Milando Fashions Limited Vs JCIT (ITAT Chandigarh)
Section 69C Requires Proof of Expenditure: Uncorroborated Third-Party Diary Cannot Displace Documented Export Receipts
Background
The Chandigarh Tribunal quashed the reassessment and deleted an addition of ₹12,13,78,038 under Section 69C, holding that the Revenue had failed to independently establish the alleged cash expenditure. The addition arose from a third party’s diary and statement suggesting that the assessee had paid cash to obtain foreign remittances disguised as export receipts.
The assessee, formerly known as Kaursain Exports Limited, was engaged in manufacturing, trading and exporting hosiery goods. It filed its return declaring income of approximately ₹68.84 lakh. The original scrutiny assessment, completed on 26 March 2015, determined income at approximately ₹69.01 lakh and accepted the export sales.
The Assessing Officer subsequently issued a notice under Section 148 on 30 March 2019, beyond four years from the end of the relevant assessment year.
Basis of the Reopening and Addition
The reopening originated from information concerning a search conducted by the Enforcement Directorate under FEMA at the premises of Shri Tarlochan Singh, alias Tochi, and his brother.
The seized material allegedly indicated that the assessee had paid more than ₹12 crore in cash to obtain telegraphic transfers in foreign currency. The Revenue relied on purported matching of transfer numbers, dates and amounts with the assessee’s bank credits, coded diary entries and the appearance of a director’s telephone number.
The Assessing Officer treated the alleged cash payments as unexplained expenditure under Section 69C. The CIT(A) upheld both the reopening and the addition, considering the material sufficiently connected with the assessee.
Assessee’s Documentary Explanation
The assessee consistently denied any connection with the alleged operators or payment of cash to them. It explained that the foreign remittances represented realisation of genuine export sales already recorded in its books.
It furnished audited accounts, purchase and sales details, overseas party particulars, export invoices, shipping particulars and bill-wise reconciliation of foreign remittances. Its supporting material also included VAT returns, commission details and certificates, sample courier receipts and purchase orders.
The Tribunal further noted that the assessee had furnished particulars concerning quality-control personnel, outward freight, marine insurance expenses and agency commission.
On this evidence, the Tribunal held that the assessee had discharged its onus of substantiating the export sales. The Revenue was required to controvert that evidence rather than reject it merely by relying on third-party allegations.
Section 69C: Incurring Expenditure Must First Be Established
The Tribunal emphasised that Section 69C applies where an assessee has incurred expenditure and fails to satisfactorily explain its source. Therefore, actual incurrence of expenditure is the foundational fact that must first be established.
Here, the Revenue produced no independent receipt, confirmation, correspondence, agreement, financial record or contemporaneous evidence proving the alleged cash payments. No export sale was established to be fictitious, and no specific defect was identified in the assessee’s books.
The mere correspondence between telegraphic transfer particulars and entries in another person’s records did not, by itself, prove that the assessee had paid cash to obtain those remittances.
The Tribunal relied on decisions including ACIT v. Kishore Lal Balwant Rai, Subhash Chander Gupta and Home Construction v. DCIT, supporting the need for independent corroboration of third-party material before fastening tax liability.
Denial of Cross-Examination
The Tribunal also found that the assessee had not received an effective opportunity to cross-examine Tarlochan Singh, whose statement formed a substantial basis of the addition.
Relying on Andaman Timber Industries v. CCE, it held that denial of cross-examination in these circumstances violated natural justice. Once the unsupported third-party statement and material were excluded, there was no adequate basis remaining for the alleged expenditure.
The Tribunal additionally accepted the force of the assessee’s double-taxation objection in the particular facts: the remittances had been explained as export realisations, and the corresponding turnover had already been accepted. Without cogent evidence establishing a different character, those receipts could not sustain the impugned addition.
Reopening Beyond Four Years
On jurisdiction, the Tribunal held that the recorded reasons did not demonstrate meaningful independent verification by the Assessing Officer. Information received from another authority had effectively been adopted without adequately examining the assessee’s export records or establishing the alleged cash-payment nexus.
It relied on CIT v. Smt. Paramjit Kaur and Pr. CIT v. Supertech Forgings (India) Pvt. Ltd., distinguishing reasons to believe from reasons to suspect.
Since the original assessment had been completed under Section 143(3), the first proviso to the then-applicable Section 147 required an established failure to disclose fully and truly all material facts. A general assertion of non-disclosure did not identify the precise facts withheld or their connection with escaped income.
