Addition based on seized diary without corroborative evidence not sustainable

PCIT Vs Timblo Private Limited (Bombay High Court)

In a significant ruling, the Bombay High Court has dismissed the Revenue’s appeal in the case of Principal Commissioner of Income Tax (PCIT) vs. Timblo Private Limited. The court addressed the issue of additions made by the Assessing Officer (AO) based on entries in a seized diary during a search and seizure operation under Section 132 of the Income Tax Act, 1961. The judgment underscores the importance of corroborative evidence when making additions to the assessee’s income based solely on entries in a seized document.

Case Background

The Revenue appealed against the Income Tax Appellate Tribunal’s (ITAT) decision, which deleted the additions of Rs. 2,28,54,314 and Rs. 2,00,00,000 made by the AO. These additions were based on entries in a seized diary, which the AO believed represented unexplained expenditure and legal expenses, respectively. The key questions of law raised included whether the ITAT erred in deleting these additions despite the lack of corroborative evidence.

Revenue’s Arguments

The Revenue, represented by Ms. Razaq, argued that the search and seizure action carried out on April 21, 2010, led to the discovery of the diary. They contended that the assessee failed to correlate the entries with any disclosed income from previous years. Additionally, they argued that the revised return filed by the assessee was invalid under Section 139(5) of the Act, as it was filed beyond the permissible period. The AO, therefore, completed the assessment based on the original return, making substantial additions based on the seized diary.

Tribunal’s Findings

The ITAT, in its order, had deleted the additions, stating that the entries in the seized diary could not be linked to unexplained expenditure or legal expenses without corroborative evidence. The Tribunal noted that the group companies had already offered the income related to the unexplained expenditure in the relevant assessment year, and no additional evidence was presented by the AO to disprove the assessee’s claims.

High Court’s Analysis

The Bombay High Court reviewed the Tribunal’s findings and the arguments presented by both sides. The court observed that the Tribunal had carefully examined the facts and evidence before concluding that the additions made by the AO were unsustainable. Specifically, the court highlighted the following points:

1. Lack of Corroborative Evidence: The court emphasized that the AO did not provide any corroborative evidence to support the claim that the entries in the seized diary represented unexplained expenditure or legal expenses for the assessment year 2010-11. The Tribunal had noted that the diary entries alone could not justify the additions without supporting evidence.

2. Affidavit Filed by Assessee: The assessee had filed an affidavit to explain the entries in the seized diary. The contents of this affidavit were not disproved by the AO, and no further inquiry was conducted to challenge the affidavit’s veracity.

3. Reasoned Order by CIT(A): The Commissioner of Income Tax (Appeals) [CIT(A)] had also passed a well-reasoned order, which was upheld by the Tribunal. The CIT(A) and the Tribunal had concurred that the materials on record did not justify the additions made by the AO.

4. Assessment Based on Presumption: The court noted that the AO had based the additions on mere presumption without substantial evidence. This approach was found to be flawed, as the law requires concrete evidence to substantiate such claims.

Conclusion

The Bombay High Court’s ruling in the case of PCIT vs. Timblo Private Limited reinforces the principle that additions to an assessee’s income cannot be sustained solely on the basis of entries in a seized diary without corroborative evidence. The court upheld the ITAT’s decision to delete the additions, stating that the findings were based on a thorough examination of the facts and materials presented.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. The revenue is in appeal against the Judgment of the Income Tax Appellate Tribunal (‘Tribunal‘, for short) dated 13.05.2012, raising the following questions of law for our consideration :

“(i) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT erred in deleting the addition of Rs.2,28,54,314/- made on account of unexplained expenditure despite the said entry appearing in seized diary during the course of search action under Section 132 of the IT Act 1961 on 21.4.2010 and the assessee was not able to correlate its claim that the amount of Rs.2,28,54,314/- is out of income disclosed in earlier years.

(ii) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT erred in deleting the addition of Rs. 2,00,00,000/- made on account of legal expenses despite the said entry appearing in seized diary during the course of search action under Section 132 of the IT Act 1961 on 21.4.2010.

(iii) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT erred in accepting the assesses’ version that the entries in the diary are actual expenditure incurred and some entries in the diary are mere estimation.”

