Kiran Modes Vs ACIT (ITAT Jaipur)
Denial of Cross-Examination: ITAT Deletes ₹5.20 Lakh Bogus Purchase Addition
Introduction
The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of ₹5,20,490 relating to alleged bogus purchases, holding that an adverse third-party statement could not be materially relied upon without providing the assessee an effective opportunity to cross-examine its maker.
The Tribunal observed that deficiencies in purchase documentation could be relevant when examining genuineness. However, those deficiencies did not render the denial of cross-examination inconsequential, particularly where the third-party statement formed a material basis for treating the purchase bills as accommodation entries.
The assessee’s appeal was allowed on merits, while its challenge to the validity of reassessment was left open.
Background of the Case
Kiran Modes challenged the order dated 31 March 2026 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, for Assessment Year 2019-20.
Reassessment proceedings had been initiated on information received through the Insight portal, following a search and seizure operation involving the Hyatt Group and its key persons.
According to the Revenue, the search material indicated that the assessee had made unrecorded cash purchases of cloth through concerns including M/s Shree Padmavati Exports.
Relying on seized records and the statement of Shri Purshottam Chhipa, the Assessing Officer treated purchases aggregating to ₹5,20,490 as bogus and made an addition under section 68 of the Income-tax Act, 1961.
The CIT(A) upheld both the reassessment proceedings and the addition. Among other reasons, the appellate authority observed that the assessee had not furnished adequate evidence establishing the actual receipt and movement of goods.
Assessee Challenges Reliance on Third-Party Statement
Before the Tribunal, the assessee disputed the addition and challenged the reassessment proceedings. Alternatively, it sought restriction of the addition to the profit element embedded in the purchases, pointing out that the declared sales had been accepted.
The assessee also challenged the application of section 115BBE.
Through an additional ground, it specifically contended that the Assessing Officer had relied on a third-party statement without allowing cross-examination. It argued that this violated the principles of natural justice and sought deletion of the addition.
The Tribunal admitted the additional ground because it was purely legal and did not require investigation of fresh facts, following the principle laid down in NTPC Ltd. vs. CIT, 229 ITR 383 (SC).
Revenue’s Case Rested Materially on Seized Records and Statement
The Tribunal noted that the Revenue’s case rested substantially on entries in seized notebooks and loose papers, read together with Shri Purshottam Chhipa’s statement recorded under section 132(4).
According to the Revenue, those entries corresponded to the disputed purchase bills and represented cash transactions involving issuance of bills without actual delivery of goods.
The statement was thus used to explain the seized entries and support the conclusion that the purchases were not genuine.
The assessee disputed that allegation and maintained that it had not received an effective opportunity to test the statement through cross-examination.
Cross-Examination Is an Important Procedural Safeguard
The Tribunal held that cross-examination is an important facet of natural justice when an adverse statement is relied upon as material evidence against an assessee.
It referred to Andaman Timber Industries vs. CCE, [2015] 62 taxmann.com 3 (SC), concerning denial of cross-examination where witness statements formed the basis of an adverse conclusion.
The Tribunal explained that material proposed to be used against an assessee must be handled in a manner that provides a fair opportunity to rebut it. Although income-tax proceedings are not strictly governed by the rules of evidence, compliance with natural justice remains necessary.
In the present case, the lower authorities’ orders did not establish that the requested opportunity had been provided. Consequently, the statement could not be used to draw an adverse conclusion without addressing the cross-examination request in accordance with law.
Missing Purchase Documents Did Not Cure the Defect
The Tribunal acknowledged the CIT(A)’s references to missing transport documents, stock records and evidence of receipt and utilisation of goods.
Such shortcomings could bear upon the genuineness of purchases. Nevertheless, where the accommodation-entry finding depended materially on a third-party statement, denial of an effective opportunity to test that statement could not be overlooked.
The Tribunal also referred to CIT vs. Odeon Builders (P.) Ltd., [2019] 418 ITR 315 (SC) while emphasising the need for an adequate evidentiary basis to sustain an addition.
Cheque Payments and Final Decision
The Tribunal further noted a discrepancy between the third party’s reference to cash bills and the assessee’s recording of payments by cheque. It observed that the payment source was explained through the books, particularly the bank book.
Considering the circumstances, the Tribunal deleted the entire addition of ₹5,20,490.
The alternative plea concerning the profit element and the challenge under section 115BBE required no separate adjudication. The reassessment-validity grounds were left open because relief had already been granted on merits.
The ruling underscores the importance of providing an effective opportunity to challenge third-party evidence when that evidence materially supports a disputed addition.
Cases Discussed
- NTPC Ltd. Vs CIT — (1998) 229 ITR 383 (SC) (related TaxGuru discussion).
- Andaman Timber Industries Vs CCE — [2015] 62 taxmann.com 3 (SC) (TaxGuru case page).
- CIT Vs Odeon Builders (P.) Ltd. — [2019] 418 ITR 315 (SC); related TaxGuru judgment discussing precedent.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This appeal by the assessee is directed against order dated 31.03.2026 passed by the National Faceless Appeal Centre [hereinafter referred to as the ld ‘CIT(A)’] for the assessment year 2019-20 raising following grounds:-
1. That on the facts and in the circumstances of the case the ld. CIT (A), is wrong, unjust and has erred in law in not accepting submission of the appellant that the proceedings initiated by the ld. AO u/s 148A(b) of the Income-Tax Act, 1961 and order passed u/s 147 consequent to notice issued u/s 148 in pursuance to order u/s 148A(d) is wrong and bad in law.
