2025 (5) TMI 1778 - AT - Income Tax

Unexplained expenditure u/s 69C seized handwritten loose documents found during search and seizure action - as per DR loose documents clearly prove exchange of cash - HELD THAT - DR has failed to bring any evidence on record to dislodge the cogent findings of the CIT(A). As a result there is no scope for interference on our end with the conclusions of the CIT(A) and take a divergent view thereof. AO has merely made the addition on the basis of scribbling in some loose sheets without making any meaningful enquiry at his end. He has merely assumed that there has been certain transaction in cash without any corroboration that the shares were undervalued particularly in view of the fact that he could not produce any defect in the valuation certificate produced by the Assessee to establish the Fair Market Value. AO has clearly erred in holding the Fair Market Value will be higher than the value calculated under Rule 11UA of I.T. Rules because copyright intellectual capital internally generated goodwill brand awareness and expected future profits play an important role. The plethora of judgments overwhelmingly establish the cardinal principle that loose sheets cannot be admissible under section 34 of the Indian Evidence Act without corroborating with other evidences. There is no merit in the Revenue s appeal and accordingly same is dismissed. It is worthwhile to note that addition made in the hands of person searched is not of relevance because such addition even if confirmed at level of Ld.CIT(A) cannot be said to sacrosanct and final. We are not in agreement with the conclusions such drawn by Ld.CIT(A) because when there is a mismatch in the number of shares transferred there cannot be any obvious corroboration with the so called sales consideration. Having once admitted that there are certain arithmetic mistakes in the seized papers and then considering the same to be immaterial and insignificant is self-destructive because the foundation of document is shaken. When the number of shares transferred as per seized documents do not have any bearing with the shareholders Register share transfer firms compliance certificate of the Company Secretary addition out of such illusionary transfer is bound to crumble. These observations are no way to be considered to have any bearing upon the adjudication of the case of the searched person in view of the fact that certain legal grounds have also been raised before us in that case. Decided against revenue.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in these appeals are:

• Whether the addition of Rs. 1,46,91,237/- (A.Y. 2018-19) and Rs. 4,89,01,140/- (A.Y. 2019-20) as unexplained expenditure under section 69C of the Income Tax Act, 1961 (the Act) is justified on the basis of seized handwritten loose documents found during search and seizure action under section 132 of the ActRs.
• Whether the documents seized from the residential premises of a third party, handwritten by that third party, can be used as admissible and reliable evidence to make additions in the hands of the assesseeRs.
• Whether the addition made in the hands of the searched person on the basis of such documents can be considered sacrosanct and binding on the assesseeRs.
• Whether the Assessing Officer (AO) was justified in disregarding the purchase price of shares recorded in the books and accepted in other assessment years, to hold that the assessee paid cash at a higher price and thus made unexplained expenditureRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of addition under section 69C of the Act based on seized handwritten loose documents

Relevant legal framework and precedents: Section 69C of the Act deals with unexplained expenditure where the assessee fails to satisfactorily explain the nature and source of any expenditure. However, for such addition, the AO must have credible evidence. The Court referred to the principle laid down in CBI vs. V.C. Shukla ((1998) 3 SCC 410) that loose sheets or scraps of paper cannot be considered as books of account or reliable evidence. Further, the Karnataka High Court in DCIT v. Sunil Kumar Sharma held that loose sheets and diaries found during search do not have evidentiary value unless corroborated by other evidence.

Court's interpretation and reasoning: The Tribunal observed that the AO's entire case was based on loose handwritten notes seized from the residence of Shri Atul Yamsanwar, a third party, and that these notes were not corroborated by any other credible evidence linking the alleged cash payments to the assessee. The Tribunal noted that the AO failed to produce any defect in the valuation certificate or any other material to establish that the purchase price recorded in the books was incorrect or undervalued.

Key evidence and findings: The assessee produced audited financial statements, ledger accounts showing share purchases at market-related prices through proper banking channels, and annual returns of the company. These documents showed no purchase of shares from Shri Atul Yamsanwar in the year 2018-19 and only a limited number in 2019-20, contrary to the AO's assumption of higher quantities and cash payments at inflated prices. The seized documents were found to contain arithmetic mistakes and did not tally with the shareholding records or transfer documents.

Application of law to facts: The Tribunal applied the principle that loose sheets without corroboration cannot form the basis for addition under section 69C. The AO's reliance on such documents without meaningful enquiry or corroboration was held to be erroneous. The Tribunal emphasized that the purchase price accepted in other assessment years, which was at fair market value as per Rule 11UA of the Income Tax Rules, could not be disregarded without valid reasons.

Treatment of competing arguments: The Revenue argued that the seized handwritten documents constituted incriminating evidence showing cash payments at inflated prices. The assessee countered that these were "dumb notings" or rough calculations unrelated to the assessee's transactions and that the share purchases were properly recorded and paid through banking channels. The Tribunal found the assessee's submissions and documentary evidence more credible and held that the AO's conclusions were based on surmises and conjectures.

Conclusions: The Tribunal concluded that the addition under section 69C based solely on loose seized documents was not sustainable and upheld the deletion of the addition by the CIT(A).

Issue 2: Admissibility and evidentiary value of seized handwritten documents found from third party premises

Relevant legal framework and precedents: Section 132 of the Act empowers search and seizure but does not automatically validate all seized documents as evidence against third parties. The Indian Evidence Act requires that documents be relevant, authentic, and corroborated to be admissible. The Tribunal relied on the Supreme Court's ruling in CBI vs. V.C. Shukla and the Karnataka High Court's decision in DCIT v. Sunil Kumar Sharma, which held that loose sheets or diaries are not "books" and lack evidentiary value unless linked conclusively to the assessee.