2. Ms. Razaq appearing for the revenue while assailing the Order of the Tribunal invited our attention to the facts. It is pointed out that a search and seizure action under Section 132 of the IT Act, 1961, (‘Act‘, for short), was carried out in the case of the Assessee on

21.04.2010. Notice under Section 153A of the Income Act, 1961 dated 04.08.2010 was issued and served on the Assessee calling for return of income for the aforesaid Assessment year. The Assessee filed Return of Income on 30.09.2010 declaring total income of Rs.54,51,02.479/-. The assessee filed revised return of income on 13.12.2012 declaring total income of Rs.53,88,63.191/-. The Assessing Officer was of the opinion that the return filed on 13.12.2012 is not a valid one since as per the provisions of Section 139(5), a revised return can be filed at any time before the expiry of one year from the end of the relevant Assessment year or before the completion of the assessment whichever is earlier and, as such, before 31.03.2012 for the relevant Assessment year. As such, the revised return was treated as non est and the assessment was completed based on the return filed on 30.09.2010. The Assessing Officer completed the search assessment under Section 153A on 31.12.2012 determining the total income of the assessee at Rs. 58,79,56,793/- for the Assessment Year 2010-11 inter alia making additions under two heads viz. unexplained expenditure of Rs.2,28,54,314/- and Rs. 2,00,00,000/-, the first representing general expenses and the second representing legal expenses. The Assessment year relevant for the purpose herein is Assessment Year 2010-11.

3. Assailing the common Order passed by the Tribunal dismissing the Appeal filed by the revenue as well as the Cross Appeal of the Assessee, the learned Counsel for the Appellant urged that the impugned Order is contrary to the provisions of the Act and is against the well settled interpretation of the relevant cited provisions. It is urged that the substantial questions of law set out herein above arise out of the Order of the Tribunal. Our attention is invited to the findings recorded by the CIT(A) and the Tribunal. Such findings are assailed on the ground that the same are perverse.

4. Shri Naik, learned Counsel for the Respondents submitted that the findings recorded are findings of facts which cannot be said to be perverse.

5. We have gone through the findings of the Tribunal as well as CIT(A). The Tribunal has re-produced the relevant observations and the findings of the CIT(A) in the impugned Order. So far as the ground raised by the Assessee as regards addition to the amount of Rs.2,25,54,314/- is concerned, the Tribunal has tendered a finding of fact on the basis of the materials. It held that group companies having offered income on account of unexplained expenditure for the Assessment Year 2007-08 in their respective hands totalling Rs.2,28,54,314/-, can be considered as an explanation and coupled with the fact that the department has not disproved the contention of the assessee company with any corroborative evidence. The Tribunal further observed a well reasoned Order is passed by the CIT(A). The Tribunal has further recorded that the assessee company in support of its stand has in fact filed an affidavit, the contents of which affidavit has not been disproved by the Assessing Officer and no further inquiry appears to have been carried out by the Assessing Officer. The Tribunal observed that the Assessing Officer has arrived at a belief that the contents in the said seized diary are pertaining to the instant Assessment Year 2010-11 only on the basis of presumption. We do not find any perversity in such a finding.

6. Further as regards to the addition of Rs. 2 Crore relating to legal expenses made by the Assessing Officer, the Tribunal based on the materials on record, arrived at a conclusion that it is not discernable whether the Assessee has actually paid the said amount towards the legal expenses as no date is mentioned nor any other information can be gathered to say that the said amount of Rs. 2 Crore has been incurred towards legal expenses by the assessee company and no corroborative evidences have been brought on record by the Assessing Officer. It is further observed that the assessee company has to this effect, filed an affidavit itself, which cannot be brushed aside since the averments made in the duly sworn affidavit has not been disproved by the Assessing Officer during the course of assessment proceeding or before the CIT(A) or before the Tribunal. We find that the CIT(A) and the Tribunal has recorded findings of fact based on the materials which cannot be said to be perverse. The view is a possible one. Thus, the CIT(A) and the Tribunal have concurrently come to the conclusion that the materials on record does not justify such additions of the Assessing Officer.

7. No question of law arises. Hence, the Tax Appeal is dismissed. No costs. Sponsored

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