Facts of the Case

A search and seizure operation under Section 132 of the Income Tax Act was conducted on 17.01.2002 at the business premises of Indair Carriers Pvt. Ltd. and at the residences of its directors, shareholders, and employees. During the search, cash of ₹2,07,300 was found at the company’s premises.

The assessee filed a block return declaring undisclosed income of ₹12 lakhs. During assessment proceedings, the Assessing Officer examined a seized table diary marked as Annexure A-59. The diary contained various receipts and payment entries aggregating to ₹35,75,110.

The Assessing Officer treated the entire amount recorded in the diary as undisclosed income. Out of this, ₹21,75,000 was added on a substantive basis and ₹14,00,110 on a protective basis. Additionally, unexplained cash of ₹62,273 and another amount of ₹30,000 recorded in Annexure A-5 were also added as undisclosed income.

The total undisclosed income was determined at ₹36,67,380.

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals) [CIT(A)] and subsequently before the Income Tax Appellate Tribunal (ITAT).

Issues Involved

  1. Whether entries recorded in the seized diary (Annexure A-59) represented undisclosed income of the assessee company.
  2. Whether the Assessing Officer was justified in making an addition of ₹21,75,000 as undisclosed income.
  3. Whether an addition of ₹14,00,110 could validly be made on a protective basis in block assessment proceedings.
  4. Whether temporary advances of ₹30,000 constituted undisclosed income.
  5. Whether the ITAT was justified in remanding the matter to the Assessing Officer for fresh examination.

Petitioner’s Arguments (Revenue)

  • The diary was recovered from the business premises of the assessee and therefore all entries recorded therein should be presumed to relate to the business activities of the assessee.
  • Verification of the books of account revealed that the transactions noted in Annexure A-59 were not recorded in the books during the relevant period.
  • The assessee failed to rebut the statutory presumption attached to documents found during the search.
  • Since the transactions aggregating ₹35,75,110 were not properly reflected in the books, the entire amount represented undisclosed income.
  • The additions made by the Assessing Officer were justified and ought to have been sustained.

Respondent’s Arguments (Assessee)

  • The diary was maintained by Director Mr. V.K. Khosla and contained both company-related and personal transactions.
  • Transactions amounting to ₹14,00,110 belonged to Mr. Khosla in his individual capacity and had already been considered in his separate block assessment.
  • The entries of ₹21,75,000 represented normal business transactions carried out through cheques and were duly accounted for in the books of account.
  • The diary mainly recorded assurances of payments, expected cheque receipts, collection details, and business follow-ups rather than unaccounted cash transactions.
  • The advances of ₹20,000 and ₹10,000 were temporary accommodations provided to representatives of customers for customs clearance purposes and did not constitute income.

Findings of the CIT(A)

  • The addition of ₹14,00,110 made on a protective basis was deleted.
  • The Assessing Officer failed to establish that these transactions belonged to the assessee company rather than to Mr. V.K. Khosla personally.
  • Block assessment proceedings do not justify determination of undisclosed income on a protective basis.
  • However, the CIT(A) sustained the addition relating to ₹21,75,000 and also upheld the addition of ₹30,000.

Findings of the ITAT

  • The ITAT observed that the assessee had explained that the entries represented cheque transactions received from customers and recorded in the regular books of account.
  • Merely because there were differences between the dates of notation in the diary and the dates of actual realization or accounting could not automatically justify treating the amounts as undisclosed income.
  • The Department possessed sufficient powers to verify the cheque transactions from banks and counterparties.
  • Without bringing contrary material on record, additions could not be sustained solely on the basis of diary entries.
  • Accordingly, the ITAT remanded the matter to the Assessing Officer for fresh adjudication after granting adequate opportunity to the assessee.

Delhi High Court Findings

The Delhi High Court upheld the order of the ITAT and observed that:

  • The assessee was engaged in the cargo business and earned commission income from airline-related activities.
  • The Department had not conclusively established that the entries in the seized diary represented unaccounted income.
  • The ITAT correctly held that verification of cheque transactions was necessary before treating the entries as undisclosed income.
  • The temporary advances of ₹20,000 and ₹10,000 could not be treated as undisclosed income without examining the concerned persons or producing contrary evidence.
  • The remand order passed by the ITAT was justified and required no interference.

Court Order

The appeal filed by the Revenue was dismissed.

The Delhi High Court affirmed the order of the Income Tax Appellate Tribunal remanding the matter to the Assessing Officer for fresh consideration after granting proper opportunity to the assessee.

The Court held that no substantial question of law arose for consideration.

Important Clarifications

  1. Entries found in seized documents do not automatically constitute undisclosed income unless supported by corroborative evidence.
  2. Where cheque transactions are claimed to be recorded in regular books, the Department must undertake proper verification before making additions.
  3. Protective additions are generally not sustainable in block assessment proceedings when undisclosed income has already been assessed substantively in another person's hands.
  4. Mere discrepancies in dates of diary entries and accounting entries cannot by themselves justify additions.
  5. The burden remains on the Revenue to establish that seized entries actually represent undisclosed income.

Relevant Sections Involved

  • Section 132 – Search and Seizure
  • Section 158BC – Block Assessment
  • Section 143(2) – Scrutiny Assessment
  • Section 142(1) – Inquiry Before Assessment
  • Section 158BFA – Interest and Penalty in Block Assessment Cases
  • Presumption relating to documents seized during search proceedings

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:5830-DB/SKT01122010ITA4212009.pdf

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