Hemal Paresh Madeka Vs ACIT (ITAT Rajkot)
Borrowed Satisfaction and Denial of Cross-Examination: ITAT Deletes ₹26.02 Lakh Loan Addition
The Rajkot Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of ₹26,02,186 concerning alleged accommodation-entry loans. The Tribunal found that reopening rested on borrowed satisfaction and factually incorrect reasons, without independent examination of the assessee’s records. It also found a violation of natural justice through denial of cross-examination and accepted that the loans were supported by documentary evidence and repaid in the subsequent year.
The assessee, Hemal Paresh Madeka, originally filed his return on 8 January 2021, declaring total income of ₹62,19,410.
Following search and survey proceedings involving the Qutone Group and associated persons on 9 August 2022, the Department obtained information concerning Shri Rajesh Janaklal Daftary and related entities allegedly providing accommodation entries.
Based on digital accounting data and loose papers, the Assessing Officer attributed transactions of ₹26,02,186 to the assessee and issued a Section 148 notice on 24 March 2024.
Loan transactions treated as accommodation entries
The assessee filed a return in response declaring the same income. During reassessment, he denied involvement in accommodation entries and maintained that the seized material did not establish any undisclosed transaction attributable to him.
He also requested cross-examination of the person whose statement was relied upon, challenged the factual basis of reopening and raised objections concerning the satisfaction note and jurisdiction.
The Assessing Officer rejected the explanations and added ₹10,39,973 relating to Bhoomi P. Vachhani and ₹15,62,213 relating to Rajesh J. Daftary, aggregating to ₹26,02,186. The CIT(A) sustained the addition.
Reopening lacked independent application of mind
The Tribunal examined the recorded reasons and found that the Assessing Officer had relied on incorrect facts without verifying the assessment records and returns.
It held that the reasons reflected suspicion rather than an independently formed belief of escapement of income. Relevant facts already available on record had been ignored.
Relying on the Gujarat High Court’s decisions in Vijay Ramanlal Sanghvi and Inductotherm (India) Pvt. Ltd. v. M. Gopalan, the Tribunal observed that reopening could not be used merely to verify existing records through a fishing or roving enquiry.
It accordingly held that the reopening was liable to be set aside.
Denial of cross-examination violated natural justice
The Tribunal observed that the Assessing Officer could rely on third-party statements and material, but the assessee had to receive an effective opportunity to rebut them.
Where statements formed the basis of an addition, denial of the opportunity to cross-examine the persons concerned violated the principles of natural justice. The Tribunal referred to the Supreme Court’s decisions in Kishinchand Chellaram v. CIT and Andaman Timber Industries v. Commissioner of Central Excise.
Loans supported by records and subsequent repayment
On merits, the Tribunal found that the transactions represented genuine loans recorded in the books, supported by ledger accounts, PAN particulars, bank statements, confirmations and repayment details.
It further noted that the loans had been repaid in the subsequent year. Referring to the Gujarat High Court’s decision in CIT v. Ayachi Chandrashekhar Narsangji, it accepted repayment as supporting relief on the facts.
Accordingly, the Tribunal deleted the ₹26,02,186 addition and allowed the appeal.
Cases Discussed
- Vijay Ramanlal Sanghvi — [2023] 146 taxmann.com 55 (Gujarat HC).
- Inductotherm (India) (P.) Ltd. v. M. Gopalan — (2013) 356 ITR 481 (Gujarat HC).
- Kishinchand Chellaram v. CIT — 125 ITR 713 (SC).
- Andaman Timber Industries v. Commissioner of Central Excise — (2015) 281 CTR 241 (SC).
- CIT v. Ayachi Chandrashekhar Narsangji — 42 taxmann.com 251 (Gujarat HC).
FULL TEXT OF THE ITAT RAJKOT JUDGMENT/ORDER
Captioned appeal filed by the assessee, pertaining to assessment year (AY) 2020-21, is directed against the order under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the National Faceless Appeal Centre (NAC) Delhi/Commissioner of Income-tax (Appeals) [in short ‘NFAC/Ld.CIT(A)’], dated 27.05.2026, which in turn arises out of an assessment order passed by the Assessing Officer u/s 147, r.w.s. 144 of the Act, dated 23.03.2025.
2. Grounds of appeal raised by the assessee, are as follows:
(1) The learned Commissioner of Income Tax (Appeals) erred in law and on facts in upholding the reopening of the assessment under the provisions of the Income-tax Act. The reopening of the assessment is bad in law, unjustified, and liable to be quashed, as the conditions precedent for assuming jurisdiction to reopen the assessment were not duly satisfied.