2. That without prejudice to the ground No. (1) above on the facts and in the circumstances of the case the ld. CIT (A), is wrong, unjust and has erred in law in upholding finding recorded by the ld. AO that purchase of Rs. 5,20,490/- made by the appellant firm from M/s Padmawati Exports is not genuine and are allegedly made to inflate profit after rejecting submission and explanation of the appellant and thereby confirming addition of whole of said amount to the income of the appellant as alleged unaccounted purchases u/s 68 of the Income-tax Act, 1961.
3. Without prejudice to above the ld CIT(A) should have sustained addition on above count for G.P. rate thereon only in as much as declared sales have been accepted.
4. That without prejudice to the ground No. (1) above on the facts and in the circumstances of the case the ld. CIT (A), is wrong, unjust and has erred in law in confirming charging addition of Rs. 5,20,490/- made vide ground No. (2) above u/s 115BBE of the Income-tax Act, 1961.
5. That the appellant craves permission to add to or amend to any of the above grounds of appeal or to withdraw any of them.
2. The assessee has challenged the validity of the reassessment proceedings and the addition of ₹5,20,490 made by the Assessing Officer on account of alleged bogus purchases from M/s Shree
Padmavati Exports. The assessee has also raised an alternative plea for restricting the addition to the profit element embedded in the purchases and challenged the applicability of section 115BBE of the Income-tax Act, 1961 (“the Act”).
3. Before us, the Ld. Counsel for the assessee also raised an additional ground reproduced as under:-
1. That on the facts and circumstances of the case and law, Id. CIT(A) has erred in confirming that no opportunity was provided to the assessee to cross-examine the person whose statements were relied upon by the Id. AO. The action confirmed by Id. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the entire proceedings being illegal and against the principles of natural justice and thereby deleting the entire addition of Rs. 5,20,490.
4. The above additional ground raised is purely legal in nature and not requiring investigation of the fresh fact and the same is admitted for adjudication in view of the said principle of theHon’ble Supreme Court in the case of NTPC Ltd. Vs. CIT 229 ITR 383 (SC).
5. Briefly stated, the reassessment proceedings were initiated on the basis of information received through the Insight portal pursuant to a search and seizure operation conducted in the case of the Hyatt Group and its key persons. The material gathered during the search allegedly indicated that the assessee-firm, M/s Kiran Modes, had made unrecorded cash purchases of cloth through concerns including M/s Shree Padmavati Exports. Relying upon the seized records and the statement of Shri Purshottam Chhipa, the Assessing Officer treated purchases aggregating to ₹5,20,490 as bogus and made an addition under section 68 of the Act. The learned CIT(A) upheld the reassessment proceedings as well as the addition, observing, inter alia, that the assessee had failed to furnish adequate evidence regarding the actual receipt and movement of the goods.
6. We have heard the rival submissions and perused the material available on record. The case of the Revenue, as emerging from the findings recorded by the learned CIT(A), rests substantially upon the entries in the seized notebooks and loose papers, read with the statement of Shri Purshottam Chhipa recorded under section 132(4) of the Act. According to the Revenue, the entries correspond to the disputed purchase bills and represent cash transactions for which bills were issued without actual delivery of goods. The assessee, on the other hand, disputes the allegation and contends that the statement and the material gathered from the third party were relied upon without affording it an effective opportunity to cross- examine the person concerned.
7. The right to cross-examine is an important facet of the principles of natural justice where an adverse statement is relied upon as material evidence against an assessee. In Andaman Timber Industries v. CCE (2015) 62 taxmann.com 3 (SC), the Hon’ble Supreme Court held that denial of cross-examination, in the circumstances of that case, vitiated the adjudication where the statements of the witnesses constituted the basis of the adverse conclusion. The principle is that material sought to be used against an assessee must be dealt with in a manner consistent with a fair opportunity to rebut it. The fact that income-tax proceedings are not strictly governed by the rules of evidence does not dispense with compliance with the principles of natural justice.
8. In the present case, the statement of Shri Purshottam Chhipa was relied upon to explain the entries in the seized records and to conclude that the disputed bills represented purchases without actual delivery of goods. The assessee specifically raised the objection that it had not been afforded an opportunity to cross- examine him. However, the orders of lower authorities do not establish that such an opportunity was provided. In these circumstances, the third-party statement could not have been relied upon to draw an adverse conclusion against the assessee without addressing its request for cross-examination in accordance with law.
9. We are conscious that the learned CIT(A) has also referred to the assessee’s failure to furnish transport documents, stock records and other evidence of actual receipt and utilisation of the goods. Such deficiencies may be relevant to the assessment of the genuineness of the purchases. Nevertheless, where the conclusion that the bills were accommodation entries is founded materially upon the statement of a third party, the denial of an effective opportunity to test that statement cannot be treated as inconsequential.. On the facts recorded in the impugned order, the addition cannot be sustained in the absence of the requisite procedural safeguard. The ratio of CIT v. Odeon Builders (P.) Ltd. (2019) 418 ITR 315 (SC), concerning the evidentiary basis for sustaining additions founded on adverse material, also reinforces the need to examine whether the material relied upon is adequate to support the addition.
10. We also note that Sh Chippa stated of raising bills on assessee in cash whereas the assessee has recorded payment by cheque and in that case, source of payment is explained from books of account or particularly bank book and such circumstances no addition can be made u/s 69A of the Act as unexplained investment
11. In view of the above, we hold that the impugned addition of ₹5,20,490 cannot be sustained. The addition is accordingly deleted, and the assessee’s grounds challenging the addition on merits are allowed. Consequently, the alternative plea for restricting the addition to the profit element and the ground challenging the levy of tax under section 115BBE of the Act do not survive for separate adjudication.
12. Since the appeal is being allowed on the merits, the grounds challenging the validity of the reassessment proceedings are left open and are not adjudicated upon.
13. In the result, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 23.10.2026
