2025 (9) TMI 639 - AT - Income Tax

Unaccounted expenditure quantified as single taxable sum of Rs.4,65,000 for AY2015-16; 25% adjustment; s.131/133(6) inquiry absent

Minesh Bipinbhai Patel Versus The DCIT, Cent. Cir. 1, Vadodara

ITAT reduced the AO's unaccounted-expenditure addition to a single taxable sum of Rs.4,65,000 (25% of the net alleged unaccounted expenditure), to be ... Unaccounted expenditure - expenditure aggregated by AO only the positive balances from the seized diary - HELD THAT:- We are of the considered view that a restricted addition equivalent to 25% of the net alleged unaccounted expenditure is fair and reasonable. AO had computed total unaccounted expenditure by aggregating only the positive balances from the seized diary while ignoring negative balances and without undertaking any third-party verification. The net differential between the AO’s estimate of gross renovation cost and the accounted payments. This figure represents the potential area of dispute, subject to appropriate discounting. Applying a 25% estimation rate to the above amount, the sustainable addition would be Rs. 4,66,810/-, rounded to Rs. 4,65,000/- for convenience. This estimate strikes a balanced midpoint: it acknowledges the evidentiary value of the contemporaneous diary and the possibility of partial out-of-book expenditure, while discounting for duplications, retrospective cost estimation, confirmations filed, and absence of any enquiry by the AO under section 131 or 133(6). In our view, 25% represents a logically defensible threshold lower than the CIT(A)’s ad-hoc additions (which is approximately 30% of unaccounted expenses) estimate on account of the following: The valuation report filed by the assessee estimated the total cost at Rs. 26.66 lakh, which is less than the accounted payment of Rs. 36.19 lakh, suggesting no inflation or suppression prima facie; Substantial confirmations from vendors and cash/bank books were placed on record during appellate proceedings; There was no attempt by the AO to cross-verify diary entries or to summon any of the parties named therein; The seized diary, though contemporaneous, contained several entries without exact date linkage, leading to ambiguity in year-wise allocation; Negative balances in the AO's table (indicating excess or duplicate payments) were ignored, potentially leading to overestimation. Therefore, by applying a 25% calibrated adjustment, we derive a singular addition figure of Rs. 4,65,000/-, to be taxed substantively in A.Y. 2015–16, considering that most entries pertain to that period, with no separate addition warranted for A.Y. 2016–17. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether delay in filing appeals attributable to technical glitches and subsequent receipt of appellate order constitutes sufficient cause for condonation of delay and admission of appeals. 2. Whether entries in a seized diary, without independent corroboration, can sustain additions under section 69C as unexplained expenditure for house renovation. 3. Whether a valuation report filed belatedly (post-assessment) can be admitted or considered and what evidentiary weight it may carry in contesting additions based on seized documents (rule 46A implications). 4. What is the proper approach to estimation/apportionment of alleged unaccounted renovation expenditure where seized entries, books of account, confirmations and partial explanations exist but no third-party enquiry under sections 131/133(6) was conducted. 5. Whether a protective addition in a subsequent assessment year should be sustained when primary year allocation is reasonably determinable from seized material and other records. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: Principles governing condonation of delay require sufficient cause for inability to file within limitation; equitable consideration to prevent denial of substantial justice for technical/ procedural impediments. Precedent Treatment: Reliance on established principle (Katiji principle) that substantial justice should not be defeated merely by technical delays when sufficient cause is shown. Interpretation and reasoning: The Tribunal accepted documentary evidence of persistent technical glitches (portal grievances, emails) and contemporaneous requests to obtain certified order copies; appeals filed within 60 days of actual receipt. Revenue raised no objection. Ratio vs. Obiter: Ratio - technical/systemic impediments supported by evidence constitute sufficient cause for condonation; obiter - none. Conclusion: Delay of 153 days condoned; appeals admitted for merits. Issue 2 - Evidentiary Value of Seized Diary Entries for Additions under Section 69C Legal framework: Section 69C permits charging unexplained expenditure where books or documents suggest cash payments/transactions outside books; however, additions must rest on reliable, corroborated material and cannot be purely conjectural. Precedent Treatment: Court and tribunal practice require seized documents to be tested for reliability; contemporaneity and corroboration increase probative value; gut aggregation or mechanical addition without accounting for negative entries or verification is impermissible. Interpretation and reasoning: The seized diary contained various notings-estimates, payments, repetitive entries. AO prepared a summary considering only positive balances and ignored negative balances; AO did not summon or verify third parties named in the diary. Assessee produced books, bank statements, cash book, confirmations and a