The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that income tax additions cannot be sustained solely on the basis of unverified Excel sheets recovered during search proceedings when the entries are not supported by independent evidence establishing their ownership, authenticity and connection with actual transactions undertaken by the taxpayer.
The Bench of Challa Nagendra Prasad (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that an electronic file recovered during a search may provide a starting point for further investigation, but cannot automatically be treated as conclusive evidence of undisclosed income.
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The appeals arose from assessment orders passed under Section 153A of the Income Tax Act, 1961, following search and seizure proceedings conducted on March 17, 2021, against the Rubberwala Group and others, including the Bhajwad Group.
The taxpayer was engaged in trading mobile accessories through a proprietorship concern operating under the name “Patel Mobile”.
During the proceedings, the tax authorities recovered Excel files, loose papers and electronic material from a laptop associated with the taxpayer. WeChat data was also found on the mobile phone of an employee, Suraj Kumar Patel.
On the basis of this material, the Assessing Officer made several additions under Sections 69, 69A and 69C of the Income Tax Act. These included additions for alleged unexplained investments in loan transactions, interest allegedly earned from such loans, unexplained expenditure relating to Onyx Collections, unaccounted turnover, cash rent, difference in stock and alleged undisclosed sundry debtors.
The assessments resulted in income being determined at approximately ₹7.44 crore for Assessment Year 2019-20, ₹29.44 crore for Assessment Year 2020-21 and ₹15.49 crore for Assessment Year 2021-22.
Excel Sheets Did Not Establish Alleged ₹31.03 Crore Loan Transactions
One of the principal disputes concerned two Excel files bearing the name “NH.xlsx”. The files contained worksheets with labels such as “KK”, “Pankaj Bhai”, “After Diwali”, “Interest KK A/c”, “JRC”, “DP”, “G Power” and “Harshan”.
The worksheets recorded figures under columns such as date, opening balance, received, paid and closing balance. Certain formulas calculated an amount at the rate of 0.05% on the closing balance.
The Assessing Officer treated the entries as undisclosed loan transactions and computed peak additions under Section 69. Consequential additions were also made under Section 69A by treating the amounts calculated at 0.05% as undisclosed interest income.
The additions relating to the alleged loan transactions and interest included ₹7 crore and ₹8.47 lakh for Assessment Year 2019-20, ₹20.09 crore and ₹2.53 crore for Assessment Year 2020-21, and ₹1.28 crore and ₹2.18 lakh for Assessment Year 2021-22.
The Tribunal found that the Excel sheets nowhere stated that the entries represented loans advanced by the taxpayer. No corresponding loan agreements, promissory notes, receipts, repayment schedules, cash books, bank entries or other financial records were found.
It also noted several inconsistencies in the electronic data, including instances where amounts appeared to have been received and repaid on the same day and a worksheet showed a negative closing balance. Certain sheets contained only figures without narrations, complete dates or particulars explaining the nature of the transactions.
The Tribunal further noted that the alleged transactions aggregating to approximately ₹31.03 crore were wholly disproportionate to the taxpayer’s disclosed business operations, financial capacity and net worth.
Although the taxpayer had furnished the names, addresses and permanent account numbers of persons allegedly referred to in the Excel sheets, the Assessing Officer did not summon or examine those persons. No third-party verification was conducted to determine whether the alleged loan transactions had actually taken place.
The taxpayer had explained that part-time accountants occasionally used the computer for accounting work and printing documents and that the disputed files might have been mistakenly stored on the system. The taxpayer consistently denied ownership of the files and denied having carried out the alleged transactions.
Upholding the relief granted by the Commissioner of Income Tax (Appeals), the Tribunal ruled that the entries in deleted or inactive Excel files could not sustain additions under Sections 69 and 69A without independent and cogent evidence.
The Tribunal observed that statutory presumptions concerning documents recovered during a search are rebuttable and do not convert unverified electronic material into conclusive proof of undisclosed transactions.
Selective Matching of Bank Entries Termed Impermissible Cherry-Picking
Another dispute related to an Excel file named “Bhajwad.xls”, which contained multiple worksheets, including a “PAYMENT” sheet. The Assessing Officer treated this sheet as a running account of transactions with Onyx Collections.
Certain banking entries in the spreadsheet were found to correspond with payments appearing in the taxpayer’s regular ledger. Based on those limited matches, the authorities treated the remaining cash entries as unaccounted purchases and made additions of ₹41.74 lakh for Assessment Year 2020-21 and ₹1.44 crore for Assessment Year 2021-22 under Section 69C.
The Tribunal, however, found that the invoice numbers, invoice values, quantities and purchase entries appearing in the disputed spreadsheet did not correspond with the taxpayer’s regular ledger account of Onyx Collections.
It held that matching a few banking transactions could not establish that every cash entry appearing in the independent spreadsheet represented an actual unaccounted transaction.
The Tribunal described the Assessing Officer’s approach as an impermissible “pick and choose” method. If the spreadsheet was to be treated as a genuine running account, all material particulars—including bill numbers, dates, invoice amounts, quantities and payments—should have shown consistent correlation with the regular books.
