2025 (6) TMI 242 - HC - Income Tax

Addition emanating from the seized diary notings only on the Solitary premise that the same were not reflected in the books of accounts of the appellant - Addition u/s 69A - HELD THAT - The questions whether additions can be made on the basis of documents or diaries is necessary to be construed by the nature of the entries or the material recorded in those diaries. In the present case the facts as found indicate that the seized diaries contained recordings of receipts which pertained to booking of flats. The additions made in the present case were not solely on the basis of the diaries alone but also on the basis of reconciling the material as found in the diaries and the formal books of accounts maintained by the Assessees. The findings essentially are that cheque payments for booking of flats were reflected in the diaries and also reflected in the formal books of accounts. However certain cash entries which were received for the said bookings did not for obvious reasons find mention in the formal books of accounts which were maintained using the accounting software tally . Thus the fundamental premise on which the contentions advanced on behalf of the Assessee are founded that the addition has been made on the basis of random documents on a standalone basis fails to take into account the exercise conducted by the Income Tax Authorities in unearthing the unexplained receipts. There is also no absolute proposition that diaries found cannot be construed as books of accounts. If accounts are maintained in a diary even though the accounts may be partial the same in given circumstances may qualify as books of accounts. It is apparent from the plain language of Section 2 (12A) of the Act the definition of books of accounts is couched in wide language. The use of the word includes also indicates that the expressions books or books of accounts are required to be construed in an expansive manner. The plain meaning of the books of accounts would obviously be books where accounts or some part of thereof are entered. It is not necessary that the books be maintained in physical forms there could be also soft files which would also in given circumstances be construed as books of accounts. In the facts of this case where the diaries were found to record receipts of bookings of flats it would be erroneous to construe the diaries as a random paper or dumb documents that did not reveal any information. No substantial question of law arises

Summary

Issues Presented and Considered:

The core legal questions considered by the Court were:

• Whether the Income Tax Appellate Tribunal (ITAT) erred in sustaining additions to income solely on the basis that seized diary entries were not reflected in the appellant's books of accounts.
• Whether additions could be sustained in the absence of corroborative or incriminating material beyond the seized diaries.
• Whether the ITAT was justified in upholding additions on the premise that substantial relief had been granted by the Commissioner of Income Tax (Appeals) and that the Revenue did not contest such relief.
• Whether additions could be made when no incriminating material was brought on record at the time of the search, which was concluded.
• Whether additions under Section 69A of the Income Tax Act, 1961 ("the Act") were sustainable when based solely on seized diary notings not forming part of the books of accounts.
• Whether the deeming provisions under Section 69A of the Act could be invoked on the basis of diary entries that were not part of formal books of accounts.

Issue-wise Detailed Analysis:

1. Admissibility and Evidentiary Value of Seized Diaries vis-`a-vis Books of Accounts

Legal Framework and Precedents: The definition of "books or books of account" under Section 2(12A) of the Act includes "ledgers, day-books, cash books, account-books and other books," whether in written form or electronic data. The term "includes" indicates an expansive interpretation. The Court also considered precedents such as the Madras High Court decision in M. Vivek v. DCIT and the Supreme Court decision in Common Cause (A Registered Society) v. Union of India.

Court's Interpretation and Reasoning: The Court held that it is not necessary that additions be made solely on the basis of formal books of accounts. Documents or diaries seized during search operations can have evidentiary value if they reveal incriminating material relevant to income assessment. The Court emphasized that diaries containing entries of receipts related to booking of flats, even if not maintained as formal books of accounts, cannot be dismissed as mere random or dumb documents.

The Court noted that the Assessing Officer (AO) reconciled diary entries with formal books of accounts and found that certain cash receipts recorded in diaries were not reflected in the formal accounting software ("Tally") maintained by the Assessees. This reconciliation established that the diaries were partial books of accounts recording some transactions not otherwise accounted for.

Key Evidence and Findings: The seized diaries contained detailed entries of cash receipts for flat bookings. The AO found that cheque payments were reflected both in diaries and books of accounts, whereas certain cash payments appeared only in the diaries. This formed the basis for additions to unexplained income.

Application of Law to Facts: Given the wide definition of books of accounts and the nature of entries in the diaries, the Court held that the diaries qualified as books of accounts or at least as documents having evidentiary value. Therefore, additions under the Act based on such diaries were legally sustainable.

Treatment of Competing Arguments: The Assessees contended that diaries could not be considered books of accounts and that no corroborative evidence existed to sustain additions. The Court rejected these arguments, emphasizing the reconciliation exercise and the nature of entries in the diaries. The Court also clarified that the Supreme Court decision in Common Cause did not preclude the use of such documents as evidence but rather dealt with a different factual context.

Conclusion: The Court upheld the ITAT's finding that the diaries could form the basis for additions under the Act and that the AO's action was justified.

2. Requirement of Corroborative Evidence Beyond Diaries

Legal Framework and Precedents: The Income Tax Act permits additions to income based on incriminating material found during search and seizure under Section 132. The AO's findings must be based on tangible evidence, but the law does not mandate corroboration beyond seized documents if the documents themselves are credible and relevant.

Court's Interpretation and Reasoning: The Court observed that the AO did not rely solely on the diaries but also reconciled the entries with formal books of accounts. The entries in the diaries were not random but related to actual receipts from flat bookings. The Court found no legal requirement that corroborative evidence beyond the seized diaries was necessary when the diaries themselves constituted credible material.

Key Evidence and Findings: The reconciliation showed that some diary entries matched banked amounts in the books of accounts, lending credibility to the diaries. Cash receipts not reflected in books were considered unexplained income.

Application of Law to Facts: The Court applied the principle that incriminating material found during search proceedings can form the basis of additions without requiring additional corroboration, provided the material is reliable and relevant.