(2) The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the addition of Rs.26,02,186/-, as unexplained income under section 69A of the Income-tax Act and in subjecting the same to tax under section 115BBE of the Act.
(3) The learned Commissioner of Income Tax (Appeals) erred in law and on facts in upholding the impugned addition despite the gross violation of the principles of natural justice. The learned Commissioner failed to appreciate that the Assessing Officer had relied upon statements, information, and/or material collected from third parties without providing the assessee an effective opportunity to confront the same and without affording the assessee the right to cross-examine the persons whose statements were relied upon. The denial of cross-examination has caused serious prejudice to the assessee and vitiates the assessment proceedings. The addition sustained on the basis of such untested material is therefore unsustainable in law and liable to be deleted.
3. Succinctly, the factual panorama of the case is that assessee before me is an Individual. The assessee, filled his original return of income declaring total income of Rs.62,19,410/-, on 08.01.2021 for the assessment year (A.Y.) 2020-21, relevant to the Financial Year (F.Y.) 2019-20. As per the information, a Search & Seizure and survey action was carried out by the Income tax Department in the case of ‘Qutone Group of Companies’ and its various associated concerns & persons u/s 132 of the Act, on 09.08.2022. In the said search action, Shri Rajesh Janaklal Daftary and their related entities were also covered in the action who were observed to be involved in the practice of providing accommodation entry transactions.The assessing officer, on perusal of tally files extracted from digital data backup and loose papers, found that the assessee was involved in the accommodation entry transactions with Rajesh Janaklal Daftary including his controlled entities viz. Rajesh Janaklal Daftary and his associates and total amount of the transaction is to the tune of Rs.26,02,186/-. 2
4. Therefore on the basis of above information, case of the assessee was reopened for reassessment and notice u/s 148 of the Act was issued on 24.03.2024 after recording reason and obtaining the necessary approval of the competent authority. The assessee filed return of income declaring income of Rs. 62,19,410/-, on 15.04.2024 in response to the notice u/s 148 of Income Tax Act, 1961. During the assessment proceedings, the assessing officer issued notices u/s 142(1) of the Act, to the assessee.
5. In response to the notice of the assessing officer, the assessee submitted replies before the assessing officer. The assessee requested for cross examination referring to the case law Andaman Timber Industries vs Commissioner of Central Excise, Kolkata-II and contented that the department solely relies on the statement of Mr. Rajesh Janaklal Daftary. The assessee also submitted that there is no tangible material to reopen the assessment and the assessment was reopened under section 147 of the Act based on incorrect facts. The assessee submitted that there was no independent application of mind by the assessing officer and that the reopening of assessment was based solely on borrowed satisfaction. The assessee also submitted that there is no evidence that the assessee is involved in accommodation entries and during the search and seizure, the search team did not find any incrementing material against the assessee. The assessee also submitted that the seized material did not pertain to him. Therefore, based on the dump document, the addition should not be made in the hands of the assessee. The assessee also stated that there is absence of DIN on the satisfaction note and approval given by Income Tax Authorities. The assessee also challenged the jurisdiction of the jurisdictional assessing officer on the ground that proceedings ought to have been initiated only through faceless 3 mechanism under section 144B of the Act and not by jurisdictional, assessing officer.
6. However, assessing officer rejected the contention of the assessee and completed the assessment order u/s 147 of the Act, by making the additions of loan transactions with Bhoomi P. Vachhani of Rs. 10,39,973/- and Rajesh J Daftary of Rs. 15,62,213/-, totalling to Rs. 26,02,186/- (Rs. 10,39,973 + Rs. 15,62,213), under section 68 of the Act.
7. Being aggrieved by the said order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT(A), but remained unsuccessful. Therefore, assessee is left with no other alternative but to knock on the doors of the Tribunal with this appeal praying for justice.
8. Shri R. D. Lalchandani, Learned Counsel for the assessee, pleaded that there is no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer. It reflects an arbitrary exercise of the power conferred under section 147 of the Act, and in the reasons recorded, there is complete non-application of mind and reasons were recorded based on the incorrect facts. The information gathered by the assessing officer and stated in the reasons recorded had already been mentioned in the books of accounts of the assessee, therefore, there is no any new tangible material to reopen the assessment, hence, reassessment proceedings initiated against the assessee under section 147 of the Act should be quashed. 4
9. Shri Lalchandani, Learned Counsel further pleaded that opportunity of cross examination was not provided to the assessee. There is absence of DIN on the satisfaction note and approval given by Income Tax Authorities.
