The Income Tax Appellate Tribunal, Delhi, has delivered a significant ruling reinforcing the evidentiary and procedural safeguards under Section 68 of the Income Tax Act, 1961. The Tribunal held that mere suspicion, unsupported by tangible material or independent verification, cannot sustain an addition to income. Crucially, it emphasized that denying the assessee the opportunity to cross-examine witnesses whose statements form the basis of an assessment renders the order legally unsustainable.
Background & Facts
The Dispute
The appellant, Neelkhanth Township Pvt. Ltd., a real estate company, was assessed under Section 153A of the Income Tax Act, 1961, following a search operation conducted on 23.03.2018 at premises registered to M/s Seetal Impex Pvt. Ltd. & Ors. The same address was also the registered office of the appellant. The Assessing Officer (AO) initiated proceedings under Section 153A, alleging that the appellant received accommodation entries in the form of share capital and unsecured loans from M/s Vagmi Financials Pvt. Ltd. (formerly M/s Fitworth Constructions Pvt. Ltd.), a company identified by the Investigation Wing as an entry operator.
Key Facts
- The appellant filed its return of income for AY 2017-18 on 23.10.2017 declaring nil income.
- Search under Section 132 was conducted on 23.03.2018 at 4735/11, 22, Prakash Deep, Ansari Road, Dariya Ganj, New Delhi.
- The panchnama recorded during the search listed only M/s Seetal Impex Pvt. Ltd. & Ors. as the subject; the appellant’s name was not mentioned.
- The appellant filed objections on 05.11.2019 and 20.11.2019, challenging jurisdiction under Section 153A and demanding production of incriminating material.
- The AO issued notice under Section 143(2) on 11.11.2019 and Section 142(1) on 28.11.2019.
- The appellant submitted detailed documents including bank statements, audited financials, ITR acknowledgments, and ROC filings to substantiate the source of funds.
- The AO made two additions under Section 68:
- Rs. 49,50,000 as unexplained share capital (4,95,000 equity shares of Rs. 10 each)
- Rs. 54,50,000 as unexplained unsecured loan
- The AO relied on statements recorded under Section 131 on 20.06.2018 (Mahender Lal Sethia) and 17.07.2018 (Praveen Kumar Agarwal), both of whom later retracted their statements via affidavits.
- The CIT(A) deleted the addition of Rs. 54,50,000 (unsecured loan) but upheld the Rs. 49,50,000 addition (share capital).
Procedural History
- 23.03.2018: Search conducted under Section 132 at premises of M/s Seetal Impex Pvt. Ltd. & Ors.
- 14.11.2019: Notice issued under Section 153A to the appellant.
- 07.11.2019: Appellant filed return declaring nil income.
- 29.12.2019: AO passed assessment order under Section 153A r.w.s. 143(3), making additions of Rs. 49,50,000 and Rs. 54,50,000 under Section 68.
- 16.09.2025: CIT(A) order: Deleted Rs. 54,50,000; upheld Rs. 49,50,000.
- 02.04.2026: Hearing before ITAT Delhi.
- 30.04.2026: ITAT judgment pronounced.
The Parties' Positions
For the Assessee
- Challenged jurisdiction under Section 153A, arguing no search was conducted at its premises.
- Contended that no incriminating material was found during search, and additions were based solely on retracted third-party statements.
- Submitted comprehensive documentary evidence to establish identity, creditworthiness, and genuineness of transactions.
- Argued denial of cross-examination of witnesses violated principles of natural justice.
- Relied on Pr. CIT v. Abhisar Buildwell (P.) Ltd. and Andaman Timber Industries v. CCE.
For the Revenue
- Argued that since the search was conducted at the appellant’s registered address, jurisdiction under Section 153A was valid.
- Claimed that statements under Section 131 constituted incriminating material.
- Asserted that the lender company was a shell entity, and the transactions were accommodation entries.
- Opposed admission of additional grounds, claiming they required fresh verification.
Relief Sought
The appellant sought:
- Quashing of the assessment order under Section 153A.
- Deletion of both additions of Rs. 49,50,000 and Rs. 54,50,000 under Section 68.
- Cancellation of penalties under Section 271AAC, interest under Sections 234B and 234C, and tax under Section 115BBE.
- Grant of opportunity to cross-examine witnesses.
The Legal Issue
The central questions were: (1) Whether proceedings under Section 153A can be initiated without incriminating material found at the assessee’s premises? (2) Whether statements recorded under Section 131, and not Section 132(4), can form the basis of an addition under Section 68? (3) Whether denial of cross-examination of witnesses renders the assessment order void for breach of natural justice?