valuer's report. CIT(A) found diary to have some evidentiary value but rejected AO's wholesale approach and adopted partial estimation. The Tribunal found AO's method selective and unreliable; absence of third-party enquiry and ignoring negative entries reduced probative weight of AO's computation. Ratio vs. Obiter: Ratio - seized diary can be foundation for addition only if tested and corroborated; mere notings without verification, mechanical aggregation or ignoring contrary entries weakens basis for charge under section 69C. Obiter - contemporaneity of diary increases weight but is not conclusive without corroboration. Conclusion: AO's full addition unsustainable; diary has limited probative value and supports at best a restricted estimate after discounting for duplications, negative entries and lack of third-party verification. Issue 3 - Admissibility and Evidentiary Weight of Belated Valuation Report (Rule 46A) Legal framework: Rule 46A and allied principles govern admissibility of evidence not furnished during assessment; explanation for delay and procedural compliance affect admissibility and weight. Precedent Treatment: Late material may be rejected if no sufficient cause or if it seeks to re-open settled contemporaneous facts; however, even inadmissible material may serve as an indicative benchmark where relevant and not prejudicial to procedure. Interpretation and reasoning: CIT(A) rejected the valuer's report because it was filed long after assessment, without sufficient explanation under Rule 46A, and appeared conservative and retrospective. Tribunal observed that while formal admission under Rule 46A could be declined, the report could still function as an indicative benchmark to test the reasonableness of AO's figures and the overall scale of renovation costs. Ratio vs. Obiter: Ratio - procedural non-compliance justifies non-admission under Rule 46A; Obiter - even non-admissible late evidence may be useful indicatively to test reasonableness of official computation (not as substantive proof displacing admissible material). Conclusion: Valuation report not admitted as formal evidence but considered indicatively in assessing reasonableness of AO's estimate; rejection of the report alone does not validate AO's mechanical addition. Issue 4 - Need for Third-Party Verification under Sections 131/133(6) and Impact on Estimation Legal framework: When seized material points to payments to third parties, statutory provisions permit summoning/examination of witnesses and verification; absence of such verification impairs reliability of unauthenticated notings. Precedent Treatment: Failure to utilize statutory powers for verification undermines the completeness and reliability of the AO's conclusions; tribunals apply conservative discounting where AO did not make enquiries. Interpretation and reasoning: AO did not summon the contractors or examine confirmations; CIT(A) noted absence of enquiry; Tribunal recorded that non-use of sections 131/133(6) diminished the weight of diary entries, and confirmed that confirmations and cash/bank records filed by assessee were not cross-verified by AO. This warranted discounting AO's aggregate computation. Ratio vs. Obiter: Ratio - where AO fails to undertake available verification, addition based solely on seized notings sans corroboration cannot be fully sustained. Obiter - extent of discount depends on totality of available corroborative material. Conclusion: Absence of third-party verification materially weakens AO's estimate and justifies a reasoned reduction in addition. Issue 5 - Principles for Estimation/Apportionment and Treatment of Protective Addition Legal framework: Estimation must have a reasonable base; no guesswork; authorities may make proximate estimates but must identify objective basis and apply a logical discount where uncertainty exists. Protective additions can be deleted if substantive year is reasonably determined. Precedent Treatment: Courts require that any estimate be grounded in objective material (e.g., seized documents, books, valuations, confirmations); ad hoc figures without reasoned basis are impermissible. Interpretation and reasoning: AO's net alleged unaccounted expenditure was ~Rs.18.67 lakh (or AO's positive balances ~Rs.20.10 lakh). Considering bankers'/books' accounted payments (Rs.36.19 lakh), valuer's indicative estimate (Rs.26.66 lakh), confirmations, ignored negative balances and lack of AO enquiry, Tribunal applied a calibrated discount of 75% (i.e., accepted only 25% of net alleged unaccounted amount) as a fair, objective compromise. The Tribunal rounded the calculation to Rs.4,65,000 as sustainable addition for AY 2015-16 and deleted the protective addition for AY 2016-17 on basis most entries related to AY 2015-16 and no separate addition warranted for subsequent year. Ratio vs. Obiter: Ratio - where seized entries are partly corroborated and partly ambiguous and AO failed to verify, a reasoned percentage reduction (with articulated objective bases) is permissible to arrive at a sustainable addition; protective addition may be deleted if substantive year allocation is reasonably determined. Obiter - the specific 25% discount is fact-sensitive and not a universal rule. Conclusion: AO's addition reduced to Rs.4,65,000 (substantive, AY 2015-16); protective addition for AY 2016-17 deleted; Tribunal's apportionment grounded in objective factors: accounted payments, valuer's indicative benchmark, confirmations on record, ignored negative entries and absence of verification by AO.