A tax addition under Section 68 of the Income-tax Act cannot be sustained merely on the basis of statements recorded during departmental inquiries without allowing the taxpayer an opportunity to cross-examine the witnesses, the Income Tax Appellate Tribunal (ITAT) has held.
In a case involving alleged unexplained cash credits, the tribunal ruled in favour of the taxpayer after finding that the tax department had failed to provide independent evidence to support the additions.
The ruling reinforces an important legal principle that tax authorities must rely on credible and legally admissible evidence rather than suspicion when treating a transaction as unexplained income.
Background of the case
The case involved an individual taxpayer whose assessment was reopened after the tax department noticed several cash credits recorded in his books.
During the inquiry, the Assessing Officer accepted the identity of some creditors but questioned their financial capacity and treated certain deposits as unexplained income under Section 68 of the Income-tax Act.
As a result, additions were made to the taxpayer’s income on the ground that the creditors allegedly lacked sufficient creditworthiness.
The matter was later taken up before the Commissioner of Income Tax (Appeals), who partly upheld the additions while deleting some others. The dispute eventually reached the Income Tax Appellate Tribunal.
What the tribunal examined
Before the tribunal, the taxpayer argued that the transactions were genuine and that the creditors were identifiable individuals who were themselves income-tax assessees.
The loans were made through account payee cheques, and the creditors had also filed confirmations and affidavits acknowledging the transactions.
During the proceedings, the creditors appeared for cross-examination and confirmed that they had indeed advanced the money.
The tribunal therefore examined whether earlier statements recorded during departmental inquiries — which were taken without the taxpayer’s presence — could be relied upon to make an addition under Section 68.
Why the ITAT ruled in favour of the taxpayer
The tribunal held that reliance on such statements was legally unsustainable.
It noted that although the department had recorded statements from some creditors earlier, those statements were taken behind the back of the assessee without giving him an opportunity to cross-examine the witnesses.
However, when the same creditors were later examined in the presence of the taxpayer and subjected to cross-examination, they confirmed the genuineness of the transactions.
The tribunal observed that when testimony is tested through cross-examination, it carries greater evidentiary value than statements recorded unilaterally during departmental inquiries.
The tribunal also noted that the creditors had disclosed the transactions in their own tax returns and had been assessed accordingly. In such circumstances, treating the same amount as unexplained income in the hands of the taxpayer would effectively lead to double taxation.
Based on these findings, the tribunal deleted the additions made under Section 68.
Key principle under Section 68
The tribunal reiterated that for an addition to be made under Section 68, the taxpayer must establish three key elements: identity of the creditor, creditworthiness of the creditor, and genuineness of the transaction.
Once these three conditions are satisfied with documentary evidence, the explanation provided by the taxpayer cannot be rejected without valid reasons.
Expert view: Why the ruling matters
According to Dinkar Sharma, Partner & CS, Jotwani Associates, the ruling highlights the importance of evidence and procedural fairness in tax proceedings.
“The ruling in the present case reinforces an important principle that governs additions under Section 68 of the Income-tax Act that such additions must be based on credible and legally admissible evidence, and cannot be sustained merely on the basis of statements recorded behind the back of the assessee.”
Sharma said the tribunal carefully examined the evidence placed on record and concluded that the taxpayer had successfully established the basic requirements under the law.
“The law relating to unexplained cash credits is well settled and accordingly for an addition to be made under Section 68, the assessee is required to establish three fundamental elements: the identity of the creditor, the creditworthiness of the creditor, and the genuineness of the transaction.”
He added that once the creditors appeared during cross-examination and confirmed the transactions under oath, earlier untested statements could not override that evidence.
“Statements recorded behind the assessee’s back cannot override sworn testimony given during cross-examination.”
Courts have repeatedly upheld this principle
Sharma noted that several recent court rulings have reaffirmed this legal position.
For instance, in Principal Commissioner of Income-tax v. Kishore Kumar Mohapatra (2024), the Supreme Court upheld the deletion of additions where the tax department relied on statements of alleged entry operators without allowing cross-examination.
Similarly, in Principal Commissioner of Income-tax v. Hadoti Punj Vikas Ltd. (2023), the Supreme Court ruled that additions made solely on investigation reports and statements cannot survive when procedural fairness is not followed.
Another decision by the Delhi ITAT in JSM Oilfields Services Pvt. Ltd. v. DCIT (2025) also held that additions under Section 68 cannot be sustained when the statement relied upon by the tax department is not supplied to the taxpayer or tested through cross-examination.
Importance of natural justice in tax proceedings
Experts say the ruling highlights that tax proceedings, though administrative in nature, are still quasi-judicial and must follow principles of natural justice.
“Tax proceedings are quasi-judicial in nature, and the taxpayer must be given a meaningful opportunity to challenge the evidence relied upon by the department,” Sharma said.
He added that the burden placed on taxpayers under Section 68 is not unlimited.
“While the assessee must establish the basic factual framework of the transaction, the Revenue cannot disregard documentary evidence and rely solely on untested statements or suspicion.”
What this ruling means for taxpayers
The tribunal’s decision reiterates that tax authorities must rely on verifiable evidence before treating a transaction as unexplained income.
Where the taxpayer can demonstrate the identity of creditors, their financial capacity and the genuineness of transactions — supported by documents such as bank records, income-tax returns and confirmations — additions under Section 68 may not stand.
The ruling therefore strengthens an important safeguard for taxpayers by reaffirming that tax assessments must be based on credible evidence, transparent investigation and adherence to principles of natural justice.