Red Ray Laboratories Vs ITO (ITAT Nagpur)
A Parallel Tally Is Not a Parallel Reality: Third-Party Entries Without Corroboration or Cross-Examination Cannot Sustain Addition u/s 69C
A suspicious entry found in the computer of a third party may provide a reason to investigate, but it cannot, by itself, become conclusive evidence against the assessee. The Nagpur Bench of the ITAT has reiterated this important principle while deleting an addition of ₹36,29,200 made u/s 69C solely on the basis of “parallel Tally data” seized during a search conducted on another business group.
The assessee, Red Ray Laboratories, was a partnership firm engaged in manufacturing plastic packaging products used by commercial explosive companies. For AY 2020-21, it filed its return declaring income of ₹10,61,600.
A search u/s 132 was conducted in the case of the Special Blasts Ltd. group. During the search, certain Tally data containing various ledger accounts was found. One of the ledgers allegedly indicated that the assessee had made bogus purchases of ₹36,29,200 from M/s SBL Energy Ltd. The person whose statement was relied upon reportedly stated that the parallel Tally data represented cash entries & transactions.
Acting upon this information, the AO reopened the assessee’s assessment u/s 147. The assessee categorically denied having purchased any goods from SBL Energy Ltd. It explained that the commercial relationship between the parties was exactly the reverse—the assessee regularly sold goods to SBL Energy Ltd.
To establish this, the assessee produced sale invoices, purchase orders issued by SBL Energy Ltd., GST invoices, e-way bills, inward records, ledger accounts & bank statements evidencing receipt of sale consideration. It also filed an affidavit affirming that it had neither purchased goods from the said company nor made any cash payment to it.
The AO, however, proceeded entirely on the basis of the seized Tally data and treated ₹36,29,200 as bogus or unaccounted purchases. The amount was added u/s 69C, taking the assessed income to ₹46,90,800. The CIT(A) confirmed the addition.
Before the Tribunal, the assessee submitted that the third-party data had not been supported by even a single purchase invoice, e-way bill, lorry receipt, delivery document, stock entry, GST return or banking transaction. The AO had also not demonstrated the movement of any goods from SBL Energy Ltd. to the assessee or the payment of purchase consideration by the assessee.
Another serious objection was that, despite repeated requests, the assessee was not permitted to cross-examine the person whose statement and electronic records formed the foundation of the addition.
The Tribunal found that the only basis of the addition was the Tally data discovered during the search of the Special Blasts Ltd. group. Apart from this third-party information, the AO had not confronted the assessee with any independent evidence establishing that the alleged purchases had actually taken place.
There was nothing to show that the AO had undertaken any independent verification or meaningfully applied his mind before making the addition. No transportation documents were produced, no evidence concerning the delivery of goods was identified & no seized document showed that the assessee had paid cash or any other consideration for the alleged purchases.
On the contrary, the material furnished by the assessee consistently demonstrated that its transactions with SBL Energy Ltd. were sales transactions. The assessee had produced ledger accounts not only for the relevant year but also for the earlier & subsequent years. These records were supported by regular GST invoices, tracking details, e-way bills & banking evidence.
Importantly, the assessee’s books of account were audited, the book results had not been rejected & the AO had not explained why the assessee would have made the alleged cash purchases or how such purchases were utilised in its business. The assessee’s sworn affidavit denying the purchases also remained effectively uncontroverted.
The Tribunal held that the allegation was founded merely upon incomplete third-party information, which did not directly establish the assessee’s involvement in any cash purchase. Information received from a search may create suspicion and justify investigation, but suspicion cannot substitute proof. The primary burden of establishing that expenditure was actually incurred remained upon the Revenue. An assessee cannot be compelled to disprove a transaction which it consistently says never occurred, particularly when the Department fails to produce the underlying transactional evidence.