Decision
The Tribunal quashed the reassessment proceedings. Independently, it held that Section 69C could not be invoked on the evidence available and deleted the entire addition. The assessee’s appeal was allowed.
Author’s Comments
The decision places the enquiry in its proper sequence: first establish expenditure, then examine its source. A disputed diary entry cannot automatically become the assessee’s unexplained expenditure when substantial export documentation remains unrebutted.
The ruling also distinguishes information sufficient to trigger investigation from evidence sufficient to sustain an addition. Matching remittance particulars may warrant enquiry, but the missing link—proof of the alleged cash payment—must still be supplied.
The reopening finding concerns the erstwhile Section 147 framework applicable to this case. The substantive evidentiary lesson is equally clear: documentary explanations require reasoned rebuttal, and disputed witness statements require a meaningful opportunity for cross-examination.
Cases Discussed
- ACIT v. Kishore Lal Balwant Rai — Third-party diary entries require independent corroboration before tax liability can be fastened on an assessee.
- Subhash Chander Gupta v. ITA — Loose papers and a third-party statement, without sufficient corroboration, were held insufficient to establish the alleged cash payment.
- Home Construction v. DCIT — Third-party digital records or documents without corroborative material or independent enquiries could not sustain the addition.
- Andaman Timber Industries v. CCE — Denial of cross-examination where witness statements form the basis of an adverse order violates the principles of natural justice.
- CBI v. V.C. Shukla — Loose sheets or diaries not maintained as regular books of account require independent corroboration before entries can establish liability against another person.
- Common Cause (A Registered Society) v. Union of India — Uncorroborated records cannot, by themselves, establish the alleged transactions.
- CIT v. Smt. Paramjit Kaur — Reassessment based on unverified information and suspicion, without independent examination by the Assessing Officer, cannot satisfy the requirement of reasons to believe.
- Pr. CIT v. Supertech Forgings (India) Pvt. Ltd. — Reopening based on third-party statements or investigation material requires independent verification and corroboration by the Assessing Officer.
- Winsome Textiles Industries Ltd. — Reliance on an investigation report without preliminary enquiry and a nexus between the material and alleged escapement of income was considered insufficient.
- Smt. Anju Jindal — Reassessment reasons based on an investigation report without preliminary enquiry or an independent nexus exercise were held jurisdictionally deficient.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHANDIGARH
1. Aforesaid appeal by assessee for Assessment Year (AY) 2012-13 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC \(CIT(A)\) dated 23.01.2026 in the matter of an assessment framed by Ld. Assessing Officer \(AO\) u/s 143(3) r.w.s. 147 of the Act on 31.12.2019. The grounds of appeal as raised by the assessee read as under: –
1. That the impugned order passed by the Learned Commissioner of Income Tax (Appeals) is contrary to law and facts on record, arbitrary, unjustified and liable to be set aside.
A. Grounds challenging validity of reassessment (Jurisdictional Grounds)
2. That the Learned CIT(A) has erred in upholding the validity of reassessment proceedings initiated under Section 147 of the Income-tax Act, 1961, which are bad in law, without jurisdiction and liable to be quashed.
3. That the Learned CIT(A) has failed to appreciate that the reassessment proceedings have been initiated on the basis of borrowed satisfaction and mere information received from third-party sources without any independent application of mind by the Assessing Officer.
4. That the Learned CIT(A) has erred in law in holding that there existed “reason to believe” for reopening of assessment, whereas the same was based merely on suspicion, conjectures and unverified third-party information, without any tangible material linking the Appellant to alleged escapement of income.
5. That the Learned CIT(A) has failed to appreciate that complete reasons recorded for reopening were not supplied to the Appellant in a timely and proper manner, thereby vitiating the reassessment proceedings.
6. That the Learned CIT(A) has erred in law and on facts in upholding the reassessment proceedings without appreciating that the same are barred by limitation under Section 149 of the Income-tax Act, 1961.
B. Grounds on addition under Section 69C (Merits)
7. That the Learned CIT(A) has erred in upholding the addition of ₹12,13,78,038/- made by the Assessing Officer under Section 69C of the Act, which is wholly arbitrary, unjustified and contrary to facts and law.