10. Shri Lalchandani, Learned Counsel also challenged the jurisdiction of the jurisdictional assessing officer on the ground that proceedings ought to have been initiated only through faceless mechanism under section 144B of the Act and not by jurisdictional, assessing officer.
11. Shri Lalchandani, Learned Counsel, on merit, submitted that there is no evidence that the assessee is involved in accommodation entries and during the search and seizure, the search team did not find any incrementing material against the assessee and the seized material did not pertain to assessee. Therefore, based on the dump document, the addition should not be made in the hands of the assessee.
12. I have heard, both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. I have gone through the reasons recorded by the assessing officer and noted that in the reasons supplied to the petitioner, there is no whisper, what to speak of any allegation, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. I note that assessing was not having any material information to form “a reason to believe” that there was an escapement of income, and there is complete non-application of mind while recording reasons. Moreover, the reasons were recorded based on the borrowed satisfaction. Thus, making the wrong statement in the reasons recorded 5 and ignoring the relevant and correct facts available on record established that the assessing officer has not applied his independent mind while forming the opinion, for that reliance is placed on the following decisions:
(i) Decision of Jurisdictional High Court viz. Gujarat High Court in case of Vijay Ramanlal Sanghvi [2023] 146 taxmann.com 55 (Gujarat)
“9 On perusal of the reasons recorded, the assessment is sought to be reopened for verification of the facts which are already on record as to whether the amount of Rs. 2.1 crore received by the assessee and reflected in the regular books of accounts pertains to any accommodation entry or not. It is not in dispute that the assessee returned that amount within a short span of two months. Therefore, it appears that under the guise of reopening the assessment, the Assessing Officer wants to have a roving inquiry. Under the circumstances, it cannot be said that Assessing Officer had any tangible material to form an opinion that the income chargeable to tax has escaped the assessment”
(ii) In case of Inductotherm (India) (P) Ltd. v. M. Gopalan, Deputy CIT reported in (2013) 356 ITR 481, the Court observed that :
“..for a mere verification of the claim, the power of reopening of assessment could not be exercised and the Assessing Officer cannot seek to undertake a fishing or a roving inquiry and seek to verify the facts which are already on record, as if it were a scrutiny assessment”.
13. In view of the above discussion, I hold that the assessing officer had taken an irrelevant fact into consideration and reopened the assessments on the basis of suspicion, further, the Assessing Officer proceeded for re-opening of the assessment on non- existent and factually incorrect basis/reasons and has not applied his mind and did not verify the assessment records/returns filed by the assessee prior to recording of the reasons, therefore, re-opening of the assessments is liable to be set aside/quashed.
14. About opportunity of cross examination, I find that under the Income Tax Act, the Assessing Officer is empowered to assess the correct income of the assessee. For this purpose, the assessing officer may make necessary enquiries and gather 6 evidences or may rely upon the materials and evidences collected by the investigating agencies and rely on the statement of third-party and documents, found at the premises of third-party. However, natural justice demands that in such cases, assessing officer must bring these facts to the knowledge of the assessee for rebuttal and also provide opportunity of cross -examination. The principles of natural justice are an inalienable part of the Income-tax law as provided under various provisions of the Act, namely audi alteram partem i.e. no man should be condemned unheard, decisions with adequate reasons, acting fairly that is, without prejudice. It is settled law that any additions made in absence of providing opportunity of cross examinations of persons, whose statement has been relied upon for making the additions is in violation of natural justice, hence cannot be sustained. The Hon’ble Supreme Court of India, in the case of Krishnachand Chelaram Vs. CIT 125 ITR 713 (SC) and Andaman Timber Industries Vs. Commissioner of Central Excise (2015) 281 CTR 0241 (SC) has held that additions without providing the opportunity of cross examination is in violation of natural justice.
15. On merit, I find that the transactions represented genuine loans duly recorded in books of account, supported by ledger accounts, PAN details, bank statements, confirmations and repayment details. If the loan has been repaid in the subsequent year, no addition should be made in the hands of the assessee, for this I rely on the judgement of the jurisdictional High Court of Gujarat in the case of CIT vs. Ayachi Chandrashekhar Narsangji 42 taxmann.com 251 – (Guj. HC),where, it was held that when the Department had accepted repayment of loan in subsequent year, no addition was to be made in current year on account of cash credit. In the assessee’s case, under consideration, the loan was repaid in subsequent year, hence, addition should not be made in the hands of the assessee. 7
16. Considering these facts and circumstances, I am not inclined to accept the contention of the Assessing Officer in any manner and hence the addition so made is deleted. Hence, I allow the appeal of the assessee.
17. In the result, appeal filed by the assessee, is allowed.
Order is pronounced in the open Court Today on 19/10/2026.