The Tribunal also treated the denial of cross-examination as a serious violation of natural justice. Relying upon Andaman Timber Industries v. CCE, it observed that where a third-party statement is made the basis of an adverse order, refusal to permit cross-examination constitutes a fundamental flaw capable of rendering the order unsustainable. Reference was also made to CIT v. Smt. Sunita Dhadda [2018] 406 ITR 220 (Raj.), whose view was affirmed by the Supreme Court through dismissal of the Revenue’s SLP.
Accordingly, the order of the CIT(A) was set aside & the entire addition of ₹36,29,200 was deleted.
Author’s Comments
This decision draws a necessary distinction between “information sufficient to reopen” and “evidence sufficient to add.” A parallel ledger recovered from another person may trigger an enquiry, but the AO must thereafter establish the assessee’s connection with the recorded transaction through independent evidence.
The ruling is especially significant for additions u/s 69C. Before unexplained expenditure can be taxed, the Department must first prove that an expenditure was actually incurred by the assessee. A third party’s private entry, unsupported by invoices, movement of goods, payment evidence or stock records, cannot automatically become the assessee’s unexplained expenditure.
The case also shows that cross-examination is not an empty procedural ritual. If the Revenue wants to use a third party’s statement as substantive evidence, it must ordinarily expose that statement to testing. A seized spreadsheet may speak—but unless its maker can be questioned and its contents independently corroborated, it should not be allowed to deliver the final verdict
FULL TEXT OF THE ORDER OF ITAT NAGPUR
This appeal by the assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi (for short, “CIT(A)”) dated 25.11.2025 passed u/sec. 250 of the Income Tax Act, 1961 (for short, “Act”) which is arising out of assessment order dated 29.03.2025 passed u/sec. 147 of the Act by the ITO, Ward-3(4), Nagpur for the Assessment Year (A.Y.) 2020-21.
2. The assessee has raised the following grounds of appeal:-
“1. Illegal Reassessment Proceeding:
That on the facts and in the circumstances of the case and in law, the learned CIT(A) failed to appreciate that the reopening of assessment u/s 147 is bad in law, void ab initio and liable to be quashed as it is based solely on unverified third-party “parallel tally data” seized from the premises of another assessee, without any independent enquiry, tangible material or live nexus establishing escapement of income in the hands of the appellant.
2. No Cross Examination Opportunity Provided:
That on the facts and in law, whether learned CIT(A) right in confirming the addition done during assessment proceeding without providing an opportunity to cross-examine, despite repetitive requests, of the persons whose statements or data were relied upon, thereby violating the principles of natural justice.
3. Addition despite Categorical denial of transaction by Appellant:
That the learned CIT(A) erred in confirming the addition of Rs. 36,29,200/-, even though the appellant had categorically denied having made any purchase from M/s SBL Energy Ltd.
4. Addition without cogent Material:
That on the facts and in law, whether learned CIT (A) is right in confirming the addition done by AO without any corroborative evidences, cogent material & evidences which establishes that assessee has made bogus purchases?
5. No corroborative Evidences of Bogus Purchase Provided:
That the learned CIT(A) failed to appreciate that the entire addition is based only on an uncorroborated parallel tally entry, without existence of any purchase invoice, e-way bill, lorry receipt, GST return, stock entry, delivery proof or banking transaction to support the allegation of purchases.
6. Unwarranted addition under section 69C:
That the learned CIT(A) erred in law in confirming the addition u/s 69C without establishing the existence of any actual expenditure incurred by the appellant and without proving the source, nature and genuineness of the alleged expenditure.
7. Ignorance of Affidavit without other material on record:
That the learned CIT(A) grossly erred in ignoring the affidavit filed by the appellant affirming on oath that no purchases or cash payments were made to M/s SBL Energy Ltd. This affidavit remained uncontroverted and unchallenged by the Department.
8. Onus to Prove:
That the learned CIT(A) erred in confirming the addition done by AO by shifting the onus to disprove a non-existent purchase on the appellant, even when the Department itself failed to discharge its primary onus of proving that any purchase transaction had actually taken place.