8. That the Learned CIT(A) has failed to appreciate that the impugned addition has been made solely on the basis of alleged statement of a third party and certain loose papers seized during third-party proceedings, which have no evidentiary value in the absence of independent corroborative material.
9. That the Learned CIT(A) has erred in law in upholding reliance on third party statements recorded behind the back of the Appellant without affording any opportunity of cross-examination, thereby violating the principles of natural justice.
10. That the Learned CIT(A) has failed to appreciate that the Appellant had furnished complete documentary evidence substantiating the genuineness of export transactions, which has been arbitrarily ignored without pointing out any specific defect therein.
11. That the Learned CIT(A) has erred in confirming the addition under Section 69C despite the fact that no expenditure was incurred or claimed by the Appellant and the impugned amount represents duly recorded export receipts.
12. That the Learned CIT(A) has failed to appreciate that the provisions of Section 69C are not applicable to the facts of the present case and have been wrongly invoked.
13. That the Learned CIT(A) has erred in not appreciating that the impugned addition results in double taxation of the same income which has already been offered to tax as part of sales/turnover.
C. General Grounds
14. That the Learned CIT(A) has passed the impugned order without properly considering the submissions, evidences on record and settled legal position, and without dealing with the specific contentions raised by the Appellant.
15. That the impugned order is bad in law as it is non-speaking, cryptic and passed without proper application of mind.
16. That the Appellant craves leave to add, amend, alter or withdraw any of the above grounds of appeal at the time of hearing.
2. The Ld. AR advanced arguments on legal grounds as well as on merits. Our attention has been drawn to the recorded reasons and various other documents to assail the jurisdiction of Ld. AO as well as quantum addition on merits. Reference has been made to various judicial decisions to support various grounds, the copies of which have been placed on record. The Ld. CIT-DR also advanced argument supporting the findings of Ld. AO. The written submissions / brief synopsis has also been filed during the course of hearing before us. Having heard rival submissions and upon perusal of case records including judicial decisions as cited before us, our adjudication would be as under.
Assessment Proceedings
3.1 The assessee being resident corporate assessee is stated to be engaged in manufacturing, trading and export of hosiery goods. The name of the assessee company has undergone change from M/s Kaursain Exports Pvt. Ltd. to M/s Milando Fashions Limited. The assessee filed its regular return of income on 25.09.2012 at Rs.68.84 Lacs which was scrutinized u/s 143(3) on 26.03.2015 at Rs.69.01 Lacs. However, the case was reopened and notice u/s 148 was issued by Ld. AO on 30.03.2019 which was beyond four years from the end of relevant assessment year.
3.2 In the recorded reasons, Ld. AO referred to the information received from ACIT, Circle-2 Ludhiana that a search under FEMA, 1999 was conducted at the residential and business premises of one Shri Tarlochan Singh @Tochi and his brother Shri Harjinder Singh at Amritsar on 17.11.2011. Upon perusal of the information received, it was gathered that during the search operations by Directorate of Enforcement (FEMA), some incriminating documents were seized which, prima-facie, revealed that M/s Kaursain Exports Pvt Ltd. made total payment of more than Rs.12 Crores in cash during the period from September, 2011 to November, 2011 to Shri Tarlochan Singh @ Tochi in lieu of acquiring Telegraphic Transfers (TT) in foreign currencies through its directors Shri Subhash Mittal, Shri Amneesh Mittal and Shri Rajneesh Mittal. The seized material also contained details correlating such TTs with the remittances received in the bank accounts of the assessee maintained with Oriental Bank of Commerce, Overseas Branch, Jandu Tower, G.T. Road, Miller Ganj, Ludhiana. The Directorate of Enforcement also forwarded the certified copy of statement of Shri Tarlochan @ Tochi along with seized documents for verification and further action. The reasons further record that the assessment of the assessee was framed u/s 143(3) on 26.03.2015 but during the assessment, the above facts as reported by Central Circle, Ludhiana were not considered. Since more than four years expired from relevant AY, the requirements to initiate proceeding u/s 147 are that the income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. It was, accordingly, alleged by Ld. AO that the assessee did not fully and truly disclose material facts of the above issue thereby necessitating reopening u/s 147. In the above background, Ld. AO formed reasons to believe that income of Rs.12 Crores as chargeable to tax for this year escaped assessment as the sources of total payment remained unverified. Notice u/s 133(6) was issued to the assessee company for verification. However, the assessee stated that the bank statement for the year under consideration was not available since the same was destroyed in fire. After independent examination of available records and information, Ld. AO formed reason of escapement of income which was alleged to be on account of failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for this year.
