Facts of the Case

The assessee, Mukesh Mohanlal Vaghela, an individual based in Mumbai, 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 marked as 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 these diaries contained records of unaccounted financial transactions.

One of the seized ledgers was titled “Mukesh Ratnajyot / Mukeshbhai RJ”, containing continuous debit and credit entries over multiple years along with interest calculations. Based on these diaries, reassessment proceedings under Section 147 were initiated against the assessee. The Assessing Officer treated the ledger as belonging 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 interest additions for all years and deleting additions under Sections 69A/69C for AY 2021-22, while sustaining Section 69C additions for other years and enhancing income for AY 2018-19. Aggrieved, the assessee filed appeals for AYs 2013-14 to 2020-21 and the Revenue filed an appeal for AY 2020-21 before the Tribunal.

Issues Involved

Whether the seized ledger “Mukesh Ratnajyot / Mukeshbhai RJ” belonged to the assessee and could form the basis of additions under Section 69C, whether incremental peak theory was correctly applied, whether the same transactions could be taxed in the hands of the assessee despite proceedings in the case of Shri Prakash Sanghvi, whether interest entries were notional or represented real income, and whether Section 115BBE was rightly applied.

Petitioner’s Arguments

The assessee contended that the seized diaries were third-party documents found from the premises of Shri Prakash Sanghvi and did not belong to him. It was argued that the name “Mukesh” was common, that no incriminating material was found from the assessee’s premises, and that the ledger in question had been treated as land trading receipts in the hands of Shri Prakash Sanghvi, thereby resulting in double taxation. The assessee further submitted that interest entries were merely notional and no real income had accrued.

Respondent’s Arguments

The Revenue argued that the seized diaries were regularly maintained records admitted by Shri Prakash Sanghvi, that the ledger “Mukesh Ratnajyot / Mukeshbhai RJ” was a running, interest-bearing account spanning several years, and that multiple entries were independently corroborated with the assessee’s disclosed investments and related bank transactions. It was contended that the assessee acted as a financier and had made unexplained payments to Shri Prakash Sanghvi, justifying additions under Section 69C. The Revenue also argued that interest entries represented real accrual of income.

Court Order / Findings

The ITAT Ahmedabad held that the seized diaries were not dumb documents and constituted reliable evidence. The Tribunal found that the ledger “Mukesh Ratnajyot / Mukeshbhai RJ” was a systematically maintained running account with opening balances, debits, credits, interest computation and closing balances carried forward year after year. The Tribunal noted exact matching of diary entries with the assessee’s disclosed investments and corroboration of other diary entries with bank statements of Ratnamani Group entities.

The Tribunal rejected the plea of double taxation, holding that the assessee’s role as a financier and unexplained payer of funds was distinct from the tax treatment of receipts in the hands of Shri Prakash Sanghvi. The Tribunal upheld the application of incremental peak theory and sustained additions under Section 69C for AYs 2013-14 to 2020-21, including enhancement for AY 2018-19. The deletion of additions for AY 2021-22 on consistency grounds was not in issue before the Tribunal in the assessee’s appeals.

On the Revenue’s appeal for AY 2020-21, the Tribunal held that interest entries recorded in the seized diaries were systematic and continuous and could not be treated as notional. The Tribunal held that such interest represented real accrual and receipt of income and restored the addition under Section 56 for AY 2020-21.

Important Clarification

The Tribunal clarified that third-party seized documents can validly form the basis of additions where corroborated by independent evidence, that unexplained expenditure is taxable in the hands of the person incurring it irrespective of tax treatment in the hands of the recipient, and that the doctrine of real income does not apply where interest accrual is evidenced by consistent and systematic records.

Final Outcome

All appeals filed by the assessee for Assessment Years 2013-14 to 2020-21 were dismissed. The appeal filed by the Revenue for Assessment Year 2020-21 was allowed, restoring the addition of interest income under Section 56. Additions under Section 69C based on incremental peak theory and application of Section 115BBE were upheld.
Link to Download Order- https://www.mytaxexpert.co.in/uploads/1769062828_MUKESHMOHANLALVAGHELAMUMBAI.pdf

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