Validity of addition done purely on basis of noting in diary impounded during survey without any corroborative evidence

 

 

Short Overview  Although addition had been made purely on basis of noting in diary impounded during survey without any corroborative evidence, however, one of the entries found in the diary was duly recorded in assessee’s books of account, thus, such figures found in the diary could not be imaginary. Further, admittedly, AO did not invoke section 69/69A; therefore, only profit element should have been taxed. Accordingly, the AO was directed to restrict the addition @10% of gross receipts.

A survey operation under section 133A was carried out at business premises of assessee. AO recorded that during the survey operation, certain documents, i.e. A-3 blue diary was impounded and certain entries were found to be unrecorded in books of account. Assessee submitted that the diary was for the purpose of keeping track of the entries for memory only. However, the explanation of the assessee was not found acceptable by the AO on the basis that one of the entries in that diary was duly recorded in the books of account. Therefore, the AO made addition on account of entries not recorded in the books. Assessee submitted that the addition had been made purely on the basis of noting in the diary without any corroborative evidence and such addition was not sustainable.

It is held that  It is settled position of law that no addition can be made merely on the basis of loose paper without being substantiated by any corroborative evidence. In instant case, undisputedly, one of the entries found in diary was duly recorded in the books of account; thus, such figures found in the diary could not be imaginary. Further, admittedly, AO did not invoke section 69/69A; therefore, only profit element should have been taxed. Accordingly, the AO was directed to restrict the addition @10% of gross receipts.

Decision: Partly in favour of assessee

IN THE ITAT DELHI, ‘SMC’ NEW DELHI BENCH

KUL BHARAT, J.M.

Bhavana Jain v. ITO

ITA No. 5137/DEL/2019

A.Y. 2013-14

21 September 2021

Assessee by: K. Sampath, Advocate, V. Rajkumar, Advocate

Revenue by: Gaurav Pundir, Sr. Departmental Representative

ORDER

This appeal filed by the assessee is directed against the order of the learned Commissioner (Appeals)-5, Ludhiana, dated 18-4-2019 pertaining to assessment year 2013-14. The assessee has raised following grounds of appeal :–

1. On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in initiating proceedings under section 147/148 of the Income Tax Act, 1961 without there being valid reasons leading to belief of escapement of income and also passing order under section 143(3) read with section 147 of the Act without providing reasons recorded;

2. On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in confirming the following additions made by the assessing officer :–

(i) Rs. 19,17,500 on account of sale of TMT scrap treating the same as unexplained income;

(ii) Rs. 57,387 on account of expenses incurred on insurance and electricity wrongly invoking under section 40A(3) of the Act;

(iii) Rs. 8,000 on account of notional interest disallowed on transactions with M/s S.K. Traders;

(iv) Rs. 50,000 on account of car expenses, telephone expenses and salary of staff on ad hoc basis.

2. Facts giving rise to the present appeal are that a survey operation under section 133A of the Income Tax Act, 1961 (hereinafter ‘the Act’) was carried out at the business premises of the assessee on 2-9-2014. Thereafter, case of the assessee was reopened by issuing notice under section 148 of the Act. Thereafter, the assessing officer proceeded to frame the assessment. The assessing officer during the course of assessment proceedings, recorded that during the survey operation, certain documents i.e. A-3 blue diary was impounded and certain entries of Rs. 19,17,500 was found to be unrecorded in the books of accounts. The assessing officer, therefore, issued show-cause notice to the assessee to explain the same. In response to the notice, it was stated by the assessee that diary was for the purpose of keeping track of the entries for memory only. However, the explanation of the assessee was not found acceptable by the assessing officer on the basis that one of the entries of Rs. 75,000 was duly recorded in the books of accounts. The assessing officer, therefore, made addition of Rs. 19,17,500. Further, the assessing officer noticed that the assessee had made expenditure in cash amounting to Rs. 29,699 on 20-12-2012 and Rs. 27,688 on 12-11-2012 respectively violating the section 40A(3) of the Act. This amount was added to the income of the assessee, the assessing officer also noticed that the assessee had bank transaction with M/s S. K. Traders, Hansi but there was no business transaction, therefore, a sum of Rs. 8,000 was added in the income of the assessee as notional interest. The assessing officer also made addition of Rs. 50,000 on account of ad-hoc disallowance of the expenditure related to Car, Phone, service or staff. Thus, the assessing officer assessed income at Rs. 24,29,887 against returned of income of Rs. 3,96,980.

