Facts of the Case

The assessee, Mukesh Mohanlal Vaghela, an individual, filed returns of income for Assessment Years 2013-14 to 2020-21. A search and seizure action under Section 132 was conducted on 23.11.2021 in the case of Shri Prakash M. Sanghvi and other Ratnamani Group concerns. During the search, handwritten diaries (Annexure A-1 to A-12) were seized from the premises of Shri Prakash Sanghvi, who admitted in his statement under Section 132(4) that the diaries recorded unaccounted cash and financial transactions.

One of the seized ledgers was titled “Mukesh Ratnajyot / Mukeshbhai RJ”, containing running debit and credit entries over multiple years. Based on these diaries, reassessment proceedings under Section 147 were initiated against the assessee. The Assessing Officer treated the ledger as pertaining to the assessee and made additions under Section 69C on the basis of incremental negative peak of unexplained expenditure for various years, along with additions of interest under Section 56 and application of Section 115BBE.

The CIT(A) partly allowed the appeals by deleting notional interest additions under Section 56 for all years and deleting additions under Sections 69A/69C for AY 2021-22, while sustaining additions under Section 69C for other years and enhancing income for AY 2018-19. Aggrieved, both the assessee and the Revenue were in appeal before the Tribunal.

Issues Involved

Whether the seized ledger “Mukesh Ratnajyot / Mukeshbhai RJ” could be treated as belonging to the assessee, whether additions under Section 69C based on incremental peak theory were justified, whether notional interest recorded in seized diaries could be taxed under Section 56, whether enhancement by the CIT(A) for AY 2018-19 was valid, and whether inconsistent methodology adopted for AY 2021-22 could be sustained.

Petitioner’s Arguments

The assessee contended that the seized diaries were third-party documents and did not belong to him, that no incriminating material was found from his premises, and that the ledger “Mukeshbhai RJ” was treated by the Assessing Officer in the case of Shri Prakash Sanghvi as a land trading ledger of Shri Sanghvi himself. It was argued that once the same ledger had been assessed as land trading receipts in the hands of Shri Prakash Sanghvi, the same transactions could not be taxed again as unexplained expenditure in the hands of the assessee. The assessee also contended that interest entries were merely notional and no real income had accrued.

Respondent’s Arguments

The Revenue argued that the seized diaries constituted reliable documentary evidence, corroborated by matching entries with the assessee’s disclosed investments and other bank transactions. It was contended that the assessee had failed to rebut the documentary linkage and that additions under Section 69C based on incremental peak theory were justified. The Revenue supported the application of Section 115BBE wherever additions under Sections 69C or 69A were sustained.

Court Order / Findings

The ITAT Ahmedabad held that the seized diaries were not dumb documents and that the ledger “Mukesh Ratnajyot / Mukeshbhai RJ” represented a real and continuous financial account. The Tribunal noted multiple corroborative factors, including admission of Shri Prakash Sanghvi, consistency of entries over several years, exact matching of diary entries with the assessee’s disclosed investments, and absence of rebutting evidence from the assessee.

The Tribunal upheld the action of the Assessing Officer and the CIT(A) in sustaining additions under Section 69C on the basis of incremental negative peak for AYs 2013-14, 2014-15, 2015-16, 2016-17, 2017-18, 2019-20 and 2020-21, and also upheld the enhancement made by the CIT(A) for AY 2018-19.

However, on the issue of interest additions, the Tribunal agreed with the CIT(A) that interest entries recorded in the diaries were merely notional and did not represent real income. Applying the real income principle and following judicial precedents, the Tribunal upheld deletion of interest additions under Section 56 for all assessment years.

For AY 2021-22, the Tribunal upheld the CIT(A)’s decision deleting additions under Sections 69A and 69C, holding that once the Assessing Officer had consistently applied the peak theory in earlier years, deviation by taxing debits and credits separately was unjustified.

Important Clarification

The Tribunal clarified that seized third-party documents can form valid basis for additions where corroborated by independent evidence, but notional entries such as hypothetical interest without real accrual cannot be taxed. It was further clarified that consistency in assessment methodology is essential, and deviation without justification cannot be sustained.

Final Outcome

The appeals filed by the assessee were partly allowed, and the appeal filed by the Revenue was dismissed. Additions under Section 69C based on incremental peak theory were sustained for most years, enhancement for AY 2018-19 was upheld, notional interest additions under Section 56 were deleted for all years, and full relief granted for AY 2021-22 was confirmed.

Link to Download Order-https://www.mytaxexpert.co.in/uploads/1769062546_DCITCENTRALCIRCLE11AHMEDABADAHMEDABAD.pdf

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