2025 (11) TMI 38 - AT - Income Tax

Diary entries and withdrawn statements insufficient for additions; capital gains and section 69A additions deleted; reassessment void ab initio

ITAT MUMBAI - AT held that diary entries seized from an employee and uncorroborated statements (later retracted) cannot support additions; additions under ... Taxability of capital gains and addition u/s 69A - entire premise of the ld. AO is based on the statements of PKS and NKS who have alleged to have explained entries in the diary found during the search as latter retracted - HELD THAT:- From deep scrutiny of the statements it is discerned that PKS in his statement has not identified the nature of entries noted in the diaries and left it for NKS to provide the clarification. NKS on the other hand in his statement has clearly stated that the diaries are not coherent, there are various duplications and most of them are rough notings etc., due to which he is not in the position to provide any clarification nor has offered any explanation or confirmed the statement of PKS. No further statement of NKS was recorded on this issue. Further, in the statement of KB which was recorded in respect of the noting in his name by showing him only one isolated single entry and then the said statement was extrapolated to all the diary entry in the name of KB, without recording his statement on to all the notings in his name in the diaries. Thus, this statement per se cannot lead to conclusion that notings in the diary maintained by PKS in his individual capacity can lead to adverse inference in so far as assessee company are concerned or the assessee company or related concerns that they have been taking cash on the deal of the land. One very important fact to be noted here is that the seized diaries were maintained by the employee of P.K.S., who has himself categorically admitted that these notings were made for his personal purposes only and were not coherent, nor have they been fully explained or corroborated The Director N.K.S., in his own statement, has clearly stated that these diaries were maintained by P.K.S. purely for his personal use and reference. Now, when the diary itself has been found in the possession of the employee who wrote and maintained it for his private reference, there can be no presumption u/s 132(4A) operating against the assessee. Once the Assessing Officer himself has found that the entries in the diaries were merely personal notings of the employee, he ought to have verified and corroborated this statement by recording the evidence of any director or by summoning the parties from whom the alleged cash was purportedly received. No such effort was made, even though the entire details such as names, addresses, and the parties to whom NOCs were given were already available on record. The entries in the diaries are nothing but rough and unverified notings, incapable of explaining the underlying transactions without resort to the statements of P.K.S. Both P.K.S. and N.K.S. have retracted their statements before the learned Assessing Officer. The reasons for such retraction were that they were not even aware that their statements would be used against the assessee company, particularly when the seized diaries were not found from the premises of any director or of the assessee company itself. When statements have been retracted with cogent and plausible reasons, the law casts a corresponding duty on the Assessing Officer to summon those persons, confront them with their earlier statements, and subject them to cross-examination. Such procedural safeguard, as repeatedly emphasised by the Hon’ble Supreme Court in several decisions cited before us by learned counsel, is not a matter of indulgence but a sine qua non of natural and fair adjudication. The mere discovery of loose papers or personal diaries, which are not even maintained by the directors of the assessee company and remain uncorroborated by any external evidence, cannot, by itself, form the sole basis for an addition. We therefore hold that the Assessing Officer, in relying solely upon unverified diary entries and uncorroborated statements, has traversed beyond the permissible confines of evidentiary inference. The seized diaries, as earlier discussed, are incapable of interpretation without contextual evidence, and the statements upon which reliance was placed stand nullified by valid retraction. The confluence of these infirmities absence of corroboration, failure to summon and cross-examine, and the intrinsic vagueness of the documents compels us to conclude that the additions made towards alleged capital gains and unexplained money are devoid of factual and legal foundation. In the result, the additions sustained under the head “Capital Gains” and under section 69A cannot be upheld and are hereby deleted. Validity of the Reassessment proceedings - notice issued by the Jurisdictional Assessing Officer - The