Despite possessing the complete name and address of Onyx Collections, the authorities did not examine its proprietor, partner, employee or any responsible person. No confirmation, receipt, delivery challan, transportation record, stock entry or corresponding sales record was obtained.
The Tribunal held that selectively accepting entries favourable to the Revenue while ignoring substantial discrepancies amounted to impermissible cherry-picking.
It therefore directed the Assessing Officer to delete the Section 69C additions for both Assessment Years 2020-21 and 2021-22.
ITAT Rejects 100-Times Multiplication of Figures in WeChat Screenshots
The Tribunal also examined an addition based on screenshots recovered from the WeChat account of the taxpayer’s employee.
The screenshots depicted handwritten entries relating to cash receipts and payments. The Assessing Officer noticed that a few figures in a smaller diary image allegedly corresponded with entries in a larger image. On this basis, the officer presumed that all figures in the larger image had been recorded at one-hundredth of their actual value and multiplied them by 100.
Accordingly, an amount of ₹5,90,370 was treated as unaccounted turnover of ₹5,90,37,000.
The Tribunal rejected the multiplier of 100, observing that the employee had never stated that the figures were recorded in coded form or represented one-hundredth of the actual amounts.
It further found that the larger and smaller diary images bore different dates and contained materially different entries. The smaller diary contained only a few figures and its total did not correspond with the total in the larger image.
No complete diary was recovered and no evidentiary material established that all figures in the larger screenshot were required to be multiplied by 100.
The Tribunal held that the enhancement was based entirely on conjecture, assumption and presumption. It reiterated that an addition cannot be sustained merely on suspicion, however strong.
However, since the search material indicated that the diary contained certain workings connected with the taxpayer’s business, the Tribunal treated the figure actually recorded—₹5,90,370—as unaccounted sales.
It directed the Assessing Officer to restrict the addition to the profit element calculated at 8% of ₹5,90,370. This would result in an addition of approximately ₹47,230, instead of computing profit on the artificially enhanced turnover of ₹5.90 crore.
₹12.65 Crore Sundry Debtors Addition Deleted
For Assessment Year 2021-22, the Assessing Officer made another addition of ₹12,65,84,996 under Section 69A based on an Excel file titled “GrpSum-952.xls”.
The file allegedly contained the names of 247 parties and their closing balances. The Revenue sought to connect the file with the taxpayer because the number “952” allegedly corresponded with the shop occupied by him. It was also found that the names of 10 parties appearing in the spreadsheet matched contacts saved on the taxpayer’s mobile phone.
The Tribunal ruled that matching 10 names out of approximately 247 could not establish that the entire file and all the transactions recorded in it belonged to the taxpayer.
The spreadsheet contained incomplete names and did not provide addresses, PAN details or other identifying information concerning the alleged debtors. Not even one of the alleged debtors was examined through notices under Section 133(6) or summons under Section 131.
The Tribunal observed that the Assessing Officer proceeded on a chain of assumptions: that the laptop belonged to the taxpayer, that every file stored on it necessarily belonged to him, that “952” referred to his shop and that the entire balance represented his undisclosed debtors.
No corresponding invoices, vouchers, cash books, bank books, sales registers, purchase registers, stock records or debtor ledgers were recovered. The Tally databases found during the proceedings also had no connection with the disputed file or the description “Samsung-2020” appearing in it.
The Tribunal said that liability could not be fastened on a taxpayer merely through such assumptions. Suspicion and conjecture could not substitute cogent and legally admissible evidence.
It accordingly deleted the entire addition of ₹12.65 crore. The Tribunal also reversed the CIT(A)’s decision to treat the amount as unaccounted turnover and estimate income at 8%.
Search Material Is Only a Starting Point for Investigation
The Tribunal emphasised that material recovered during a search constitutes an input for further inquiry. Once the material is placed before the jurisdictional Assessing Officer, the officer must independently examine it and undertake verification before using it to make an addition.
The Assessing Officer cannot merely reproduce the conclusions contained in an investigation report without applying independent judgment.
The Tribunal relied on the Supreme Court’s decisions in CBI v. V.C. Shukla and Common Cause v. Union of India, observing that even apparently correct entries cannot by themselves fasten liability upon a person without independent evidence establishing their trustworthiness.
It also referred to the Bombay High Court’s decision in PCIT v. Umesh Ishrani, where an addition based exclusively on loose papers was deleted because the entries were not corroborated and no verification had been conducted.
Additions for Cash Rent and Stock Difference Sustained
While granting substantial relief concerning the electronic records, the Tribunal upheld two smaller additions for Assessment Year 2021-22.
An addition of ₹2.40 lakh relating to rent allegedly paid in cash was sustained because the taxpayer failed to produce rent receipts, a landlord’s confirmation, the relevant ledger account or proof of payment.
The Tribunal also upheld an addition of ₹1,93,114 for unexplained investment arising from a difference between the physical stock found during the search and the stock recorded in the trial balance. It found that the taxpayer had not produced a satisfactory reconciliation supported by evidence.
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