Reassessment Can’t Be Solely Based on Third-Party Information Without Direct Evidence Against Assessee: ITAT

The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has held that reassessment proceedings cannot be sustained merely on the basis of third-party information unless the Income Tax Department brings direct evidence linking the assessee with the alleged transactions. The bench of Astha Chandra (Judicial Member) and Dr Dipak P. Ripote (Accountant Member) deleted additions after finding that the department had failed to establish any direct dealings between the assessee and the alleged accommodation entry operators. The dispute arose after the Assessing Officer issued a notice under Section 148A(b) of the Income Tax Act alleging that, during a search operation conducted against one Sanjay G. Agrawal alias Sanjay Tibrewal, information surfaced suggesting that the assessee had entered into transactions amounting to ₹49.51 lakh with entities named Hanuman Fabrics and Narayan & Co., which were allegedly engaged in providing accommodation entries. The assessee strongly denied having any transaction with those entities and submitted audited financial statements, return of income and other supporting documents before the Assessing Officer. It was also specifically pointed out that the statement recorded from Sanjay Tibrewal under Section 132(4) did not mention the assessee’s name at all. The assessee further sought cross-examination and requested the department to provide the basis of the allegations. However, despite these objections, the Assessing Officer proceeded to pass an order under Section 148A(d) and issued a reassessment notice under Section 148. Subsequently, an addition of ₹49.51 lakh was made under Section 69C by treating the amount as unexplained expenditure. Buy Now: Income Tax Judgments E-Compilation : April 2026 While examining the matter, the Tribunal found significant flaws in the reassessment proceedings. It noted that the entire case of the department was built around a chart reproduced in the notice under Section 148A(b) and the order under Section 148A(d), but the Assessing Officer failed to disclose the source of that chart or explain whether it originated from any seized or impounded material. The Tribunal further observed that the department had not brought on record any document to prove that the assessee had entered into direct transactions with Hanuman Fabrics, Narayan & Co. or Sanjay Tibrewal. It also noted that no material recovered during the search contained the assessee’s name. Before the appellate authorities, the assessee explained that it had genuine sales transactions with parties such as Kamal Textiles, Niraj Impex and Babulal Nirajkumar over several years. According to the assessee, these buyers had made payments by depositing bearer cheques issued by Hanuman Fabrics and Narayan & Co. into the assessee’s bank account. The assessee argued that this practice, locally referred to as cheque discounting, was common in trade circles and that it had no control over how buyers arranged payment instruments. The Tribunal accepted this explanation and noted that the department itself had not disputed the genuineness of the sales recorded in the books of account. It held that merely because cheques issued by third parties were deposited in the assessee’s account, it could not automatically lead to the conclusion that the assessee incurred unexplained expenditure. The Tribunal stated that the entire case of the Assessing Officer was “baseless and based on presumptions.” It further noted that the Assessing Officer had not even verified the bank statements of Hanuman Fabrics and Narayan & Co. before making the addition under Section 69C. The Bench ultimately directed deletion of the entire addition of ₹49.51 lakh and dismissed the Revenue’s appeal for Assessment Year 2019-20. The Tribunal also dealt with additions made for Assessment Year 2020-21 relating to alleged excessive payments to related parties. The Assessing Officer had disallowed 5% of purchases from related entities without bringing any comparable market data on record. Relying on judgments of the Madras High Court and the Gujarat High Court, the Tribunal reiterated that disallowances under Section 40A(2)(b) cannot be made on assumptions and that the Revenue must establish with tangible material that payments were excessive compared to fair market value. The Tribunal dismissed the department’s appeals for both assessment years and allowed the assessee’s cross-objections on the merits of the additions. Case Details Case Title: DCIT Versus Arihant Syncotex Mills Pvt Ltd Citation: JURISHOUR-1158-ITA-2026(PUN) Case No.: ITA Nos. 2540 & 2562/PUN/2025 Date: 30.04.2026 Counsel For Appellant: Bhuvanesh Kankani, Adv Counsel For Respondent: Shri Bharat Andhale Click Here To Read Order Read More: Police Can’t Declare Accused Guilty Through “Media Trial”, Public Parading & Social Media Posts Violate Article 21: Rajasthan High Court

Reassessment Can’t Be Solely Based on Third-Party Information Without Direct Evidence Against Assessee: ITAT

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