Hon’ble Bombay High Court in Hexaware Technologies Ltd. [2024 (5) TMI 302 - BOMBAY HIGH COURT] has decisively explained that where Parliament and the delegated notification have assigned jurisdiction to the faceless unit, the jurisdiction of the local officer stands eclipsed. The scheme does not contemplate a concurrent or overlapping authority. Any notice issued dehors the faceless framework is coram non judice and the proceeding is void at inception. Thus, once jurisdiction is statutorily vested in the Faceless Assessing Officer, any notice issued by the Jurisdictional Assessing Officer is coram non judice and consequently void ab initio. Manner in which the impugned assessment orders were issued bearing a manually written Document Identification Number (DIN) and followed by a separate communication of the DIN several weeks later - the reassessment proceedings initiated under section 148 by the jurisdictional Assessing Officer, in violation of the Faceless Scheme under section 151A and compounded by the failure to generate and quote a valid DIN, stand vitiated in law. The dual breaches one jurisdictional, the other procedural strike at the root of the assessment’s validity. The notice under section 148, having been issued by an officer not authorised under the notified scheme, is coram non judice, and the subsequent order passed without a valid DIN is a nullity. This conclusion is fortified by the decision of the Hon’ble Bombay High Court in Hexaware Technologies Ltd. [2024 (5) TMI 302 - BOMBAY HIGH COURT] which has been consistently followed in Capital G LP [2024 (5) TMI 1458 - BOMBAY HIGH COURT], Abhin Anil Kumar Shah [2024 (9) TMI 219 - BOMBAY HIGH COURT], and Ganesh Nivrutti Jagtap [2024 (9) TMI 876 - BOMBAY HIGH COURT] The cumulative effect of our findings leads inexorably to the conclusion that both the reassessment proceedings and the resultant assessment orders are unsustainable. The notice under section 148, issued by an authority bereft of jurisdiction under the Faceless Assessment Scheme, is void ab initio. The assessment order, bereft of a valid, pre-generated DIN, stands condemned by the express stipulations of CBDT Circular No. 19 of 2019, as interpreted by the binding judgments of the jurisdictional and other High Courts. Revenue, though afforded ample opportunity, has not demonstrated compliance with any of the statutory or procedural conditions that could lend legitimacy to its actions. In this view of the matter, the entire reassessment exercise is vitiated at inception, and all consequential proceedings are rendered nullities in the eye of law. Enhancement of income on the footing that certain unaccounted receipts were wrongly omitted or under-assessed - We find that the CIT(A) had no occasion to direct any such enhancement, nor has any cogent material been brought before us to justify it. The powers of enhancement under section 251 of the Act are indeed wide, but they are not unbounded. They must operate within the framework of issues arising out of the assessment before the CIT(A) and cannot extend to introducing new sources of income that were never the subject of consideration before the Assessing Officer. The Hon’ble Supreme Court in CIT v. Shapoorji Pallonji Mistry [1962 (2) TMI 12 - SUPREME COURT] and subsequently in Nirbheram Daluram [1997 (3) TMI 2 - SUPREME COURT] has held that while the appellate authority has plenary powers to confirm, reduce, enhance or annul an assessment, such power of enhancement must be exercised judiciously and only within the confines of the material before it. The Revenue’s present plea, seeking enhancement at this stage, is therefore not maintainable. ISSUES PRESENTED AND CONSIDERED 1. Whether entries in seized diaries and loose papers found during search, not part of statutory books and maintained by an employee, constitute admissible/ sufficient evidence to make additions as capital gains (alleged NOC receipts) or unexplained money under section 69A. 2. Whether contemporaneous statements recorded under section 132(4) / 131, which are subsequently retracted, can by themselves sustain additions in absence of independent corroboration. 3. Whether the Assessing Officer may validly rely on extrapolation of explanation given for isolated diary entries to all similar entries without confronting declarants or summoning alleged payers/counterparties for verification. 4. Whether reassessment notices under section 148 issued by the Jurisdictional Assessing Officer, when a faceless scheme under section 151A allocates jurisdiction to faceless officers, are valid. 5. Whether assessment/reassessment orders issued without a pre-generated, computerised Document Identification Number (DIN) in compliance with CBDT Circular No.19/2019 are valid, and whether post-facto/manual insertion of DIN cures the defect. 