Mumbai ITAT upholds Section 148 notice validity, confirms bogus purchase disallowance and unexplained expenditure additions

ITAT Mumbai dismissed multiple grounds raised by the assessee challenging the validity of notice u/s.148 issued by jurisdictional AO instead of faceless AO, and notice issued with incorrect sanction u/s.151 lacking valid DIN. The tribunal held both notices were valid, following precedent in J Kumar Infraprojects Ltd. case. Regarding substantive additions, ITAT sustained 12.50% disallowance for bogus purchases and confirmed Rs. 7.93 lakhs addition u/s.69C for unexplained expenditure based on diary entries from search action. However, protective additions u/s.69A for unexplained money and gold investments were deleted, as substantive additions were already made in related corporate entity's case. For long-term capital gains on property sale, ITAT directed AO to re-compute by including disputed amount as sale consideration rather than treating it u/s.69A. The tribunal found no evidence supporting cash purchase of gold bars, accepting assessee's explanation that diary entries related to business cash transfers. Overall, the appeal was partly allowed with directions for consequential relief.

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The core legal questions considered in this judgment pertain to the validity and correctness of various additions and disallowances made by the Assessing Officer (AO) under the Income Tax Act, 1961, specifically concerning bogus purchases, unexplained expenditures and unexplained money noted in seized diaries, validity of notices issued under section 148, and unexplained investments in gold. The appeals cover assessment years 2019-20 to 2022-23 and involve cross-appeals by both the Assessee and the Revenue challenging the orders passed by the Commissioner of Income Tax (Appeals) [CIT(A)].

Key issues identified and considered include:

• Validity of notices issued under section 148 of the Act by jurisdictional Assessing Officer (JAO) versus Faceless Assessing Officer (FAO) in light of section 151A and CBDT notifications.
• Validity of sanction under section 151 of the Act without a valid Document Indexation Number (DIN) as per CBDT Circular.
• Disallowance of alleged bogus purchases and the extent of such disallowance (100% versus estimated 12.5%).
• Additions of unexplained expenditure under section 69C based on diary entries seized during search.
• Additions of unexplained money under section 69A based on cash diaries seized during search and the treatment of various coded entries therein.
• Additions on account of unexplained investments in gold based on WhatsApp chats and seized material.
• Admissibility of additional evidence filed at the appellate stage and directions for de novo adjudication.

Issue-wise Detailed Analysis:

1. Validity of Notices under Section 148 and Sanction under Section 151:

The Assessee challenged the notices issued under section 148 by the jurisdictional AO rather than the Faceless AO, contending non-compliance with section 151A and CBDT Notification 18 of 2022. Similarly, the Assessee contended that the sanction under section 151 lacked a valid DIN as mandated by CBDT Circular 19 of 2019.

The Tribunal relied on precedent from the case of M/s. J Kumar Infraprojects Ltd., where after detailed consideration of the facts, including the nature of the case involving search and seizure under section 132, it was held that such cases are excluded from the faceless assessment regime under CBDT instructions. The notices issued by the JAO were held valid. The distinction between Explanation 1 and Explanation 2 to section 148 was emphasized, with the present case falling under Explanation 2, which permits notices by JAO in search cases.

Regarding the absence of DIN in sanction under section 151, the Tribunal held that the sanction is an internal communication not directly served on the Assessee and thus DIN is not mandatory. The notice issued under section 148 bore a valid DIN, and the sanction was duly signed, validating the process. Therefore, the challenges to notices and sanction on these grounds were dismissed.

2. Disallowance of Bogus Purchases:

The AO made additions totaling Rs. 31,46,560 on account of alleged bogus purchases, with 100% disallowance for Kavita Enterprises and 12.5% for other parties. The CIT(A) restricted the 100% disallowance for Kavita Enterprises to 12.5% and confirmed 12.5% for others.

The Assessee furnished extensive documentary evidence including purchase invoices, e-way bills, purchase orders, ledgers, and bank statements. The AO's reliance on statements recorded during search, particularly from the proprietor of Kavita Enterprises, was undermined by the failure to provide copies or grant cross-examination opportunities, violating principles of natural justice as per Supreme Court precedents.

The Tribunal noted internal inconsistencies in AO's order, where part of the purchases from Kavita Enterprises were accepted as genuine, and no disallowance was made in other years despite regular purchases. The Tribunal held that no incriminating material conclusively proved the purchases as bogus and deleted the entire disallowance for Kavita Enterprises. For other parties, the estimated disallowance at 12.5% was sustained, following consistent findings in related cases.

3. Additions for Unexplained Expenditure under Section 69C:

Additions of Rs. 7,93,000 and Rs. 27,000 were made based on diary entries seized during search. The AO and CIT(A) confirmed these additions after detailed scrutiny. The Tribunal upheld the additions, noting that the diary contained cash transaction records and the Assessee failed to satisfactorily explain the expenditures. The findings of CIT(A) were affirmed as there was no infirmity in the appreciation of facts and law.

4. Additions for Unexplained Money under Section 69A Based on Cash Diary:

The AO made substantial additions on a protective basis based on a black color Luxor diary found during search, which contained coded entries such as 'O', 'N', 'HO', 'NG', 'KG', and '3 No.' The CIT(A) deleted most of these additions after detailed analysis, relying on explanations that 'O' and 'N' represented opening balances carried forward, and entries like 'HO', 'NG', 'KG' represented movement of cash between head office and residences of directors, corroborated by FIRs filed for theft and reconciliations with cash book balances.

