Summary: The ITAT Mumbai in Ratul Tex Private Limited v. Deputy Commissioner of Income Tax, deleted an addition of ₹1.09 crore made under Sections 69A and 115BBE after holding that a loan transaction cannot be treated as unexplained money solely on the basis of a third-party accommodation entry statement when the assessee has furnished complete documentary evidence and was denied cross-examination of the statement maker. The assessee had produced the lender’s income-tax returns, audited financial statements, confirmations, and bank statements evidencing receipt and repayment of the loan along with interest within the same financial year. However, the Assessing Officer treated the transaction as bogus primarily relying on the statement of a third party allegedly engaged in providing accommodation entries. The Tribunal held that denial of cross-examination violated principles of natural justice and rendered reliance on the statement unsustainable. It further observed that minor address discrepancies and suspicions regarding the lender’s financial profile could not override substantive documentary evidence establishing identity, genuineness, source, and repayment of the loan transaction.
Core issue: Whether a loan transaction can be treated as unexplained money under section 69A solely on the basis of a third-party accommodation entry statement when the assessee has furnished complete documentary evidence and has been denied the opportunity to cross-examine the maker of the statement.
Statutory Provisions Involved: The dispute involved the provisions of section 69A (unexplained money), section 115BBE, section 147, section 148, section 148A, section 133(6) and section 250 of the Income-tax Act, 1961, together with the principles of natural justice, particularly the right to cross-examination.
Core Issue: The principal issue before the Tribunal was whether an addition of ₹1,09,53,000 could be sustained as unexplained money when the assessee had furnished complete documentary evidence in support of the loan transaction and the addition was made primarily on the basis of the statement of a third party whose cross-examination was not granted despite a specific request.
Facts of the Case: The assessee company filed its return declaring total income of ₹84,65,238. Based on information received from the Investigation Wing that Deepak Jain was engaged in providing accommodation entries through various entities including Surya Diamonds Pvt. Ltd., the assessment was reopened. The Revenue alleged that the assessee had received an accommodation entry of ₹1,09,53,000 from Surya Diamonds Pvt. Ltd. During the relevant year, the assessee had borrowed approximately ₹1 crore from the said concern and repaid the entire amount in the same financial year along with interest of ₹9,53,000. To establish the genuineness of the transaction, the assessee furnished copies of the lender’s income-tax returns, audited financial statements, confirmations and bank statements evidencing both receipt and repayment of the loan. The assessee specifically sought cross-examination of Shri Deepak Jain, whose statement was relied upon by the Assessing Officer, but no such opportunity was granted.
Findings of the Assessing Officer: The Assessing Officer observed that the lender had negligible share capital, insignificant assets, large turnover disproportionate to its infrastructure, and had not complied with notices issued under section 133(6). Relying principally on the statement of Shri Deepak Jain and certain address discrepancies, the Assessing Officer treated the amount of ₹1,09,53,000 as unexplained money under section 69A read with section 115BBE.
Findings of the CIT(A): The CIT(A)/NFAC upheld the addition and concurred with the Assessing Officer that the assessee had failed to satisfactorily establish the genuineness and creditworthiness of the lender.
Findings of the ITAT: The Tribunal held that the assessee had discharged the burden cast upon it by producing all primary documentary evidence, including income-tax returns, audited financial statements, confirmations and bank statements of the lender. It was also an admitted fact that the entire loan amount together with interest had been repaid within the same financial year, which strongly supported the genuineness of the transaction.
The Tribunal further observed that the addition was based mainly on the statement of Shri Deepak Jain, but no opportunity of cross-examination was afforded to the assessee despite a specific request. Following the decision of the Supreme Court in Andaman Timber Industries, the Tribunal held that use of such statement without allowing cross-examination amounted to a clear violation of the principles of natural justice and the statement could not be relied upon.
The Tribunal also noted that Shri Deepak Jain was not a director of the lender company during the relevant assessment year. Minor discrepancies in addresses between the confirmation and statutory records were held to be inconsequential and insufficient to override the substantive documentary evidence produced by the assessee. Once identity, source and repayment stood established, the addition had no legal foundation.
Accordingly, the Tribunal deleted the addition of ₹1,09,53,000.
Cases Relied Upon: The Tribunal relied upon the judgment of the Supreme Court of India in Andaman Timber Industries v. Commissioner of Central Excise, Kolkata-II, wherein it was held that denial of cross-examination of a witness whose statement is relied upon renders the order a nullity. Reliance was also placed on the judgment of the Gujarat High Court in PCIT v. Ambe Tradecorp Pvt. Ltd. and CIT v. Ayachi Chandrashekhar Narsangji, where it was held that once identity, source and repayment of the loan are established, addition cannot be sustained.
Final Conclusion: The appeal of the assessee was allowed. The addition of ₹1,09,53,000 made under section 69A read with section 115BBE was deleted on merits. In view of the deletion on merits, the legal grounds challenging reopening were treated as academic and were not adjudicated.
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