9. General ground:
The appellant craves leave to add, alter, amend, or withdraw any of the above grounds before or at the time of hearing.”
3. Facts of the case, in brief, are that assessee is a partnership firm and engaged in the business of manufacturing of plastic packaging product for the commercial explosive companies. Income of Rs. 10,61,600/- declared in the return of income for A.Y. 2020-21 filed on 18.05.2021. Based upon the information received from search and seizure proceedings carried out u/sec. 132 of the Act in the case of M/s. Special Blasts Ltd. group in which tally data was unearthed showing various ledger accounts and as per one ledger account, assessee was shown to have made bogus purchases at Rs.36,29,200/-. Based on this information, re-assessment proceedings were carried out u/sec. 147 r.w.s. 143(3) of the Act. During the course of re-assessment proceedings, assessee expressly denied to have made any purchases from M/s. SBL Energy Ltd. It was also submitted that assessee has made regular sales to M/s.SBL Energy Ltd. and proper invoices have been raised and payments have been received, however, Ld. Assessing Officer (AO) was not satisfied with these submissions and based on the search data, made addition for bogus/unaccounted purchases of Rs.36,29,200/- and assessed total income at Rs. 46,90,800/- Aggrieved, assessee preferred appeal before the Ld.CIT(A), but failed to succeed. Now assessee is in appeal before this Tribunal.
4. Learned counsel for the assessee advanced multifold arguments. Firstly, he submitted that assessee had never made any purchases from M/s. SBL Energy Ltd. and, in support of this contention, filed an affidavit placed in the paper book at pages 48–50. Secondly, he submitted that the assessee has entered into regular sale transactions with the said party. In support thereof, he referred to the sale invoices, purchase orders issued by M/s.SBL Energy Ltd., e-way bills and the inward register maintained by the assessee. Thirdly, he submitted that no opportunity of cross-examination was afforded by the Ld. AO despite repeated requests made by the assessee. He contended that entries appearing in the records of third party cannot establish the correctness of alleged addition and that the burden of proving the alleged unexplained expenditure lies upon the Revenue. He further submitted that the Ld. AO had not conducted any independent investigation or brought any corroborative material on record and had invoked the provisions of section 69C of the Act merely on the basis of suspicion. It was further submitted that there was no evidence whatsoever of any payment having been made by the assessee towards the alleged purchases. The books of account of the assessee were duly audited and had not been rejected by the Ld. AO. In support of his contentions, learned counsel placed reliance on the following judicial precedents:—
(i) DCIT vs. Mahesh Bansal in ITA no.499/IND/2018, dt. 29.07.2019 (Indore – Trib.)
(ii) Smt. Manorama Singhal vs. ITO in ITA No. 130/IND/2020, dt.21.09.2021 (Indore – Trib.)
(iii) Durgsingh Gajaram Purohit vs. DCIT in ITA Nos.8380 to 8382/MUM/2025, dt. 09.04.2026 (Mumbai – Trib.)
(iv) PCIT vs. Shodiman Investments (P) Ltd. [2020] 422 ITR 337 (Bom. HC)
(iv) M/s. Andaman Timber Industries vs. CCE in Civil Appeal No.4228/2006, dt. 02.09.2015 (SC)
(v) CIT vs. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC)
(vi) PCIT vs. Vaman International (P) Ltd. [2020] 422 ITR 520 (Bom. HC)
(vii) Shree Maya Real Estate Pvt. Ltd. vs DCIT in ITA Nos.227 & 228/NAG/2022, dt. 02.09.2024 (Nagpur – Trib.)