3.3 In response to notice u/s 148, the assessee filed return of income on 26.04.2019. The copy of reasons was provided to the assessee. Notice u/s 143(2) and 142(1) was issued thereafter calling for requisite details from the assessee. The assessee refuted the allegation of Ld. AO on the ground that the assessee was dealing in export of hosiery goods and received export consideration in US$ which form part of export sales proceeds. The copy of bank statement reflecting id of such foreign remittances was furnished. The assessee also furnished details of export invoices against which the payments were received. It was stated that entire foreign remittance was received in the bank account and the same was nothing but realization of export sales made in normal / routine course of business. However, Ld. AO maintained that the assessee failed to provide any justification of the alleged transaction with Tarlochan Singh @ Tochi and his brother.
3.4 In response to show-cause notice dated 26.12.2019, the assessee reiterated that it was engaged in export activities. The assessee sold the goods through overseas agent M/s Elbrain Trading Co. LLC and delivered the goods on the direction of the said agent. It was also stated that the assessee had no link with the stated persons which fact was also narrated during recording of statement of director Shri Rajneesh Mittal. The total payment received in bank accounts was on account of export payment remittances only. A final show-cause notice was issued to the assessee on 28.12.2019 to justify the cash payments as per impounded documents / information with documentary evidence. In the notice, it was also alleged that the TT number as depicted in the seized diary was the same as reflected in the bank statement of the assessee. The phone number of one of the directors was also mentioned in the diary which proves the nexus of the assessee with these operators. Upon perusal of reply of the assessee, it was alleged by Ld. AO that the movement of goods was not corroborated by the assessee with weigh slips, insurance certificate of goods traded etc. Finally, primarily going by the statement of Tarlochan Singh, the expenditure of Rs.12.13 Crores as found noted in the diary was added to assessee’s income as unexplained expenditure u/s 69C and the assessment was framed.
Appellate Proceedings
4.1 The assessee assailed the reopening jurisdiction on legal grounds and quantum addition on merits by way of elaborate written submissions which have already been extracted in the impugned order. On legal grounds, it was contended that the reopening was on borrowed satisfaction only and no independent reasons to believe were present. The recorded reasons did not constitute reasonable belief of escapement of income and the same was triggered on mere suspicion, without application of mind and without any tangible material. Reliance placed by Ld. AO on loose papers and mere statement of third-party lacked much credibility. The assessee also alleged that complete reasons were not provided to the assessee. It was also contended that the reopening was merely on ‘reasons to suspect’ which could not be sustained in the light of settled judicial pronouncements. A pertinent fact brought to the notice that the mention of assessee’s name by that person was barely at one place and that too for an amount of Rs.22 Lacs only. While Shri Tarlochan Singh mentioned receiving money from ‘some person’ of the assessee, he failed to mention precise identity of such person. Reliance on such vague statement of third-party was not tenable in law. No opportunity of cross-examination was ever afforded to the assessee.
4.2 Reference was made to the decision of Hon’ble Apex Court in CBI v. V.C. Shukla 1998 Taxmann.com 2155 (SC) holding that loose sheets or diaries, not being books of account regularly kept in the course of business, are not admissible evidence. The Court observed that entries made by one person in such documents, unless corroborated by independent evidence, cannot fasten liability on another. Similarly, in the case of Common Cause (A Registered Society) v. Union of India \(2017\) 77 Taxmann.com 245/245 Taxman 214/394 ITR 220 (SC), it was held that uncorroborated records would have no evidentiary value. Reference was also made to various decisions of Tribunal dealing with identical issue. It was contended that in the present case, the additions were made merely on the basis of loose papers and statement of a third-party which lack requisite credibility and thus, the same was not tenable.
