Facts of the Case

The appeal arose from block assessment proceedings covering the period 1 April 1989 to 14 July 1999 in the case of Arun Malhotra. The matter had undergone multiple rounds of litigation before the Income Tax Appellate Tribunal (ITAT) and the High Court.

During search proceedings, the Revenue alleged that certain export transactions and purchases were not genuine and sought to treat the export proceeds as undisclosed income under Section 69A. Additions were made on this basis, which were subsequently deleted by the Commissioner of Income Tax (Appeals) and affirmed by the ITAT.

Issues Involved

  1. Whether export proceeds received through banking channels can be treated as undisclosed income under Section 69A.
  2. Whether additions in block assessment were justified in the absence of incriminating evidence found during search.
  3. Effect of denial of cross-examination of a witness whose statements were relied upon by the Revenue.
  4. Eligibility for deduction under Section 80HHC in block assessment proceedings.

Petitioner’s (Revenue’s) Arguments

The Revenue contended that the transactions in question were not genuine and that the ITAT erred in deleting additions made in the block assessment. It relied heavily on statements of a third party and surrounding circumstances to argue that the assessee had undisclosed income from export activities.

Respondent’s (Assessee’s) Arguments

The assessee maintained that the export transactions were genuine, duly documented, and supported by evidence including customs records and banking receipts. It was argued that export proceeds were recorded in the books of account and received through normal banking channels, leaving no basis to treat them as undisclosed income.

Court Order / Findings

  • Documentary evidence established that export sales were genuine and conducted through proper customs procedures.
  • Export proceeds were received through banking channels and recorded in the books of account.
  • No incriminating material was found during search to suggest that the export transactions were bogus.
  • In the absence of such material, additions under Section 69A were unjustified.
  • Statements of a witness who was not subjected to cross-examination could not be relied upon to the detriment of the assessee without corroborative evidence.
  • Purchases related to exports were also held to be genuine, and no evidence existed to show cash purchases or undisclosed income.

Important Clarification

The judgment reinforces that in block assessment proceedings, additions must be supported by concrete evidence unearthed during search. Legitimate business transactions, particularly export earnings documented through official channels and banking systems, cannot be arbitrarily characterized as undisclosed income.

It also highlights the importance of natural justice—especially the right to cross-examination—when Revenue relies on third-party statements.

Link to download the order –   https://www.mytaxexpert.co.in/uploads/1772176371_PR.COMMISSIONEROFINCOMETAXVsARUNMALHOTRA.pdf  

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