Lack of confrontation and Denial of Cross-Examination on Third-Party Documents Invalidates Sales Addition: ITAT [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) deleted the additions of estimated Gross Profit (GP) made on unaccounted sales for Assessment Years (A.Y.) 2018-19 and 2020-21 observing that lack of confrontation and denial of cross-examination on third-party documents.

Sunil Kumar Agarwal (assessee), an individual engaged in the business of precious and semi-precious stones. These additions stemmed from documents seized during a search conducted on the premises of a broker, Shri Nikhil Kumar Goyal, and attributed to the assessee.

The additions challenged by the assessee was Gross Profit (GP) on unaccounted sales of ₹1,41,52,295 (A.Y. 2019-20) and GP on unaccounted sales of ₹4,18,58,330 (A.Y. 2020-21).

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The AO had estimated Gross Profit at 10% on the turnover figures found recorded in shorthand/coded form on loose papers seized from the broker’s office, totaling over ₹5.60 crore across the assessment years.

Aggrieved by the AO’s order, the assessee filed an appeal before the commissioner of the 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's counsel argued that the papers did not contain the full name, address, or phone number of the alleged transacting parties. The Counsel argued that the AO failed to provide the full context and original seized papers found on the third party (the broker).

The assessee also argued that the AO relied on a statement given by Nikhil Kumar Goyal to confirm that figures were coded (with two zeros omitted), but failed to provide that part of the statement or the crucial opportunity to cross-examine him.

The two-member bench comprising Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) noted that the assessee consistently disputed the methodology used by the AO.

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The tribunal asserted that the seized papers were "rough and dumb" and, more importantly, requested access to the full material and the right to cross-examine the broker, Shri Nikhil Kumar Goyal.

The Tribunal found significant gaps in the AO's procedure, noting that the assessee was essentially "shouting" for due process in his replies to the AO but was ignored.

The bench observed that the specific request for cross-examination of Shri Nikhil Kumar Goyal and the full seized material was made by the assessee's counsel in a letter dated September 15, 2021, shortly before the assessment order was passed on September 29, 2021.

The tribunal observed that the AO merely noted that the statement and documents were provided, but failed to record the specific evidence showing the broker was confronted with the loose sheets used to make the additions.

The tribunal noted that the AO did not provide any evidence that the broker admitted to the 'two zero omission' for decoding the transaction values.

The Tribunal concluded that the addition was based on an unverified surmise and conjecture without providing the assessee the fundamental right to confront the evidence relied upon, leading to a direct violation of the principles of natural justice.

The Tribunal directed the deletion of the additions of estimated GP on the entire body of unaccounted sales originating from the third-party premises. In the result, the appeal of the assessee was allowed.

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