4.3 The assessee further contended that during the course of assessment proceedings, all the required details of export remittances stood furnished by the assessee. The export sales were made in the ordinary course of business which was duly recorded in the books of accounts on the credit side of Profit and Loss account. The export proceeds were received through proper banking channels. A date-wise comprehensive list as regards the payments received, exchange rate along with invoice number, invoice date, shipment number, shipment date, party name and realization reference number was also furnished to Ld. AO which was simply ignored. The assessee furnished plethora of document to substantiate the export sales which include audited financial statements, details of purchase and sales during this year, party-wise details where purchases and sales exceeded Rs.5 Lacs, details of sundry debtors and creditors with their closing balances as on 31.03.2012, bill-wise details of all overseas parties with whom dealing was made during the year, detail of export, party-wise detail of telegraphic transfers received in bank account, copies of VAT-15 & VAT-20 (quarterly / annual VAT return) for the relevant period which reflected value of goods purchased and sold, bill-wise detail of commission deducted by the M/s Elbrina Trading Co. LLC (Commission agent) along with their certificate, copy of the two courier receipts and two purchase orders regarding samples of finished goods being sent to the Agent by courier. On these facts, it was stated that the assessee’s onus stood discharged and there remains no doubt on exports receipts. The assessee also raised the plea of double taxation on the ground that the export proceeds were reflected as sales which stood accepted in scrutiny assessment proceedings u/s 143(3).
4.4 On assessee’s legal grounds, Ld. CIT(A) observed that the case was reopened since Ld. AO received specific, tangible and credible information from ACIT, Central Circle-2, Ludhiana based on a search conducted by the Directorate of Enforcement (ED) under FEMA in the case of Shri Tarlochan Singh @ Tochi. The seized material and statement recorded during search specifically named the assessee company and contained details of telegraphic transfers (TT) in foreign currency which exactly matched with credits in the assessee’s bank account. The AO reproduced the information, examined the material, recorded independent satisfaction and clearly brought out the nature of information, the nexus between seized diary entries & assessee’s bank credits and failure of the assessee to disclose these facts during original assessment. Thus, this was not a case of borrowed satisfaction or reopening based on mere suspicion rather it was based on live, tangible material directly linked to the assessee. Since reopening was beyond four years, Ld. AO specifically recorded failure on the part of the assessee to fully and truly disclose material facts, which is clearly borne out from records. The contention that reasons were not supplied in time was also not acceptable because the assessee participated in reassessment proceedings, filed replies, never demonstrated what prejudice was caused due to alleged delay. The reassessment was, therefore, held to be legally valid and jurisdictionally sound.
4.5 On merits, the impugned addition was made on the basis of the seized diary of hawala operator, the statement of Shri Tarlochan Singh @ Tochi, matching TT numbers in assessee’s bank account, correlation of dates, amounts & foreign remittances, admission that coded entries “KO” referred to Kaursain Exports, phone number of director appearing in seized diary and independent confirmation by Enforcement Directorate Further, the assessee did not dispute the receipt of foreign remittances, matching of TT numbers and matching of dates & amounts. On the plea of export sales, there was no evidence of transportation of goods to Mumbai port, no insurance documents, no evidence of buyer, no quality control records, no evidence as to who bore the risk after port, no evidence of sampling or overseas buyer approval and no explanation why exports to Gulf were paid from UK. Thus, the assessee completely failed to establish genuineness of export transactions. The copies of seized documents and statements were supplied, show-cause notice was issued, multiple opportunities were given and final opportunity was also granted. The assessee merely denied connection but did not rebut the material evidence. The statement of Shri Tarlochan Singh was not the sole basis of addition but the addition was based on documentary evidence, bank trail, seized diary, correlation of TT numbers and surrounding circumstances. Therefore, reliance on such material was fully justified. The facts clearly establish that cash was paid in India, telegraphic transfers were obtained in foreign currency and source of such cash remained unexplained. The expenditure incurred for obtaining such remittance would clearly be hit by the provisions of Section 69C.
4.6 The assessee’s argument that no expenditure was claimed in books would be irrelevant. The provision of Sec. 69C cover even unrecorded expenditure. When incriminating material is found and linked to the assessee, the burden is on the assessee to explain its nature and source. The Ld. AO brought clear material on record, established nexus between seized documents & assessee, granted full opportunity and passed a reasoned order. There was, therefore, no infirmity in the reassessment or in the addition made. Finally, the assessment was confirmed against which the assessee is in further appeal before us.