3. Ground no.1 of the assessee’s appeal is against the reopening of the assessment. At the time of hearing, no arguments was addressed on this ground, therefore, this ground of appeal is dismissed.

4. Ground No. 2 (i) is against the sustaining the addition of Rs. 19,17,500, the learned counsel for the assessee submitted that the authorities below were not justified in making addition, he submitted that the addition has been made purely on the basis of noting in the diary without any corroborative evidence. He submitted that the law is well settled that no addition can be made on the basis of entry in the diary without corroborative evidence. He further submitted that even otherwise also the assessing officer should not have made the entire addition even if it is assumed that without prejudice to the submissions that no addition could be made, the only profit element could be taxed.

5. On the contrary, the learned Departmental Representative opposed the submissions and supported the orders of authorities below. The learned Departmental Representative submitted that submissions of the learned counsel for the assessee are misplaced. He submitted that the assessing officer has specifically recorded, which has not been disputed by the assessee that out of entry made in the diary of Rs. 75,000 was found recorded in the books of accounts, therefore, it cannot be construed that the figures mentioned in the diary were imaginary and nonexistence.

6. I have heard the rival submissions, perused the material available on record and gone through the order of the authorities below. The assessee’s explanation with regard to interest in the loose sheet i.e. blue diary found during the course of search was that it was for the purpose of memory and the addition could not have been made solely on the basis of loose paper which is against the well settled law in this regard. Moreover, the entire alleged receipt could not partake character of profit. The profit element embedded into such receipt could be subjected to tax. There is no ambiguity under law that no addition can be made merely on the basis of loose paper without being substantiated by any corroborative evidence. In the present case, undisputedly, one of the entries of Rs. 75,000 was found to be duly recorded in the books of accounts, therefore, I am in the agreement with the contention of the learned Departmental Representative that such figures found on loose sheet could not be imaginary. The moot question arises whether the entire receipt is correctly taxed or only the profit element should have been taxed. Admittedly, the assessing officer has not invoked section 69/69A of the Act. Therefore, I am of the considered view that only profit element should have been taxed. I, therefore, direct the assessing officer to restrict the addition of Rs. 1,91,750 @ 10% of the gross receipts. This ground of assessee’s appeal is partly allowed.

7. Coming to Ground No. 2(ii) relates to addition on account of disallowance of expenditure, where payment has been made in cash exceeding Rs. 20,000.

8. The learned Counsel for the assessee submitted that the payments are genuine, hence the assessing officer should have not invoked the provisions of section 40A(3) of the Act.

9. On the contrary, the learned Departmental Representative submitted that the assessee failed to demonstrate that the payments fall in any of the exception clause as mentioned in the section 40A(3) of the Act.

10. I have considered the rival submissions. I am in agreement with the contention of the learned Departmental Representative that the assessee was required to demonstrate that the payments which has been made in excess of Rs. 10,000 fall under any of the exception as provided under section 40(3) of the Act and Rules framed thereunder. Hence, the findings of the authorities below are affirmed. The ground of the assessee’s appeal is dismissed.

11. Ground no. 2(iii) relates to charging of the tax on earning of notional interest and the ground no. 2(iv) relates to ad-hoc disallowance of Rs. 50,000.

12. The learned Counsel for the assessee submitted that both the addition have been made on the basis of conjectures and surmises which is not permissible under the law. He submitted that there is no specific finding by the assessing officer and the disallowance has been made purely on guess work.

13. On the other hand, the learned Departmental Representative opposed the submission of the learned Counsel for the assessee and relied on the order of the authorities below.

14. I have heard the rival submission. I find merit in the contention of the assessee that both the additions has been made on the basis of surmises only. The assessing officer has made disallowance purely on the basis of guess work. Therefore, the assessing officer is hereby directed to delete the addition of Rs. 8,000 on account of notional interest and Rs. 50,000 made on account of ad-hoc disallowance out of car, telephone and salary of staff and other expenses. Thus, the ground no. 2(iii) and ground no. 2(iv) of the appeal are allowed.

15. In the result, the appeal of the assessee is partly allowed.