5. On the other hand, Ld.DR vehemently argued supporting the order of Ld.CIT(A).
6. I have heard the rival submissions and perused the material placed before me. The issue raised is against the bogus /unaccounted purchase at Rs. 36,29,200/- allegedly made by the assessee from M/s.SBL Energy Ltd. The only basis for impugned addition is the tally data found during the course of search in the case of M/s. Special Blasts Ltd. group. Ld. AO in the notice issued u/sec. 148 of the Act observed that the said tally data includes a numerous ledger entries and as stated by Mr. Shah Jagrut Vijaykumar Dongaonkar, it solely comprises cash entries and transactions. The details in Annexure A- Parallel Tally “SBLEL-Bogus Purchase” indicate that assessee- Red Ray Laboratories made bogus purchases amounting to Rs. 36,29,200/-. Apart from this information, no other evidence confronted by the Ld. AO to the assessee in support of the allegation for bogus purchases. It is not discernible as to whether Ld. AO has made any independent verification and application of mind before making addition for bogus purchases. Ld. AO has also not provided opportunity of cross- examination to the assessee nor has confronted with the details showing bogus purchases.
7. I find that assessee has made submissions at all stages including affidavit consistently stating that it has never made any purchases from M/s. SBL Energy Ltd. It is also proved that assessee is having regular business transactions with M/s. SBL Energy Ltd. in the nature of sales. In support, ledger account for the A.Ys. 2017-18 & 2018-19 & 2019-20 have been filed. Even ledger account for A.Y. 2020-21 and subsequent years also demonstrates assessee making sales with M/s. SBL Energy Ltd. on regular basis. That the assessee has been issuing regular GST invoices along with tracking number, e-way bills and bank statements received from M/s. SBL Energy Ltd. Further, I find that Ld.AO has not provided any supporting documents indicating transport of goods from M/s. SBL Energy Ltd. to the assessee nor has referred to any seized document showing that the assessee had made any payment for such purchases. In totality assessee has furnished all evidences indicating that it is making sale transactions with M/s. SBL Energy Ltd. and never entered into purchase transactions with this party. But, Ld. AO has only taken the basis of information received from a search action without making any further investigation or giving any opportunity of cross-examination to the assessee. I find that so far as the facts of the case placed before me are the allegation of Ld. AO is merely based on incomplete information not showing any direct involvement of the assessee of making alleged cash purchase whereas assessee has furnished sufficient evidence to prove that even though it is having regular business transactions with M/s. SBL Energy Ltd. but they are only to the extent of making sales and it has never entered into purchase transactions. Ld. AO has not disputed the book results and had not commented on the purpose of making alleged purchase in cash. Therefore, under the given facts and circumstances of the case, in my considered view impugned addition for bogus/unaccounted purchases is uncalled for.
8. I also find that even not providing of opportunity of cross- examination, which is a serious flaw and violation of principles of natural justice. I find support from the judgment in the case of M/s. Andaman Timber Industries (supra), where the Hon’ble Apex Court held that not allowing the assessee to cross-examine the witnesses by adjudicating authority though the statements of witnesses were made basis of the impugned order is serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice. Hon’ble High Court of Rajasthan in the case of CIT vs. Smt. Sunita Dhadda [2018] 406 ITR 220 (Raj) held that as per the principles of natural justice, Ld. AO has to provide opportunity of cross-examination and this view of the Hon’ble Rajasthan High Court has subsequently been affirmed by the Hon’ble Apex Court vide order dated 28.03.2018 in SLP No. 9432/2018. Strictly following the above judicial precedents, I find that in the present case also, assessee has not been afforded any opportunity of cross-examination with the statement given by the third party as well as seized records, which is serious violation of principles of natural justice. On this legal ground also, assessee deserves to succeed.
9. Accordingly, the finding of Ld.CIT(A) is set aside and the addition for bogus/unaccounted purchases of Rs. 36,29,200/- is hereby deleted. Effective grounds of appeal dealt with herein above are allowed and the remaining grounds of appeal become academic in nature, needs no adjudication.
10. In the result, appeal of the assessee is allowed.
Order pronounced on 11th September, 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963