6. Whether reopening/reassessment constitutes impermissible telescoping or fishing inquiry when entries pertain to different years and no prima facie verification has been done. 7. Ancillary: Whether additions sustained by CIT(A) or deleted require remand under Rule 46A for verification and whether appellate enhancement by Revenue is permissible absent fresh material. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Evidentiary value of seized diaries / loose papers for assessing capital gains and section 69A additions Legal framework: Documentary evidence principle; distinction between books of account and loose diaries; presumption under section 132(4A) limited to documents 'found to belong to' assessee; burden on Revenue to establish nexus between seized material and taxable receipt. Precedent treatment: Courts and Tribunals recognise that loose, unauthenticated scribblings (so called 'dumb documents') lack independent evidentiary value unless corroborated; entries in third-party/employee diaries do not automatically become assessee's books. Interpretation and reasoning: The seized diaries were maintained by an employee for personal reference; entries were illegible, duplicated, rough and not supported by vouchers, bank records, or counterpart confirmations. The Assessing Officer made additions solely by treating initials (eg. 'KB') and isolated explanations as representative of systemic receipts without independent verification. No contemporaneous corroboration (cash recovered, payers' statements, bank evidence) was produced. Ratio vs. Obiter: Ratio - unauthenticated personal diaries, absent corroboration or demonstrable belonging to the assessee, cannot by themselves constitute the basis for charging capital gains or unexplained money. Obiter - comments on ideal audit steps for verification. Conclusion: Entries in the seized diaries were insufficient proof of taxable capital receipts or unexplained money; additions based solely on those entries are unsustainable and therefore deleted where contested. Issue 2 - Reliance on statements under section 132(4)/131 subsequently retracted Legal framework: Statements recorded under search provisions are admissible evidence but their probative worth depends on circumstances and corroboration; law requires retracted statements to be tested by independent evidence before being treated as conclusive. Precedent treatment: Authorities hold that retracted confessions or admissions cannot be sole basis for addition absent corroborative material; retraction triggers duty on Revenue to summon, confront and cross-examine or produce independent proof. Interpretation and reasoning: Declarants (employee and director) repeatedly qualified entries as rough notings, left explanation to others, and later formally retracted with cogent reasons. Revenue did not undertake cross-examination, summon alleged payers, or obtain corroborative material. AO treated retractions as afterthoughts without procedural testing, thereby violating basic evidentiary safeguards. Ratio vs. Obiter: Ratio - a retracted statement under search provisions, unsupported by independent corroboration, cannot sustain additions. Obiter - procedural steps revenue should take when faced with retractions. Conclusion: Statements recorded during search that were subsequently retracted and uncorroborated lack probative value; reliance on them alone to make additions is legally impermissible. Issue 3 - Extrapolation from isolated explanations and failure to verify / summon counterparties Legal framework: Quasi-judicial duty of AO to apply independent mind; requirement to verify material facts and summon relevant parties when details are available; principle against acting as a mere forwarding agent of Investigation Wing findings. Precedent treatment: Courts require AO to test search inputs, make independent inquiry and not mechanically adopt Investigation Wing inferences; corroboration by third-party evidence or bank/contractual records is necessary for taxing receipts. Interpretation and reasoning: AO extrapolated an isolated admission regarding one diary page to hundreds of entries across years and different entities without confronting declarants on those specific entries or summoning payers whose names were available in the records. Such mechanical extrapolation amounts to conjecture and violates principles of fair adjudication. Ratio vs. Obiter: Ratio - AO must test, verify and seek corroborative evidence rather than extrapolate isolated explanations to all entries. Obiter - recommended verification techniques (summons, bank inquiry, counterpart confirmations). Conclusion: Extrapolation without verification is impermissible; additions founded on such method are invalid. Issue 4 - Validity of reassessment notices under section 148 issued by Jurisdictional AO contrary to Faceless Scheme under section 151A Legal framework: Statutory scheme vesting jurisdiction to faceless units under section 151A read with notified Scheme; notices issued outside designated jurisdiction are