Arguments Presented
For the Appellant
The appellant relied on Pr. CIT v. Abhisar Buildwell (P.) Ltd. [2023] to argue that no addition can be made under Section 153A without incriminating material found during the search. It submitted that the statements relied upon were recorded under Section 131, not Section 132(4), and thus could not be treated as material found during search. The appellant further cited Andaman Timber Industries v. CCE to assert that denial of cross-examination is a fatal flaw. It demonstrated that the share capital and loan were received through banking channels, supported by audited accounts, ITRs, and repayment records. The appellant argued that the burden under Section 68 was discharged and that the Revenue’s suspicion, unsupported by evidence, could not override documentary proof.
For the Respondent
The Revenue contended that the search at the shared address conferred jurisdiction under Section 153A. It argued that the statements of Mahender Lal Sethia and Praveen Kumar Agarwal, even if recorded under Section 131, constituted incriminating material because they revealed the modus operandi of entry operators. The Revenue maintained that the appellant failed to prove the creditworthiness of the lender and that the timing of repayment did not negate the initial nature of the transaction. It opposed the admission of additional grounds, claiming they were not bona fide and required factual verification.
The Court's Analysis
The Tribunal first addressed jurisdiction under Section 153A. It held that although the appellant’s name was not explicitly mentioned in the panchnama, the search was conducted at its registered office, and the warrant was issued in the name of "M/s Seetal Impex Pvt. Ltd. & Ors." The word "Ors." was interpreted to include the appellant, thereby validating jurisdiction. This finding was accepted.
However, the Tribunal turned to the core issue: the validity of the additions under Section 68. It observed that the CIT(A) had accepted the genuineness of the unsecured loan of Rs. 54,50,000 because it was repaid within the year and supported by banking records. Yet, the same tribunal upheld the Rs. 49,50,000 share capital addition based on identical evidence - a dual standard the Tribunal found legally untenable.
"It is surprising that when the creditworthiness of lender company is doubted and allegation has been made with respect to the lender company as Shell company as to what prevent the ld. CIT(A) to hold that the entire funds received were accommodation entry."
The Tribunal then examined Section 68. It reiterated that the initial burden lies on the assessee to explain the nature and source of the credit. Once the assessee provides credible documents - bank statements, audited accounts, ITRs, ROC filings - the burden shifts to the Revenue to disprove the genuineness. The Tribunal emphasized that the Revenue’s reliance on retracted statements, without any corroborative evidence, was legally impermissible.
"It is well-settled position of law that no matter how strong suspicion is, it cannot take place of the evidence."
The Tribunal further held that the statements of Mahender Lal Sethia and Praveen Kumar Agarwal, recorded under Section 131, were not material "found during the course of search" under Section 153A. Section 132(4) statements are admissible as evidence; Section 131 statements are not. The Tribunal cited Andaman Timber Industries v. CCE to hold that denying cross-examination of witnesses whose statements are relied upon is a violation of natural justice and renders the order void.
"The denial of opportunity to cross examine which goes to the root of the matter and strikes at the very foundation of the assessment and, therefore, renders the assessment order passed by the AO not sustainable."
The Tribunal concluded that the appellant had discharged its burden under Section 68. The Revenue failed to produce any evidence contradicting the documentary proof. The reliance on retracted statements, without independent verification or cross-examination, was insufficient to sustain the addition.
The Verdict
The appellant succeeded on all material grounds. The Tribunal set aside the addition of Rs. 49,50,000 under Section 68 and confirmed the deletion of Rs. 54,50,000. All penalties under Section 271AAC, interest under Sections 234B and 234C, and tax under Section 115BBE were cancelled. The appeal of the assessee in ITA No. 7604/Del/2025 was allowed, and the Revenue’s appeal in ITA No. 8880/Del/2025 was dismissed. The order of the CIT(A) dated 16.09.2025 was modified accordingly.
What This Means For Similar Cases
Documentary Evidence Must Prevail Over Suspicion
- Practitioners must insist that the Revenue produce tangible, corroborative evidence to rebut documentary submissions under Section 68.
- Merely alleging a lender is a "shell company" without proof of circular funding or cash deposits is insufficient.
- Bank statements, audited accounts, and ITRs of the lender are sufficient to discharge the initial burden.
Cross-Examination Is Non-Negotiable
- Any reliance on third-party statements - even under Section 131 - requires the assessee to be given an opportunity to cross-examine.
- Failure to provide this opportunity is a jurisdictional defect, not a procedural lapse.
- Tribunals and courts will set aside assessments where cross-examination is denied, regardless of the strength of suspicion.
Section 153A Additions Require Incriminating Material
- Additions under Section 153A cannot be based on post-search statements unless they are recorded under Section 132(4).
- Statements under Section 131 are investigative tools, not evidentiary material for assessment.
- Practitioners must challenge assessments that rely on Section 131 statements as "incriminating material" under Section 153A.
