AO's Failure to issue SCN and Grant Cross-Examination Opportunity Necessitates Deletion of Unaccounted Interest Income Addition: ITAT [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) deleted the addition of ₹20,34,000 made on account of undisclosed interest income for the Assessment Year (A.Y.) 2020-21 by observing the AO’s failure to issue Show cause notice and denial of cross-examination opportunity.

Sunil Kumar Agarwal (assessee), an individual engaged in the business of precious and semi-precious stones. The addition originated during search and seizure operations, where the AO discovered seized documents that allegedly contained coded calculations for interest on delayed realization of large business payments (imports/sales).

The Assessing Officer (AO) inferred that the assessee had received ₹20.34 lakh in out-of-book interest on these transactions and added the entire sum to the total income.

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The assessee consistently contended throughout the assessment and appellate proceedings that the documents were misinterpreted and that he had explained the principal transactions as already accounted.

Aggrieved by the AO’s order, the assessee filed an appeal before the commissioner of Income Tax (appeals) [CIT(A)]. The CIT(A) upheld the addition. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

The assessee argued that the AO had built the case on an assumption, and had failed to issue a specific show cause notice (SCN) or provided an opportunity to rebut the proposed addition purely on the component of interest income derived from those papers.

The assessee also argued that the addition relied heavily on the interpretation of documents found at the premises of broker Shri Nikhil Kumar Goyal. The assessee specifically requested the right to cross-examine Shri Goyal regarding the content and coding of the entries, which was denied.

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The two-member bench comprising Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) observed that the AO's failure to call for a clear explanation on the interest income after the sales dispute was settled constituted a violation of the principles of natural justice.

The Tribunal held that the AO had violated the principles of natural justice while making this addition merely based on the surmise and conjecture and that too without calling for the explanation of the assessee.

Therefore, the tribunal directed the AO to delete the addition. The tribunal deleted the addition of ₹20,34,000. In the result, the appeal of the assessee was allowed.

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