ITO Vs Manju Diamonds Pvt. Ltd. (ITAT Mumbai)
The present case concerns the reassessment of Manju Diamonds Pvt. Ltd. for the Assessment Year 2017–18. The assessee had filed its original return declaring a total income of ₹1,70,303, which was processed under Section 143(1) of the Income Tax Act. Subsequently, the Assessing Officer (AO) received information from the DCIT, Kolkata, originating from a search and seizure operation under Section 132 conducted on 27.05.2018 in the case of Shri Sushil Lahoti and associated entities. The information suggested that Mr. Lahoti controlled entities engaged in providing accommodation entries in the form of fictitious unsecured loans and share capital in lieu of commission.
Based on this information, the AO recorded reasons to believe that income chargeable to tax had escaped assessment and issued a notice under Section 148 on 31.03.2021. The assessee filed its return in response, reiterating the same declared income. During reassessment, the AO noted that the assessee had received unsecured loans totaling ₹75,50,000 from four entities allegedly controlled by Shri Lahoti. The assessee submitted loan confirmations, bank statements, and email correspondence, asserting that the loans were taken for working capital requirements and that documentation had been facilitated through Mr. Lahoti.
Despite these submissions, the AO treated the entire ₹75,50,000 as unexplained cash credit under Section 68, based solely on the statement of Mr. Lahoti admitting to providing accommodation entries to various entities, including the assessee. The assessee requested the opportunity to cross-examine Mr. Lahoti, arguing that reliance on his untested statement violated natural justice principles. The AO rejected this request and made the addition.
On appeal, the CIT(A) held that the addition was entirely based on the uncorroborated statement of Mr. Lahoti and that the AO failed to: (i) allow cross-examination of Mr. Lahoti, and (ii) discharge the burden of proof after the assessee submitted primary evidence. The CIT(A) observed that relying on evidence gathered from third parties without affording the assessee a chance to rebut it violated the principles of natural justice (‘Audi Alteram Partem’). Consequently, the addition of ₹75,50,000 was deleted. The CIT(A) relied on several judgments, including Andaman Timber Industries (SC), Laxmanbhai S. Patel vs CIT (Gujarat HC), and M/s R.W. Promotions (Mumbai HC), which consistently emphasize that additions based on third-party statements without cross-examination are null and void.
The assessee also challenged the validity of reassessment under Section 147, arguing that Section 153C should have been invoked since the information originated from a search on Mr. Lahoti. The Department contended that no documents or assets belonging to the assessee were recovered, and the AO acted on Shri Lahoti’s statement under Section 132(4). The Tribunal observed that Section 153C applies only if seized assets, books, or information pertain to the assessee. Since no such material was recovered, the AO validly reopened the assessment under Section 147, and the reassessment proceedings were held legally valid.
The assessee further argued that the AO did not properly verify the source of information or record reasons with adequate application of mind. The Tribunal rejected this contention, noting that the AO relied on credible information from the DCIT containing details of the loans, PAN numbers, and companies involved. Supreme Court jurisprudence (ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd.) clarifies that at the stage of recording reasons under Section 147, the AO is required to form only a reasonable belief based on relevant material.
Regarding the merits of the addition, the Tribunal noted that while the CIT(A) deleted the addition for procedural violations, the assessee also bore responsibility to produce Shri Lahoti for verification and cross-examination, especially after obtaining confirmations from the four lending entities. The assessee did not undertake this step, nor did the CIT(A) conduct further inquiry into the genuineness and creditworthiness of the lending entities, which reportedly had minimal profits and questionable sources of funds. Considering these factors, the Tribunal restored the matter to the file of the CIT(A) for detailed inquiry, ensuring the assessee is provided an opportunity of being heard.
In conclusion, the Tribunal held:
