Introduction
In the matter of Maple Destinations and Dreambuild (P.) Ltd. v. Deputy Commissioner of Income-tax[i], the Income Tax Appellate Tribunal, Delhi (‘ITAT’) observed that the assessing officer (‘AO’) had ignored the documentary evidence of a registered sale deed, yet made an addition under s. 69 of the Income-tax Act, 1961 (‘Act’). This addition was made solely on the basis of retracted statements of the witnesses. Thus, the ITAT deleted the addition since the Assessee was not given an opportunity for cross-examination and there was an absence of any other substantial material on record.
Brief Facts
The Assistant Director of Income Tax, Faridabad received information in March 2015, that the Assessee had purchased a Farmhouse in New Delhi in the assessment year (‘A.Y’) 2011-12, for which a sale deed was registered on a value of Rs. 1.2 crores. The Income Tax Department (‘DIT’) suspected additional, unrecorded cash payments of Rs. 5.41 crores. Further investigation revealed that the Assessee had also received Rs. 3.2 crores from another individual around the same time, thus doubting the source of funds used for the entire purchase of the farmhouse.
In November 2015, the Assessee received a notice under s. 148 of the Act, and therefore the Assessee filed its income tax return in response. The Assessee then filed a writ petition (‘WP’) with the Delhi High Court (‘DHC’) challenging the notice on the grounds of not receiving a communication of reasons for issuing notice under s. 148 of the Act. However, after the DHC observed that the reasons for initiating proceedings were already sent to the Assessee and hence the WP was withdrawn. Following this, the Assessee received a show cause notice in December 2016, to which the Assessee replied in the same month, based on which the AO passed an assessment order.
Considering the aforementioned facts and circumstances, the Assessee challenged the assessment order and filed an appeal before the Commissioner of Income Tax (Appeals) (‘CIT(A)’) which was dismissed in December 2017. The Assessee, therefore, filed this appeal for the A.Y 2012-13 based on similar grounds taken before the CIT (A).
Held
Firstly, the ITAT observed that the AO had made the addition, disregarding the registered sale deed which was the most reliable evidence for determining the actual sale value of the farmhouse. The ITAT further noted that the AO should not have made the addition in the absence of any other evidence indicating cash transactions beyond the sale consideration mentioned in the deed and without any supporting documentary or credible oral testimony.
Secondly, the ITAT observed that the AO had completely relied upon the statements made by the witnesses, which were further retracted as such statements of the witnesses were recorded under duress. Based on this observation and placing reliance on the case of Gajjam Chinna Yellappa & Ors. v. ITO[ii], the ITAT held that addition cannot be solely based on the retracted statements. In view of the aforesaid, the ITAT noted that the Assessee had also requested the cross-examination of both persons who were closely known to the Assessee, which was denied by the AO.
Thirdly, the ITAT observed that the reasons of the AO for denying the cross-examination were flawed and that the AO could not reject the request of the Assessee. Taking into consideration the decisions of the Supreme Court, the ITAT noted that relying solely on unverified and unchallenged statements to make additions is against the principle of natural justice.
The ITAT further observed that the addition was made without any substantial evidence and there were no documents proving the unreported income of the Assessee or any suspicious cash payments during the transaction in question. Furthermore, the ITAT noted that the AO based this addition solely on retracted witness statements.
The ITAT noted that the AO had relied upon retracted witness statements and the AO had erred in giving no chance to the Assessee for conducting cross-examination. Hence, the addition made by the AO was unjustified and the CIT(A) should have removed the addition as there was also no other supporting evidence. Considering these circumstances, the AO had no justification to make additions and therefore, the ITAT allowed the second ground of this appeal and deleted the additions made by the AO by partly allowing the appeal.
Conclusion
The ITAT reiterated the important principle that conducting cross-examination is a crucial right of the Assessee to ensure fair proceedings. The ITAT deleted the addition and emphasized that the Assessee should not be denied the opportunity for cross-examination on frivolous grounds, as this can impact the fairness of the proceedings. It was further emphasized that the AO relied solely upon the retracted witness statements and no other substantial evidence, thereby erring in the addition. A timely retraction with valid reasons, like in this case where witnesses were coerced, can significantly impact the outcome. This decision, therefore, sets a valuable precedent for similar situations where witness statements are withdrawn and cross-examination is not granted to the Assessee.
End Notes
[i] [2024] 162 taxmann.com 157 (Delhi - Trib.)
[ii] [2015] 59 taxmann.com 69 (Andhra Pradesh and Telangana)
Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.