Chennai ITAT: Loose Diary Entries Cannot Justify Additions Without Corroboration

DCIT Vs Anbuchezhian (ITAT Chennai)

Chennai ITAT: Loose Diary Entries Alone Cannot Justify Additions Without Independent Corroboration

The Chennai ITAT dismissed the Revenue’s appeals and upheld the CIT(A)’s order deleting additions made solely on the basis of handwritten diary entries and loose sheets seized during a search conducted on a film financier. The Tribunal held that uncorroborated rough diary notings, without any supporting evidence of actual transactions, cannot form the sole basis for making additions under the Income-tax Act.

The assessee had admitted undisclosed income during the search and subsequently quantified it using the net asset accretion method, supported by statements of affairs, fund-flow statements and party-wise reconciliations. The Tribunal noted that the Assessing Officer accepted this disclosure but made further additions by selectively relying on diary entries as representing undisclosed loans and interest income, without any independent verification.

The Tribunal observed that no loan agreements, confirmations, bank entries, receipts, promissory notes or evidence of actual disbursement were found. Although the diaries were admittedly written by the assessee, they were merely rough notings and the Revenue failed to establish that the entries represented completed transactions. The statutory presumptions under sections 132(4A) and 292C are rebuttable and do not automatically prove that every figure noted in a diary represents undisclosed income.

Relying on the Supreme Court decisions in Common Cause v. Union of India and CBI v. V.C. Shukla, the Tribunal reiterated that diaries and loose sheets are not books of account capable of establishing liability without independent corroborative evidence.

The ITAT also faulted the Assessing Officer for not examining any of the parties named in the seized diaries, despite having their names and addresses and the statutory powers u/s 131 and 133(6). Such failure to conduct basic enquiries rendered the additions purely presumptive.

Further, the Tribunal held that the Assessing Officer had selectively picked debit entries while ignoring corresponding repayments and closing balances, resulting in inflated additions. It also found that principal repayments and expenditure items such as salaries and office expenses had been wrongly treated as interest income. Since the assessee followed the cash system of accounting, notional interest could not be taxed in the absence of actual receipt.

Holding that the Revenue failed to establish any defect in the assessee’s reconciliation, fund-flow statements or net asset accretion computation, the Tribunal upheld the deletion of additions for AYs 2010-11, 2011-12 and 2013-14 and dismissed all the Revenue’s appeals.

Cases Discussed

• Common Cause (A Registered Society) v. Union of India (Supreme Court), (2017) 394 ITR 220
• Godhra Electricity Co. Ltd. v. CIT (Supreme Court), (1997) 225 ITR 746 (SC)
• CBI v. V.C. Shukla (Supreme Court), (1998) 3 SCC 410
• Chuharmal Vs CIT (Supreme Court), (1988) 38 Taxmann 190 (Supreme Court)

FULL TEXT OF THE ORDER OF ITAT CHENNAI

These three appeals filed by the Revenue are directed against the common order of the learned Commissioner of Income Tax (Appeals)-19, Chennai, dated 31.10.2025, passed u/s.250 of the Income-Tax Act, 1961 [hereinafter referred to as the “Ld.CIT(A)”], for the assessment years 2010-11, 2011-12 and 2013-14 arising out of the separate orders of assessment passed u/s.153A r.w.s. 143(3) of the Act, all dated 18.11.2021, by the Deputy Commissioner of Income Tax, Central Circle – 2(2), Chennai (hereinafter referred to as “the AO”).

2. Since all the three appeals arise out of one and the same appellate order, involve an identical set of facts arising from the same search action and raise identical questions of law, they were heard together and are being disposed of by this common order for the sake of convenience and brevity.

3. The grounds of appeal raised by the Revenue in all the three appeals are identical, except for the figures and the assessment year involved. For the sake of convenience, the grounds raised are consolidated and reproduced hereunder:

“1. The Order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts and in law.

2. The Ld CIT(A) failed to appreciate that the material having been found from the premises of the assessee w/s 132(4A) r.w.s 292C of IT Act the presumption is that (i)that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person & the onus is on the assessee to furnish evidence or explanations to rebut the same.

3. The Ld.CIT(A) failed to appreciate that the onus is on the assessee to prove to the contrary the findings of the search.