Our findings and Adjudication
5. From the enumerated facts, it emerges that the assessee is engaged in export activities. The majority of assessee’ sales constitute export sales. The assessee filed regular return of income on 25.09.2012 at Rs.68.84 Lacs which stood scrutinized by Ld. AO u/s 143(3) on 26.03.2015 at Rs.69.01 Lacs. The export sales as made by the assessee stood accepted therein. The reasons to reopen the case were recorded beyond four years. The reasons expressly originate from information received from ACIT, Central Circle-2, Ludhiana which, in turn, is based on FEMA search at the premise of Shri Tarlochan Singh. In response to the said notice, the assessee furnished its audited accounts, purchase / sales details, list of debtors / creditors, overseas party details, export proceeds and bank remittance reconciliation. The records also contain bill-wise export proceeds / shipping bill particulars and bill wise foreign remittance mapping. The export sales were made in the ordinary course of assessee’s business. which were duly recorded in the books and offered to tax. All the sales proceeds have been received through banking channels only. The assessee furnished date-wise comprehensive list of payment received, exchange rate, invoice mapping, shipping details, etc. The assessee has furnished plethora of documents to substantiate the export sales which include copies of relevant VAT returns containing sales and purchase details, bill-wise details of commission deducted by the commission agent along with their certificates, sample courier receipts and purchase orders etc. In reply dated 28.12.2019, the assessee also furnished names of quality control personnel, freight outward details, marine insurance expense details, agency commission details. The assessee sufficiently substantiated the fact that the TT remittances were nothing but export receipts through banking channels supported by shipping / custom documents. In our considered opinion, by furnishing all such documents, the onus of the assessee, to substantiate its export sales, stood discharged. The onus was on Ld. AO to controvert these substantial evidences. However, the perusal of orders of lower authorities would show that nothing of that sort has been done by Ld. AO rather the additions have been made merely going by third-party material / statements which do not have any corroboration. It is trite law that no addition could be made merely on the basis of suspicion, conjectures or surmises. The complete onus was on Ld. AO to substantiate its allegation that the TT remittances were not export receipts but the same were received against alleged cash payments by the assessee to Shri Tarlochan Singh. However, none of the export sales have been found to be fictitious or bogus and no specific defect has been pointed out in the books of the assessee. The entire addition is substantially founded upon the statement of Shri Tarlochan Singh and certain entries allegedly found in the seized diary / material in his possession. The assessee has consistently denied having any connection with Shri Tarlochan Singh or having made any cash payment to him. More importantly, there is no independent corroborative evidence establishing the alleged cash payment by the assessee. The revenue has not brought on record any receipt, confirmation, correspondence, agreement, independent financial record or other contemporaneous evidence demonstrating that the assessee actually paid the alleged amount to Shri Tarlochan Singh. Further, no independent evidence has been brought on record by the revenue to establish that the assessee actually incurred the alleged expenditure. The statement of a third party, by itself, cannot conclusively establish that the assessee incurred unexplained expenditure, particularly when such statement is specifically disputed by the assessee. The mere fact that certain telegraphic transfer numbers or foreign remittances allegedly correspond with entries found in third-party material, cannot, by itself, establish that the assessee paid cash for obtaining such remittances. The corresponding foreign remittances, as explained by the assessee, were against export sales made in the ordinary course of its business. The crucial link between the alleged cash payment and the assessee has not been independently established by Ld. AO.
6. We also find that the assessee was not afforded an effective opportunity to cross-examine Shri Tarlochan Singh, whose statement has been relied upon against the assessee. The principles of natural justice require that where a third-party statement constitutes a material basis for an adverse finding, the assessee must ordinarily be afforded an effective opportunity to test such evidence by way of cross-examination, particularly when the assessee disputes the contents and veracity of the statement. However, it is also clear from the orders of lower authorities that no opportunity of cross-examination of Shri Tarlochan Singh has ever been provided to the assessee. The denial of such an opportunity of cross-examination is in clear violation of principle laid down by Hon’ble Apex Court in the case of Andaman Timber Industries vs. CCE (281 CTR 0241) holding that not allowing assessee to cross-examine witnesses by adjudicating authority though statements of those witnesses were made as basis of impugned order, amount to serious flaw which make impugned order nullity as it amounts to violation of principles of natural justice. In the present case, we find that such an opportunity of cross-examination has never been provided by Ld. AO to the assessee which would make the impugned addition nullity. If the statement / material of Shri Tarlochan Singh is ignored, nothing would be left with Ld. AO to support its allegation. Therefore, in our considered opinion the impugned addition could not be sustained on merits.
