Sapphire Fintech Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Addition Based on Retracted Third – Party Statement Without Cross-Examination Invalid – ITAT Remands Matter to AO
Assessee, a financing company, had originally been assessed u/s 143(3) accepting the returned income. Later, based on information from Investigation Wing that Rajendra Jain Group was providing accommodation entries, the AO reopened the assessment u/s 147 alleging that the Assessee received bogus loans of ₹1 crore (AY 2007-08) & ₹56 lakh/other amounts (AY 2010-11) from entities controlled by Rajendra Jain. The reopening & additions were based solely on the statement of Shri Rajendra Jain recorded during search, wherein he allegedly admitted to providing accommodation entries.
During reassessment, Assessee requested copy of statements & cross-examination of Rajendra Jain. The statement was provided, but cross-examination was denied by AO, stating that since the Assessee itself produced a retraction affidavit of Rajendra Jain, cross-examination was unnecessary. AO rejected the retraction affidavit as “afterthought” & made additions u/s 68 treating loans as non-genuine.
Before ITAT, Assessee argued that additions were made based on a third-party statement without cross-examination, which is a clear violation of natural justice as per Supreme Court rulings. ITAT held that merely supplying the statement is not enough—right of cross-examination is fundamental when such statement is the foundation of addition. The Tribunal relied on Andaman Timber Industries (SC) which held that denial of cross-examination when statement is relied upon renders the order null & void. ITAT also referred to ICDS Ltd (SC) directing fresh adjudication with opportunity of cross-examination.
Accordingly, ITAT set aside the CIT(A) orders & restored both years to AO for de novo assessment, directing that Assessee must be given opportunity to cross-examine Rajendra Jain & may file supporting evidence. AO may issue summons/notices but must follow law. Since matter was remanded, all other grounds (validity of reopening, u/s 68 merits, interest disallowance, 14A, etc.) were kept open.
Thus, both appeals were allowed for statistical purposes, recognizing that addition based solely on retracted third-party statement without cross-examination violates natural justice & cannot be sustained.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
