Diary Entries At Partner's Premises Insufficient For Additions Without Link To Firm: Gujarat High Court

The Gujarat High Court on 8 September held that diary entries or other material found during survey proceedings cannot, by themselves, justify additions in the hands of a partnership firm when the material was not recovered from the firm's premises and there is no independent evidence linking the transactions recorded in it to the firm.

A Bench of Justices Bhargav D. Karia and Pranav Trivedi dismissed the Revenue's appeals against Expert Particle Board and its partner, upholding the orders of the CIT(Appeals) and the ITAT Rajkot. It also upheld the deletion of a Rs. 54.04 lakh purchase disallowance, finding that the alleged purchases had never been claimed as a deduction in the books or the return.

On the purchase disallowance, the Court observed:

“With regard to the disallowance of Rs.54,04,130/- made under Section 37 of the Act by the Assessing Officer, both the CIT(Appeals) and the Tribunal deleted the same on the ground that the same was never claimed as deduction of alleged purchase in the books of accounts or in the Return of Income and therefore, there is no question of disallowance of purchase and accordingly, the Tribunal upheld the order of the CIT(Appeals) deleting the disallowance.”

During survey proceedings, a diary containing cash entries was found and impounded from the office of Bhagwanjibhai P. Amrutiya, who was associated with the assessee group and handled accounts. The Assessing Officer treated the entries as reflecting unaccounted transactions of Expert Particle Board and made additions of Rs. 1.48 crore under Section 69B, Rs. 6.77 crore under Section 69A and Rs. 54.04 lakh towards alleged bogus purchases under Section 37 of the Income Tax Act.

The CIT(Appeals) deleted the substantive additions made in the firm's hands, noting that the diary had not been recovered from the firm's premises, the firm had not commenced commercial production and the Investigation Wing had not independently corroborated the entries with the firm's transactions. The Tribunal upheld these findings.

It also held that the presumption under Section 292C could not be mechanically extended to the firm as the documents had not been found from its possession or premises. The material had instead been recovered from Amrutiya's office. The firm and its partners had denied any connection with several of the transactions, and no independent survey or investigation had been undertaken to corroborate the diary entries with the firm's affairs.

In the partner's case, the appellate authorities found that Rs. 97.40 lakh recorded against his name represented unaccounted funds infused by him into Expert Particle Board. They allowed an appropriate set-off against his share of unaccounted income from Kishan Minerals.

The High Court accepted the appellate authorities' findings as findings of fact based on the material available on record. It observed:

“Considering the findings of facts recorded by both the Appellate Authorities, accepting the submission of the assessee that Rs.97,40,000/- found in the name of the assessee is after taking into consideration the income from the unaccounted business of M/s.Kishan Minerals as well as the unaccounted commission income of the assessee-partner and considering the totality of the facts, both the CIT(Appeals) and the Tribunal directed the Assessing Officer to tax the amount of Rs.97,40,000/-, which was credited in impounded notebook in name of the assessee, by treating the same as unaccounted investment in the partnership firm by the assessee-partner, being unaccounted fund infused in the firm.”

The Bench held that the Tribunal's conclusions were based on concurrent findings of fact and that no question of law, much less any substantial question of law, arose.

Accordingly, the High Court dismissed both appeals.

Counsel for the Appellant: Mr. Varun K. Patel, Senior Standing Counsel