No additions based on the statements of former employees or dealers without first enabling the assessee to cross-examine them: ITAT.

DSG Papers (P.) Ltd. v. ACIT/Dy.CIT v. DSG Papers (P.) Ltd. – [2023]

A private limited company called the assesses worked in the of manufacturing paper and paper supplies. The assessee’s commercial space as well as the homes of the company’s former president and employees were all subject to a search operation by GST Intelligence. Evidence of unexplained sales to third parties was found during the search operations on the residential property. Also, statements from the assessee’s former workers were recorded.

The Assessing Officer (AO) started reassessment procedures under section 148 on the basis of suspected unreported sales by under-invoicing of the sales and added to the assessee’s income after obtaining information.

Aggrieved-assessee decided to appeal to the Chandigarh Tribunal right away after the CIT(A) affirmed the modifications made by the AO on appeal.

The Tribunal determined that the evidence for unreported sales was found at the ex-employee’s homes and not at the assessee’s place of business. No further information was gathered save the bills. Moreover, the assessee was not permitted to cross-examine those people whose testimony the AO used. Without providing the assessee with a fair opportunity to be heard, the AO went ahead and made the additions.

Regarding the availability of invoices with the ex-president, it was revealed that the assessee filed a FIR against the ex-president, accusing him of stealing company documents, which proved that the ex-president was a disgruntled employee of the company who engaged in some a kind of malpractice to cause the assessee financial difficulty. Also, the FIR was submitted well in advance of the start of the search.

Furthermore, the ex-employees said in their statement that following the delivery of the unreported consignment sales invoices, the documents were burned. This assertion conflicts with the fact that the former president of the corporation has access to such records.

As a result, the claims made by the former workers, which served as the basis for raising the assessee’s income, are incoherent and must be disregarded. Additionally, it would not be appropriate for the AO to refuse to examine the third party under cross-examination if the assessee was being negatively impacted by their statement. Hence, the AO’s contributions were subject to deletion.