Treatment of Competing Arguments: The Assessees argued that no fresh or incriminating material was produced beyond the diaries. The Court rejected this, noting that the diaries themselves were incriminating and that the AO's reconciliation further supported the findings.

Conclusion: The Court upheld the additions made based on the diaries without requiring further corroboration.

3. Impact of Relief Granted by CIT(A) and Non-Contest by Revenue

Legal Framework: The appellate authorities have the power to grant relief by deleting or reducing additions if the evidence does not support full additions. The Revenue's decision not to contest certain reliefs can influence the scope of appellate orders.

Court's Interpretation and Reasoning: The ITAT dismissed the appeal partly on the ground that the CIT(A) had granted substantial relief and the Revenue did not contest it. The Court found no error in this approach, as the relief granted by the CIT(A) was based on a detailed examination of the entries and deletion of those already reflected in books of accounts.

Key Evidence and Findings: The CIT(A) reduced the additions by excluding diary entries that were already accounted for, thereby granting partial relief. The ITAT upheld the remaining additions.

Application of Law to Facts: The Court recognized the appellate process as a fact-sensitive exercise where relief can be granted based on evidence and Revenue's stance.

Treatment of Competing Arguments: The Assessees contended that the ITAT erred in relying on the Revenue's non-contest to sustain additions. The Court rejected this, noting that the ITAT's decision was based on the merits of the case and the relief granted by the CIT(A).

Conclusion: The Court found no error in the ITAT's treatment of the relief granted and the Revenue's position.

4. Timing and Validity of Additions Post Search and Seizure

Legal Framework: Under Section 153A, reassessment proceedings can be initiated following search and seizure operations under Section 132. The assessment can include income escaping assessment revealed by seized material.

Court's Interpretation and Reasoning: The Court noted that the search and seizure operations had been conducted lawfully and reassessment notices issued accordingly. The AO's additions were made pursuant to the statutory provisions and based on the seized material.

Key Evidence and Findings: The search was conducted on 18.09.2018, and reassessment proceedings were centralized and completed in accordance with law.

Application of Law to Facts: The Court held that additions made during reassessment based on seized material are valid even if the search proceedings have concluded, provided the statutory procedure is followed.

Treatment of Competing Arguments: The Assessees argued that no additions could be made after the search concluded without incriminating material. The Court rejected this, affirming the statutory scheme allowing reassessment based on seized documents.

Conclusion: The Court upheld the validity of additions made post-search under Section 153A.

5. Applicability of Section 69A and Deeming Provisions Based on Diary Entries

Legal Framework: Section 69A of the Act deals with unexplained investments and allows the AO to deem such investments as income if the assessee fails to explain the source.

Court's Interpretation and Reasoning: The Court observed that the additions under Section 69A were made on the basis of diary entries recording cash receipts not reflected in books of accounts. Since the diaries were held to be books of account or credible documents, the AO was justified in invoking Section 69A.

Key Evidence and Findings: The AO found unexplained cash receipts aggregating significant sums based on diary entries, which were not accounted for in formal records.

Application of Law to Facts: The Court held that the deeming provisions under Section 69A could be invoked on the basis of credible documentary evidence, including diaries, if the assessee failed to satisfactorily explain the source of such receipts.

Treatment of Competing Arguments: The Assessees argued that Section 69A could not be invoked solely on diary entries not forming part of books of accounts. The Court rejected this, emphasizing the wide definition of books of accounts and the reconciliation exercise.

Conclusion: The Court upheld the additions under Section 69A based on the diary entries.

Significant Holdings:

"It is not necessary that additions are required to be made only on the basis of the 'books of accounts' and no other documents. If any incriminating material is found, during the search under Section 132 of the Act or any requisition made under Section 132 of the Act, the AO can assume jurisdiction to assess/reassess the income."

"There is also no absolute proposition that diaries found cannot be construed as books of accounts. If accounts are maintained in a diary, even though the accounts may be partial, the same, in given circumstances may qualify as books of accounts."

"The use of the word 'includes' also indicates that the expressions 'books' or 'books of accounts' are required to be construed in an expansive manner."

"The decision in the case of Common Cause (A Registered Society) v. Union of India (supra) is also of no assistance to the Assessees. In the facts of that case, certain documents were found to have no evidentiary value. The said decision is not an authority to the proposition that no document found during the Search and Seizure operations conducted as per law, can possibly have evidentiary value."

"We find no substantial question of law arises in the facts of the present case. The appeals are, accordingly, dismissed."

Core Principles Established:

• Documents seized during lawful search and seizure operations, including diaries containing accounting entries, can be treated as books of accounts or credible evidence for income tax assessment.
• The AO is empowered to make additions based on such documents even if they are not part of formal accounting records, subject to reconciliation and verification.
• Corroborative evidence beyond the seized documents is not mandatory if the documents themselves are reliable and relevant.
• Section 69A deeming provisions can be invoked on the basis of such credible documentary evidence to treat unexplained investments or receipts as income.
• The appellate authorities have discretion to grant relief by excluding accounted entries, and the Revenue's non-contest of such relief is a relevant factor.

Final Determinations on Each Issue:

• The ITAT did not err in sustaining additions based on seized diary entries not reflected in books of accounts.
• The absence of additional corroborative or incriminating material beyond the diaries did not invalidate the additions.
• The ITAT was justified in relying on the relief granted by the CIT(A) and the Revenue's non-contest to dismiss the appeals.
• Additions made post-search under Section 153A are valid and lawful.
• Additions under Section 69A based on diary entries are sustainable given the wide definition of books of accounts and the reconciliation exercise.
• No substantial question of law arose warranting interference with the ITAT's order; hence, the appeals were dismissed.