Court's interpretation and reasoning: The Tribunal held that the seized documents were handwritten by Shri Atul Yamsanwar and found at his residence, not from the assessee. There was no direct evidence linking these documents to the assessee's transactions. The Tribunal observed that mere possession of such documents by a third party does not establish their relevance or authenticity as evidence against the assessee.

Key evidence and findings: The statement of Shri Atul Yamsanwar during search proceedings denied receipt of cash from the assessee and described the documents as rough, unrelated notings. The assessee's books and financial statements were consistent and accepted in other assessment years, further weakening the AO's reliance on the seized papers.

Application of law to facts: Applying the principles of evidence law and judicial precedents, the Tribunal found no basis to treat the seized handwritten loose papers as admissible evidence against the assessee.

Treatment of competing arguments: The Revenue contended that the seized documents demonstrated cash transactions and unexplained expenditure. The assessee rebutted by pointing to the lack of connection of the documents with the assessee and the consistency of the books of account. The Tribunal sided with the assessee's position.

Conclusions: The Tribunal held that the seized handwritten loose documents found from a third party's premises have no evidentiary value to sustain the addition in the hands of the assessee.

Issue 3: Effect of addition made in the hands of the searched person on the assessee

Relevant legal framework and precedents: Additions made in the hands of the searched person under section 153C are not automatically binding on other parties unless supported by independent evidence. The Tribunal noted that the CIT(A) had upheld the addition in the hands of Shri Atul Yamsanwar but this does not preclude the assessee from challenging the addition on merits.

Court's interpretation and reasoning: The Tribunal emphasized that the addition in the hands of the searched person cannot be considered sacrosanct or final for the assessee. Each case must be adjudicated on its own facts and evidence.

Key evidence and findings: The Tribunal noted that the CIT(A) had sustained the addition in the searched person's case on the basis of the seized documents, but had deleted the addition in the assessee's case due to lack of corroborative evidence.

Application of law to facts: The Tribunal applied the principle that evidence admissible against one party is not necessarily admissible against another and that independent proof is required to sustain additions in the assessee's hands.

Treatment of competing arguments: Revenue argued that the addition confirmed in the searched person's case should be binding on the assessee. The Tribunal rejected this argument.

Conclusions: The Tribunal held that the addition in the searched person's case does not bind the assessee and does not justify addition in the assessee's hands without independent evidence.

Issue 4: Validity of AO's rejection of fair market value and purchase price accepted in other years

Relevant legal framework and precedents: Rule 11UA of the Income Tax Rules, 1962 prescribes the method for determining fair market value of unquoted shares. The AO must provide valid reasons to reject the fair market value accepted in other years.

Court's interpretation and reasoning: The Tribunal observed that the AO failed to produce any valid material to reject the fair market value accepted in A.Y. 2017-18 and 2020-21. The AO's generic assertion that intangible assets like goodwill and brand awareness justify a higher value was held to be a naive approach without application to the facts of the case.

Key evidence and findings: The assessee's financial statements and valuation certificate were undisputed and accepted in other years. The AO's valuation was based on surmises and conjecture.

Application of law to facts: The Tribunal held that in the absence of any distinctive factor or credible evidence, the AO could not arbitrarily reject the fair market value accepted in other years.

Treatment of competing arguments: Revenue argued for higher valuation based on intangible assets. The Tribunal rejected this as unsupported by evidence.

Conclusions: The Tribunal upheld the purchase price recorded in the books and accepted in other years as the fair market value for the years under consideration.

3. SIGNIFICANT HOLDINGS

"Collection of sheet fastened or bound together so as to form material whole. Loose sheets or scraps of paper cannot be termed as books."

"The entire allegation is made out on the basis of loose sheets of documents, which does not come under the ambit and scope of 'books of entry' or as 'evidence' under the Indian Evidence Act."

"Assessing Officer has merely made the addition on the basis of scribbling in some loose sheets without making any meaningful enquiry at his end. He has merely assumed that there has been certain transaction in cash without any corroboration that the shares were undervalued."

"It is difficult to comprehend how the details noted by appellant himself in his handwriting should be considered as rough notings... It is possible that a few arithmetic mistakes are appearing in the seized papers, but the same is immaterial and insignificant. These seem to be calculation errors on part of appellant himself which does not have any impact on the fact that cash was indeed received by the appellant." (This reasoning was rejected by the Tribunal as self-destructive due to mismatch in share numbers and lack of corroboration.)

"Addition made in the hands of person searched, is not of relevance because such addition even if confirmed at level of Ld.CIT(A) cannot be said to sacrosanct and final."

Core principles established include:

• Loose handwritten documents seized from third party premises cannot be used as reliable evidence against an assessee without corroboration.
• Additions under section 69C require credible and corroborative evidence, not mere surmises or arithmetic notings.
• Purchase price accepted in other assessment years and recorded in books cannot be arbitrarily disregarded without valid reasons.
• Additions confirmed in the hands of searched persons do not bind other parties absent independent proof.

Final determinations:

• The additions of Rs. 1,46,91,237/- and Rs. 4,89,01,140/- under section 69C were deleted by the CIT(A) and the Tribunal upheld these deletions.
• The Revenue's appeals against the orders of the CIT(A) for A.Y. 2018-19 and 2019-20 were dismissed.