4. The Ld.CIT(A) failed to observe that the receipts and payments have been recorded on day-to- day basis in the seized material meticulously, the day-wise/page-wise total was also found therein & the incriminating material seized from G.N.Anbuchezhian satisfies the meaning of “book of account” as per the provisions of Sec. 34 of the Evidence Act, 1872. The Hon’ble Supreme Court in the Case of Chuharmal Vs CIT (1988) 38 Taxmann 190 (Supreme Court) has held that, whenever a need arises, the tax authorities can invoke the provisions of the Evidence Act.

5. For these grounds and any other ground including amendment of grounds that may be raised during the course of appeal proceedings, the Order of the Ld CIT(Appeals) may be set aside and that of the Assessing Officer may be restored.”

4. Ground Nos. 1 and 5 are general in nature and require no separate adjudication. Ground Nos. 2 to 4 relate to the solitary issue of the deletion of the additions made by the AO on the strength of the noting appearing in the seized diaries and loose sheets, and are therefore taken up together.

5. The brief facts of the case as per the records are that the assessee is an individual carrying on the business of film financing and film distribution, principally in the Madurai and Ramanathapuram regions, and is also a producer of feature films under the banner “M/s.Gopuram Films”. In the course of his business the assessee advances monies to producers and theatre owners and recovers the same along with interest at the time of release of the film out of theatre collections. Admittedly, the assessee did not maintain regular books of account up to A.Y. 2014-15 and filed his returns of income on an estimated basis. A search action u/s.132 of the Act was conducted in the case of the assessee on 30.09.2015 at his residential and business premises at Madurai and Chennai. In the course of the search, diaries were found and seized, inter alia under Annexures ANN/ARS/GNA/B&D/S-1 to 46, ANN/ARS/GNA/L/S/S-1 to 10, ANN/VJ/GNAC/B&D/S-1 to 3 and ANN/VJ/GNAC/LS/S-1 to 2. In his sworn statements recorded on 06.10.2015, 20.10.2015 and 05.11.2015, the assessee confirmed that the handwriting in the diaries was his own, but consistently maintained that the diaries were rough books containing sundry, non-chronological and kaccha entries, including estimates and requisitions of funds which did not always fructify into actual transactions.

6. By his letter dated 20.11.2015, the assessee offered additional income of Rs.25,10,95,304/- for A.Ys.2010-11 to 2016-17, computed on the net asset accretion method, of which Rs.84,26,014/- (in the aggregate) related to A.Ys. 2010-11 to 2013-14. An application filed before the Income Tax Settlement Commission on 26.12.2017 was rejected on 05.01.2018 while the writ petition in the Hon’ble High Court of Madras, against the said rejection was dismissed on 19.01.2018; and the writ appeal, in which the Hon’ble Division Bench of the Madras High Court permitted the AO to proceed with, but not to conclude, the assessments was dismissed as withdrawn on 27.07.2021 leading to passing of the order being received by the AO on 23.09.2021.

7. A second search u/s.132 of the Act was conducted on 05.02.2020, pursuant to which notices u/s.153A were issued for A.Ys. 2014-15 to 2019-20 and materials were seized under Annexures ANN/YAFA/DS/LS/S and ANN/PP/RA/LS/S. A second settlement application in respect of A.Ys.2014-15 to 2020-21 (SA No.TN/CN52/2020-21/73/IT) came to be settled by the Interim Board for Settlement (ISB) by its order dated 27.12.2023 passed u/s.245D(4) of the Act.

8. In the assessment proceedings for the years presently under consideration, which were revived after 23.09.2021, the assessee suo motu offered, vide letter dated 11.11.2021, a further and higher additional income of Rs.9,79,51,811/- for A.Ys.2010-11 to 2013-14, as against the sum of about Rs.2.23 crores originally offered for those years, again computed under the net asset accretion method and supported by a statement of affairs, a funds flow statement, a computation of total income and party-wise and year-wise receipts and payments statements.