7. This Tribunal in the case of ACIT vs. Kishore Lal Balwant Rai (17 SOT 380 Chd.; dated 29.06.2007) held that third-party dairy entries, without independent corroboration and verification, could not fasten tax liability on the assessee. In the case of Subhash Chander Gupta vs. ITA (ITA Nos.765/Chd/24 & ors. dated 07.04.2025), it was similarly held by the bench that loose papers found with a third-party and third-party statement were insufficient to establish alleged cash payment. The Ld. AO lacked material to firmly conclude that cash had been paid. Similarly, in the case of Home Construction vs. DCIT (ITA No.615/Chd/2025 dated 11.02.2026), it was held by the bench that the addition based on third-party digital / documents without corroborative material from the assessee or without independent enquiries from parties, could not be sustained. All these case laws duly support the case of the assessee on merits.
8. We further find considerable force in the assessee’s contention that the addition, in the facts of the present case, would result in taxing the same transaction twice. The foreign remittances which are alleged to have been obtained through cash payments were explained by the assessee as realization of export sales. Such export sales were duly recorded in the books of account and had already been accepted in the original scrutiny assessment. Once the corresponding export turnover and sales have been accepted, the Revenue cannot, without bringing cogent evidence to establish that the same receipts represent something other than export realization, treat a part of such already accounted-for business receipts as unexplained expenditure merely on the basis of an uncorroborated third-party statement. At this juncture, it is also relevant that Sec.69C is attracted only where an assessee has incurred expenditure and offers no explanation about the source of such expenditure or the explanation offered is not satisfactory. The essential foundational fact of incurring the expenditure by the assessee must, therefore, be established before the deeming provision can be invoked. In the present case, the Revenue has failed to establish, by independent and reliable evidence, that the assessee actually incurred the alleged cash expenditure. In fact, the evidentiary material relied upon by the Revenue does not establish a complete and unbroken nexus between the assessee, Shri Tarlochan Singh, the alleged cash payment and the foreign remittances. The addition has essentially been sustained on the basis of third-party material without adequate independent corroboration and without affording cross-examination of the person whose statement has been relied upon. In these circumstances, we are of the considered view that the assessee’s explanation, supported by contemporaneous books of account and substantial documentary evidence relating to export transactions, could not have been rejected merely on the basis of the uncorroborated statement and seized material of a third-party. Therefore, the provisions of Sec.69C could not have even been invoked on the facts of the present case.
9. On legal grounds, the assessee has challenged the validity of reopening on the ground that the same was on borrowed satisfaction and there was no formation of reasons to believe on the part of Ld. AO qua escapement of income by conducting any independent verification or examination of underlying material / information stated to be originating from search conducted by FEMA authorities. Admittedly, the original assessment for the year under consideration was completed u/s 143(3) of the Act on 26.03.2015, wherein the returned income was duly subjected to scrutiny. The export sales and the corresponding business results of the assessee stood recorded in the books of account and were accepted in the original assessment proceedings. The notice u/s 148 has been issued on 30.03.2019, i.e. beyond a period of four years from the end of the relevant assessment year. In a case where reopening is made beyond four years, the statutory condition prescribed by the first proviso to Sec. 147 is required to be strictly satisfied. The Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. Upon perusal of the recorded reasons, we find that the foundation of the reassessment proceedings is the information allegedly received by Ld. AO from the ACIT, Central Circle, Ludhiana which, in turn, was based upon a search conducted by FEMA authorities in the case of Shri Tarlochan Singh. The Ld. AO referred to certain entries allegedly found in the seized material and the statement of Shri Tarlochan Singh and proceeded to form a belief that the assessee had made cash payments for obtaining telegraphic transfers (TT) in foreign currency.
10. However, significantly, the recorded reasons do not demonstrate any independent enquiry or verification conducted by the Ld. AO before forming the alleged belief of escapement of income. The information received from another authority was adopted as the basis for reopening without any meaningful independent verification of the underlying material, without examining the assessee’s books of account or export records and without establishing, at the stage of recording reasons, any direct nexus between the assessee and the alleged cash payments. It is settled position of law that the power to reopen an assessment cannot be exercised merely on the basis of borrowed satisfaction. The Ld. AO himself must apply his independent mind to the information / material in his possession and arrive at a reasoned belief that income chargeable to tax has escaped assessment. Mere reproduction or adoption of information received from another authority, without independent examination of the material and without establishing the live nexus between such material and the assessee, cannot, by itself, satisfy the jurisdictional requirement of Section 147. Upon perusal of recorded reasons in the present case, we are of the considered opinion that the reasons recorded do not demonstrate any independent verification by Ld. AO as to whether the alleged cash payments were, in fact, made by the assessee. There is no independent material in the recorded reasons establishing that the assessee had any business or other nexus with Shri Tarlochan Singh and his brother. The allegation regarding the assessee’s connection is substantially founded upon the third-party material and statement. The Ld. AO has not demonstrated from the reasons themselves how the alleged diary entries conclusively establish that the assessee made the alleged cash payments.
