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
