ITAT Restores Section 80G Disallowance Over Denial of Cross-Examination Opportunity

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 22 May held that additions based solely on third-party statements cannot be sustained when the assessee is denied the opportunity to cross-examine those witnesses. A Bench comprising Accountant Member Smt. Annapurna Gupta and Judicial Member Shri Siddhartha Nautiyal restored the matter involving Shakti Polyweave Private Limited back to the file of the Assessing Officer for fresh adjudication. The Tribunal highlighted that:

“The denial of opportunity to cross-examine the persons whose statements formed the very basis of the addition amounts to violation of principles of natural justice.”

The dispute arose during scrutiny assessments for AYs 2018-19 and 2019-20, where the Assessing Officer made an addition of Rs. 13,25,500/- on account of alleged bogus donations. The addition was primarily based on statements recorded from third-party representatives of donee institutions during investigation proceedings, wherein they allegedly admitted to providing accommodation entries in the guise of donations.

Before the tax authorities, Shakti Polyweave contended that the donations were made through regular banking channels and were duly reflected in the books of accounts. The assessee also specifically requested an opportunity to cross-examine the persons whose statements were being relied upon by the department. However, the Assessing Officer proceeded to finalize the assessment without granting such opportunity. The addition was subsequently confirmed by the CIT(A)/NFAC.

Before the ITAT, the assessee argued that reliance on third-party statements without allowing cross-examination rendered the entire addition legally unsustainable. It was submitted that the statements had been used as the sole foundation for making the addition and denial of cross-examination, causing serious prejudice to the assessee.

The tribunal observed that the departmental representative could not controvert the factual position that no opportunity for cross-examination had been provided. The Bench reiterated the settled legal position that whenever adverse statements of third parties are relied upon against an assessee, the right to cross-examine such persons becomes an integral part of fair hearing and natural justice. The Tribunal pointed out that

“Any material collected at the back of the assessee and used adversely must be subjected to cross-examination if specifically demanded.”

Thus, the ITAT set aside the orders passed by the lower authorities on the issue of donation disallowance and restored the matter to the file of the assessing officer for fresh adjudication. The assessing officer was directed to provide proper opportunity for hearing, including cross-examination of relevant persons, before passing a fresh order in accordance with the law.