The Tribunal concurred with CIT(A)'s approach, emphasizing that additions cannot be made on mere assumptions or presumptions. The Tribunal accepted the explanation that mismatches in balances were due to totalling errors or missing pages and that the diary was not a continuous cash book. Additions relating to scrap sales noted in the diary were deleted to avoid double addition as these were accounted elsewhere. However, unexplained money additions where no satisfactory explanation was given were upheld, e.g., Rs. 7 lakhs in AY 2020-21 and Rs. 35 lakhs in AY 2021-22.

Protective additions made by the AO were deleted following the substantive adjudication in related cases. The Tribunal also confirmed that income must be taxed in the hands of the person to whom it relates, as in the case of on-money received on sale of a bungalow, which was rightly taxed in the individual's hands and not the company's.

5. Additions for Unexplained Investment in Gold:

The AO made additions totaling Rs. 70,20,000 and Rs. 13.16 crores based on WhatsApp chats between the Assessee and Shri Suresh Poddar, and diary entries, alleging unexplained cash purchases of gold. The Assessee contended that Shri Suresh Poddar dealt only in diamonds, not gold, supported by his response to summons and documentary evidence. The WhatsApp chats showed diamond purchases paid through banking channels, and the cash/gold references were inferred incorrectly by the AO.

The CIT(A) deleted these additions, and the Tribunal upheld this deletion. It was noted that no corroborative evidence was found to support the AO's presumption of cash gold purchases. The explanation that gold bars were purchased from third parties and the WhatsApp photos were quotations, not evidence of purchase, was accepted. The Tribunal also noted that the diary entries involving Shri Suresh Poddar related to movement of business cash, not gold purchases.

6. Admissibility of Additional Evidence and Direction for De Novo Adjudication:

For AY 2022-23, the Assessee filed additional evidence post CIT(A) order concerning Rs. 1.50 crores added as unexplained income on account of unsecured loan. The Tribunal admitted the evidence, noting that the events and documents arose after the lower authorities' orders and were not previously available. The matter was remanded to the AO for fresh adjudication after considering the new evidence and providing the Assessee an opportunity to be heard, following principles established by the Supreme Court.

Significant Holdings:

On the validity of notices under section 148 and sanction under section 151 without DIN, the Tribunal held:

"The notice u/s.148 of the Act issued by JAO could not be treated as invalid... The approval sanctioned u/s.151 of the Act is duly signed and is thus a valid document... By not obtaining and mentioning DIN on the approval sanctioned u/s.151 of the Act can be said to be irregularity but that does not make the same illegal."

On disallowance of bogus purchases from Kavita Enterprises, the Tribunal held:

"No incriminating material or evidence found conclusively proving that the purchase made from this party is bogus... Merely placing reliance on statements without cross-examination cannot be accepted... No reason to doubt the rest of the purchases made by the Assessee... AO was not justified in making 100% disallowance... entire disallowance in respect of this party is deleted."

On unexplained money noted in the diary, the Tribunal observed:

"The figures noted against the abbreviations 'O' and 'N' are balances carried forward... The explanation of the Assessee that noting against abbreviations 'HO', 'KG', 'NG', etc. are nothing but movement of cash... is plausible... Addition cannot be made merely on assumption and presumption."

On unexplained investment in gold, the Tribunal held:

"Nowhere in the WhatsApp chat is there any mention of gold purchased in cash from Shri Suresh Poddar... Shri Suresh Poddar confirmed he only deals in diamonds... No corroborative evidence found... The presumption of the AO that gold bars are purchased in cash is not tenable... The protective addition of Rs.13.16 cr. is rightly deleted."

On admission of additional evidence and remand:

"The additional evidences filed have bearing on the issue at hand... These evidences could not be filed earlier... The AO shall deal with the issue afresh after providing due opportunity... The issue is set aside to the file of the AO."

Core principles established:

• Notices under section 148 in search cases can validly be issued by jurisdictional AO despite faceless assessment regime, per CBDT instructions and statutory provisions.
• Sanction under section 151 without DIN is irregular but not illegal if duly signed and internal in nature.
• Additions for bogus purchases must be supported by conclusive evidence; reliance on statements without cross-examination is impermissible.
• Entries in seized diaries must be carefully analyzed; mere noting without narration or coded entries representing cash movement cannot be treated as unexplained income without corroborative evidence.
• Unexplained investments require clear proof; mere inferences from WhatsApp chats without corroboration are insufficient.
• Additional evidence arising post appellate orders can be admitted and remanded for fresh adjudication to ensure justice.

Final determinations on issues:

• The Assessee's challenge to notices under section 148 and sanction under section 151 was dismissed.
• The 100% disallowance of purchases from Kavita Enterprises was deleted; estimated disallowance of 12.5% for other parties was sustained.
• Additions for unexplained expenditure under section 69C were upheld.
• Most additions for unexplained money under section 69A based on diary entries were deleted except where satisfactory explanation was lacking.
• Additions for unexplained investment in gold were deleted based on lack of evidence.
• Additional evidence filed was admitted and the related addition remanded for fresh adjudication.
• Protective additions made by AO were deleted following substantive adjudication in related cases.

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