Third-party book entries cannot justify tax additions without independent proof linking drafts to the assessee's income.

Third-party book entries alone cannot sustain an income-tax addition without independent evidence linking the drafts to the assessee's income or unexplained expenditure; the Revenue must prove ownership of the amount, and the assessee need not disprove the third party's records. The Court also held that, where the disputed drafts were connected to business dealings and raw material purchases, the corresponding expenditure could still be allowed as business expenditure for an assessment year before the 1999 amendment, because the proviso inserted in section 69C did not apply retrospectively. The additions were therefore not upheld against the assessee.

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Issues: (i) Whether the additions could be sustained on the basis of entries in the books of the third party without independent evidence establishing that the drafts represented the assessee's income or unexplained expenditure; (ii) Whether, assuming the drafts were remittances by the assessee, the corresponding expenditure was deductible as business expenditure for the assessment year in question.

Issue (i): Whether the additions could be sustained on the basis of entries in the books of the third party without independent evidence establishing that the drafts represented the assessee's income or unexplained expenditure.

Analysis: The assessment rested on drafts appearing in the books of the payee, but no corresponding entries were found in the assessee's books. The Court held that the Department could not fasten liability merely from third-party book entries. The burden remained on the Revenue to prove, by proper evidence, that the drafts belonged to the assessee and represented its income or unexplained investment/expenditure. The assessee was not required to disprove the third party's entries or to call the bank or the payee's officers to discharge the Department's burden.

Conclusion: The additions could not be sustained and the issue was answered in favour of the assessee.

Issue (ii): Whether, assuming the drafts were remittances by the assessee, the corresponding expenditure was deductible as business expenditure for the assessment year in question.

Analysis: The Court accepted that the assessee carried on business dealings with GMDC and that the disputed payments, if made, were connected with purchases of raw materials. It held that even if the amount was treated as unexplained expenditure, the pre-1999 legal position did not bar allowance of the corresponding business expenditure under section 37(1). The proviso inserted in section 69C with effect from 01.04.1999 was held inapplicable to the assessment year 1987-88.

Conclusion: The alternative claim also succeeded and the issue was answered in favour of the assessee.

Final Conclusion: The reference was decided against the Revenue on both questions, and the disputed addition was not upheld.

Ratio Decidendi: A tax addition based only on third-party book entries cannot stand without independent evidence proving that the amount belongs to the assessee, and for an assessment year prior to the 1999 amendment, corresponding business expenditure cannot be denied merely because it is treated as unexplained expenditure under section 69C.

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