11. The Hon’ble High Court of Punjab & Haryana in the case of CIT vs. Smt. Paramjit Kaur (168 Taxman 39) held that where Ld. AO did not examine and corroborated the information received from the survey circle before recording his own satisfaction of escaped income and initiating reassessment proceedings, AO acted only on the basis of suspicion and it cannot be said that the same was based on belief that the income chargeable to tax had escaped income. The AO has to act on the basis of ‘reasons to believe’ and not on ‘reasons to suspect’. The Tribunal had, thus, rightly concluded that the Assessing Officer had failed to incorporate the material and his satisfaction for reopening the assessment and, therefore, the issuance of notice under section 148 of the Act for reassessment proceedings was not valid. Similar is the decision of jurisdictional High Court in the case of Pr. CIT vs. Supertech Forgings (India) Pvt. Ltd. (ITA-101-202 (O&M) 2023 dated 05.09.2023) holding that where reopening rested upon investigation wing / third party statements without AO’s own corroboration and verification, the jurisdictional challenge was upheld. The denial of cross-examination was also held to be material. The decision of Chandigarh Tribunal in the case of Winsome Textiles Industries Ltd. (ITA Nos.528/Chd/2024 &ors. dated 27.02.2025) also support this legal ground as urged by the assessee. In this decision, it was held that mere reliance on investigation wing report without preliminary enquiry, investigation and nexus between material and escapement of income demonstrates lack of tangible material and independent application of mind. Similar is the decision of Tribunal in the case of Smt. Anju Jindal (ITA No.1341/Chd/2018 dated 17.03.2023) holding that the reasons recorded were based on investigation wing’s report / conclusion without preliminary enquiry and an independent nexus exercise and therefore, their was no jurisdiction u/s 147. All these case laws duly support the legal ground of borrowed satisfaction as put forth by Ld. AR.
12. We further note that the assessee’s original assessment had already been completed u/s 143(3). The assessee’s export business, sales and business results were duly disclosed in its return of income and books of account. The material now relied upon by the Ld. AO relates to alleged foreign remittances which, according to the assessee, represented realization of export sales. Therefore, in the absence of any specific material demonstrating that the assessee had failed to disclose fully and truly all material facts necessary for the original assessment, the mandatory condition contained in the first proviso to section 147 remains unsatisfied in the present case. The recorded reasons merely state that the assessee failed to disclose the alleged transactions. However, such a general assertion cannot substitute the statutory requirement of demonstrating the precise material facts which were not disclosed by the assessee and which, because of such failure, resulted in escapement of income. The reasons must establish a live nexus between the alleged failure and the escapement of income.
13. In our considered view, the material relied upon by Ld. AO may, at best, have triggered an enquiry or suspicion. However, suspicion, howsoever strong, cannot take the place of the statutory requirement of an independent reasons to believe. The Ld. AO was required to undertake an independent examination of the material and satisfy himself that there was a failure on the part of the assessee to disclose fully and truly all material facts. Such exercise is conspicuously absent in the present case. We, therefore, hold that the reopening of assessment beyond four years was based essentially upon information received from another authority without independent verification and without due application of mind by the Ld. AO. Further, no failure on the part of the assessee to disclose fully and truly all material facts necessary for the original assessment has been established. The jurisdictional requirements of the first proviso to section 147 are consequently not fulfilled. Accordingly, the reassessment proceedings initiated u/s 147 pursuant to notice issued u/s 148 are held to be invalid and are hereby quashed. The legal ground raised by the assessee is allowed.
14. In the result, the legal ground challenging the validity of reopening is allowed and the reassessment proceedings are quashed. In any event, the addition could not be sustained on merits. The deeming provision of Sec.69C could not have been invoked on the facts of the present case before us. The impugned addition stand deleted. The assessee succeeds in its corresponding grounds of appeal.
15. Accordingly, the appeal of the assessee is allowed.
Order pronounced on 07th October, 2026