coram non judice. Precedent treatment: Courts have held notices issued by non-authorised officers under the notified faceless regime to be void ab initio where jurisdiction is statutorily assigned to faceless authority. Interpretation and reasoning: The reassessment notices were issued by the Jurisdictional AO despite the Scheme allocating notice-issuing power to faceless Assessing Officers; in absence of any distinguishable factual justification and given binding judicial exposition, notices lacked jurisdictional competence. Ratio vs. Obiter: Ratio - notices issued outside the statutory faceless scheme are void for want of jurisdiction. Obiter - observations on consequences where exceptional provisions of scheme are duly followed. Conclusion: Reassessment notices issued by the jurisdictional officer in contravention of the faceless scheme are coram non judice and the resultant proceedings are void ab initio. Issue 5 - Validity of assessment orders without pre-generated computerised DIN (CBDT Circular No.19/2019) Legal framework: CBDT Circular mandates issuance of communications only with pre-generated computerised DIN via ITBA; communications without valid DIN are to be treated as invalid, with limited exceptions strictly regulated. Precedent treatment: Courts/Tribunals have held orders issued without valid pre-generated DIN (or without complying with exception procedure) to be invalid; post-dated/manual insertion of DIN does not cure defect absent prescribed approval and contemporaneous reasons. Interpretation and reasoning: Assessment orders bore manual DIN inserted after the order date; no evidence of exceptional circumstances, prior approvals, or contemporaneous recording as required. That omission undermines transparency/audit trail and renders orders invalid under the Circular and its judicial interpretation. Ratio vs. Obiter: Ratio - failure to issue orders with valid pre-generated DIN as mandated is fatal and renders orders non est. Obiter - cautionary guidance on exceptional cases where manual issuance may be permitted with strict compliance. Conclusion: Assessment orders passed without a pre-generated DIN and regularised later are invalid; such non-compliance voids the orders. Issue 6 - Telescoping and impermissible reopening across years Legal framework: Reopening under section 147/148 cannot be used as a device for roving/fishing inquiries or to transpose entries across assessment years without temporal nexus and prima facie material. Precedent treatment: Reopening must be based on credible, relevant material that indicates income was escaped for that particular year; mechanical transposition of entries across years is prohibited. Interpretation and reasoning: AO reopened multiple years based on same seized material without verifying temporal correlation; assessment thus amounted to telescoping and constituted impermissible fishing inquiry. Ratio vs. Obiter: Ratio - reopening must be temporally and factually connected; telescoping across years without basis is invalid. Obiter - procedural safeguards to be observed when seized material spans years. Conclusion: Reopenings based on mechanical transposition of entries across years are unsustainable. Issue 7 - Remand under Rule 46A and appellate enhancement Legal framework: Rule 46A permits remand for verification when necessary; appellate enhancement requires material before the original authority or new material to be placed and adjudicated fairly. Precedent treatment: Appellate authorities should call for remand when verification is necessary; however, deletion based on lack of evidence cannot be converted into enhancement absent cogent material. Interpretation and reasoning: Revenue's claim for remand/enhancement lacked identification of specific fresh evidence; CIT(A)'s deletions followed factual findings of insufficiency; no failure to follow Rule 46A was made out by Revenue. Ratio vs. Obiter: Ratio - remand/enhancement must be grounded on demonstrable need or material; mere assertion is insufficient. Obiter - procedural directions on use of Rule 46A. Conclusion: Department's remand/enhancement pleas are without merit in the facts; appellate deletions stand. OVERALL CONCLUSION The Court holds that: (a) additions based solely on unauthenticated employee diaries and uncorroborated/retracted statements are legally unsustainable and are deleted; (b) reassessment notices issued contrary to the faceless scheme are void ab initio; (c) assessment orders issued without a valid pre-generated DIN are invalid and not cured by post-dated/manual DIN; and (d) reopenings effected by telescoping entries across years without prima facie verification are impermissible. Consequently, reassessment proceedings and resultant additions founded on the seized diaries and related statements are annulled where challenged; appellate enhancement and remand demands by Revenue are dismissed for want of supporting material.