142(1) of the Act were issued. The AO vide order dated 08.02.2024 determined the income at Rs.1,38,85,725/- on account of variation of Rs.6,65,045/- u/s.69C of the Act. The AO has found that the appellant had made purchases in cash from M/s.Ratnakala Exports Private Limited (M/s. REPL) which were not accounted in the books of account. The record discloses that this finding was on account of the fact that there was a search action carried out at the premises of M/s. REPL where it was unearthed that M/s. REPL was maintaining different software for unaccounted sales and purchases. It was on the basis of the said accounting software, the AO came to the conclusion that the appellant had made a cash purchase of Rs.6,65,045/- which represents the impugned addition made.
The appellant claimed before the AO that during the year under consideration, the appellant had purchased cut and polished diamonds from M/s. REPL amounting to Rs.3,66,451/-. The appellant produced the requisite purchase bills, ledger of M/s. REPL in the appellant’s books as well as ledger account confirmation issued by M/s. REPL. The appellant also produced the details about the payment made for the purchase through banking channels.
The appellant exported these goods and offered the income to tax appropriately for which the Dollar denominated sales invoices, stock register were produced. This aspect about the purchase of the cut and polished diamonds, its export and income being offered for tax is not disputed.
It can be seen that the impugned addition was made only on account of the alleged software being found with M/s. REPL maintaining the details of unaccounted sales and purchases. The appellant had sought the said material which was the basis of the impugned addition and also requested for an opportunity of cross examination which has not been granted.
S. Sagar Enterprise 6. In appeal, the appellant reiterated that the only purchases made from M/s. REPL were amounting to Rs.3,66,541/- for which necessary documentary evidence has been produced. The appellant denied having made any purchases in cash as alleged.
The ld. CIT(A) has refused to accept the contention on the ground that the appellant failed to offer any comments regarding the material recovered during the search of M/s. REPL showing unaccounted purchases as per ledgers extracted from the software. The ld. CIT(A) also found that the appellant had not produced any matching entries in the books, bank records and purchase invoices regarding the said purchases. The ld. CIT(A) has also observed that the appellant has not provided any proof to claim that a request has been made for a cross examination (para 9.3.1 of the CIT(A) order).
Feeling aggrieved, the appellant has filed this appeal.
We have heard parties. Perused record.
It is submitted by the ld. AR that the appellant was not provided corroborative material allegedly recovered during the search of M/s. REPL which is the sole basis for making the impugned addition. It is submitted that the appellant was also not provided with an opportunity of cross examination which is clearly in breach of the principles of natural justice. It is submitted that the appellant cannot be expected to prove negative about the appellant not having made any purchases in cash for which reliance is placed on the decision of this Tribunal in Ankit Gems (P.) Ltd. vs. Income Tax Officer (2025) 178 taxmann.com 454. Reliance is placed on the decision of the Hon’ble Supreme Court in Andaman Timber Industries vs. Commissioner of Central Excise, Kolkata-II (2025) taxmann.com 3(SC) in order to submit that when the opportunity of cross examination was not allowed, the impugned addition cannot be sustained.
The ld. DR has supported the impugned order.
We have considered the submissions made. At the outset, it is necessary to note that apart from raising certain grounds challenging the merits of the impugned order,
S. Sagar Enterprise the appellant has also raised additional ground on 03.07.2025 claiming that the notice dated 27.02.2023 u/s.148 of the Act is void ab initio and bad in law as the same is not issued by the Faceless Assessing Officer (FAO) but by the Jurisdictional Assessing Officer (JAO). We will revert to this aspect a little later.
In so far as the merits of the impugned addition is concerned, we do find that the impugned addition is solely based on the alleged recovery of a software during the search action on M/s. REPL which according to the AO indicated that separate accounts were maintained by M/s. REPL in respect of unaccounted purchases and sales made. Indisputably the said material has not been supplied to the appellant nor an opportunity of cross examination is granted. The observation by the ld. CIT(A) that no opportunity of cross examination was claimed is factually incorrect. We have perused the reply dated 05.04.2023 filed by the appellant before the AO in which the appellant had sought the copy of the statement of the authorized person of M/s. REPL and the corroborative material to support the claim of the alleged cash paid by the appellant to M/s. REPL against purchase of diamonds as well as the opportunity to cross examine.
It is trite that if the AO proposes to rely on any particular material for making the impugned addition, the same has to be supplied to the assessee and opportunity of cross examination has to be granted wherever claimed. The failure of the AO in this regard is clearly in breach of the principles of natural justice. It is trite that the appellant cannot be expected to establish a negative aspect. It can thus be seen that it is not for the appellant in the first instance to establish that it had not made any purchases in cash. It is only when certain material is brought forth on record, for which appropriate opportunity is granted to the assessee to challenge, that such onus can shift. The matter would depend upon facts and circumstances of each case. In the present case we find that there is failure on the part of the AO to supply the corroborative material and to grant opportunity of hearing and therefore, the impugned addition cannot be sustained.
In the result, appeal is allowed. The impugned addition stands deleted.
Order pronounced in the open court on 03/02/2026.