Third-Party Material Must Be Disclosed Before Addition: ITAT Ahmedabad

Sadhikrupa Polysacks Private Limited Vs ITO (ITAT Ahmedabad)

Show the Evidence Before Making the Addition: Third-Party Search Material Sends Case Back to AO

Ahmedabad ITAT Requires Disclosure and an Effective Opportunity to Rebut

In Shri Sadhikrupa Polysacks Private Limited v. ITO, ITA No. 343/Ahd/2026, concerning Assessment Year 2018-19, the Ahmedabad Tribunal examined additions based substantially on statements and material collected during a search involving a third party.

The Assessing Officer had added ₹20,33,600 under section 68 as unexplained unsecured loans and ₹16,269 under section 69C towards alleged commission. The Commissioner (Appeals) confirmed both additions.

The Tribunal found that the assessment order did not establish that the adverse material had been furnished to the assessee or that an effective opportunity to rebut it had been provided. It therefore restored the matter to the Assessing Officer for fresh adjudication after disclosure of the relied-upon material.

The Bench comprising Dr. B.R.R. Kumar, Vice-President, and Shri Rahul Chaudhary, Judicial Member, pronounced its order on 1 October 2026. The appeal was allowed for statistical purposes, without a final finding that the loans were genuine.

Unsecured Loans Questioned Following a Third-Party Search

The assessee-company manufactured and exported paper laminated HDPE woven fabrics and bags. It filed its return declaring Nil income.

The assessment was subsequently reopened on the basis of information arising from a search in the case of Shri Sanjay Govindram Agrawal, also known as Sanjay Tibrewal.

The Assessing Officer treated unsecured loans aggregating ₹20,33,600 as unexplained cash credits. A further addition of ₹16,269 was made towards alleged commission expenditure.

The assessee challenged both the validity of the reassessment under sections 147 and 148 and, without prejudice, the additions on merits. Following confirmation by the Commissioner (Appeals), it approached the Tribunal.

The central dispute before the Tribunal concerned the use of third-party material without adequately confronting the assessee with the evidence relied upon against it.

Assessee Sought the Material and Cross-Examination

The assessee’s representative submitted that the reassessment relied on material collected in another person’s case, which had not been furnished to the assessee.

It was also submitted that the loans had been received through banking channels and that the transactions were duly recorded in the books of account.

Significantly, the assessee had specifically sought verification and cross-examination of the concerned persons. Its objection therefore extended beyond a general denial of the allegations: it sought access to the underlying evidence and an opportunity to test the case against it.

The Department supported the orders of the lower authorities, contending that the search material established that the transactions represented accommodation entries.

The Tribunal had to consider whether the additions could stand when the record did not demonstrate adequate disclosure and an effective opportunity of rebuttal.

Concerns About Financials Did Not Cure the Procedural Defect

The Tribunal examined the turnover figures placed in the paper book and referred to the assessee’s depreciation chart.

The turnover disclosed for Financial Year 2017-18, relevant to the disputed assessment year, was approximately ₹3.49 crore. The figures placed before the Tribunal also showed turnover for other years, reaching approximately ₹14.10 crore in Financial Year 2022-23.

However, the Tribunal expressly observed that the assessee’s activities did not instil confidence concerning the financials before it.

This observation is important in understanding the result. The Tribunal did not accept the financial records as conclusive proof of genuine borrowing. Nevertheless, its concerns about those records did not remove the requirement to furnish the adverse material and provide a meaningful opportunity to answer it.

The relief arose from the deficiency in the assessment process, rather than an affirmative acceptance of the assessee’s explanation.

Adverse Material Must Be Properly Confronted

The Tribunal found that the additions had been made substantially on the basis of statements or material arising from the third-party search.

The assessee had specifically disputed that material and requested access to it, together with cross-examination of the concerned persons.

Yet, the assessment order did not establish that the material relied upon had been duly furnished or that an effective opportunity to rebut it had been provided.

Since the evidence forming the basis of the additions had not been properly confronted to the assessee, the Tribunal held that the additions could not be sustained as they stood.

It directed the Assessing Officer to furnish the relied-upon material, provide a reasonable opportunity of rebuttal and decide the issues afresh in accordance with law.

Although the request for cross-examination was recorded, the operative direction was framed in terms of disclosure and reasonable opportunity to rebut.

Author’s Comments

The decision highlights the need to distinguish between possessing adverse information and establishing an addition through a fair assessment process. Evidence obtained in another person’s search may be relevant, but the taxpayer must be able to examine and answer the material used against it.

Equally, banking channels and entries in the books did not secure an outright deletion. The Tribunal’s reservations about the financials remained, and the substantive explanation must now withstand fresh scrutiny.

The order also should not be described as having quashed the reopening: it contains no separate finding invalidating reassessment jurisdiction.

The practical significance lies in the remand. The Department must disclose its evidence, and the assessee must receive an effective opportunity to meet it. The ultimate tax treatment will depend on the resulting examination.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals) (hereinafter referred to as “Ld. CIT(A)”), National Faceless Appeal Centre (NFAC), Delhi vide order dated 17.12.2025, under section 250 of the Income-Tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2018-19.

2. The assessee has raised several grounds challenging the validity of reassessment proceedings under sections 147/148 of the Act and, without prejudice, the additions of Rs.20,33,600/- u/s 68 of the Act and Rs.16,269/- u/s 69C of the Act.

3. The brief facts of the case are that the assessee-company, engaged in manufacturing and export of paper laminated HDPE woven fabrics and bags, filed its return declaring Nil income. The assessment was subsequently reopened on the basis of information arising from a search conducted in the case of Shri Sanjay Govindram Agrawal @ Sanjay Tibrewal. The Assessing Officer treated unsecured loans of Rs.20,33,600/- as unexplained cash credits under section 68 of the Act and made a further addition of Rs.16,269/- under section 69C towards alleged commission.

4. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A), who confirmed the additions made by the Assessing Officer.

5. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal.

6. Before us, the Ld. AR submitted that the reassessment was based on material collected in the case of a third party, which was not furnished to the assessee. It was further submitted that the assessee had received the loans through banking channels, duly recorded the transactions in its books and had specifically sought verification/cross-examination of the concerned persons. The Ld. DR, on the other hand, supported the orders of the lower authorities and submitted that the search material established that the transactions represented accommodation entries.

7. Heard the arguments of both the parties and perused the material available on record. We observe the turnover of the company, as reported in Yearly Tax Returns and Audit Report from FY 2015-16 to FY 2021-22, as reflected in page No. 47 of the paper-book, as follows:-

The depreciation chart (block of assets), as provided by the assessee at page No. 69 of the paper-book , is as under:-

7. The activities of the assessee do not instill any confidence with regard to the financials before us. In this case, we find that the additions have been made substantially on the basis of statements or material arising from the search in the case of a third party. The assessee had specifically disputed the same and sought the underlying material and an opportunity to cross-examine the concerned persons. However, the assessment order does not establish that the material relied upon against the assessee was duly furnished to it or that an effective opportunity to rebut the same was provided. Since the adverse material forming the basis of the additions was not properly confronted to the assessee, the additions cannot be sustained as such. We, therefore, restore the matter to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall furnish the material relied upon, provide reasonable opportunity to the assessee to rebut the same and decide the issues afresh in accordance with law.

8. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open Court on 01.10.2026.