9. The AO completed the assessments on 18.11.2021 by making additions aggregating to Rs.22,75,00,496/- for AYs 2010-11 to 2013-14. The first category, aggregating to Rs.9,79,51,812/-, merely gave effect to the assessee’s own offer of 11.11.2021, which had not been carried into the returns filed in response to the notices u/s.153A of the Act. The second category, aggregating to Rs.12,95,48,684/-, was contested. The additions u/s.69 for A.Ys.2010-11 and 2011-12 were founded upon the AO’s working of “loans advanced (peak)” at Rs.6,12,00,000/- and Rs.10,71,00,000/- respectively, culled from the diaries ANN/VJ/GNAC/B&D/S-1 to S-3, from which the funds held to be available with the assessee were reduced. The additions for A.Ys.2012-13 and 2013-14 were founded upon the materials ANN/YAFA/DS/LS/S and ANN/PP/RA/LS/S seized in the second search of 05.02.2020, from which the AO worked out interest and film distribution income of Rs.4,64,63,000/- and Rs.10,01,91,500/- respectively, as against Rs.3,86,54,131/- and Rs.6,99,93,692/- offered.

10. In the appellate proceedings, the predecessor of the ld.CIT(A) issued a clarification letter dated 14.11.2022 calling upon the AO to furnish the detailed party-wise computation of the “loans advanced by the assessee (peak)” together with the page numbers and seized material reference for each entry considered. The AO’s response dated 14.06.2023 furnished only a party-wise tabulation of aggregate figures. On the basis of that tabulation, the assessee filed a party-wise reconciliation which is extracted in exten so in the impugned order, and which demonstrated the following:

11. The ld.CIT(A), by the impugned common order, (i) sustained the additions of the first category, namely Rs.34,74,764/-, Rs.1,00,99,258/-, Rs.2,50,91,712/-and Rs.5,92,86,078/-, holding that the AO had done no more than give effect to the assessee’s own voluntary admission; and (ii) deleted the additions of the second category, namely Rs.6,01,67,793/- and Rs.3,13,74,214/- made u/s.69 for A.Ys. 2010-11 and 2011-12 respectively and Rs.78,08,869/- & Rs.3,01,97,808/- made as undisclosed income for A.Ys.2012-13 and 2013-14. It is against the deletions so made that the Revenue is in appeal before us.

12. It is relevant to place on record that the assessee has not preferred any appeal or cross objection against that part of the impugned order by which the additions of the first category were sustained. Those additions have accordingly attained finality and we express no opinion in regard thereto.

13. The ld.DR vehemently supported the orders of assessment. It was contended that the diaries were admittedly written by the assessee in his own hand; that the presumption u/s.132(4A) and 292C of the Act operates against him; that a person who chooses to keep no books of account and to operate some twenty undisclosed bank accounts cannot be heard to say that the records he did maintain are rough noting; that the AO had, in paragraphs 5.1 to 5.3 of the assessment order, demonstrated the systematic character of the entries, the recording of rates of interest, the carrying forward of closing balances, the notation “A/c closed” and the corroboration between the small diaries and the master diary; and that the assessee’s own admission of Rs.25.10 crores u/s.132(4) of the Act, never retracted, was sufficient to sustain the additions.

14. On the other hand the Ld.AR, supported the impugned order and invited our attention to the paper book filed. Further it was stated that the Assessee in his sworn statement u/s.132(4) admitted undisclosed income and, by letter dated 20.11.2015, quantified a year-wise undisclosed income of Rs.25.10 crores for A.Ys.2010-11 to 2016-17, of which Rs.83.00 Lakhs relates to A.Ys. 2010-11 to 2013-14. This sum was arrived at by the net asset accretion method, which method judicially recognised in search assessments and was supported by statements of affairs, funds-flow statements, ledger extracts and party-wise computations placed before the AO. Subsequently, during the assessment proceedings, the assessee in consequence to the second search had re-quantified the undisclosed income and offered a sum of Rs.9.79 crores relatable to AYs 2010-11 to 2013-14. The said sum was quantified by placing on record the fund flow statements of the assessee for the relevant period including the A.Ys.2010-11 to AY 2019-20. The consistent methodology adopted by the assessee was further approved by the Interim Board for Settlement (IBS) for the assessment years 2014-15 to 2019-20. Further, Ld. AR submitted that the AO, relying on selective entries culled from seized diaries and loose sheets (marked ANN/VJ/GNAC/B&D/S-1 to S-3), inferred unaccounted loan advances and notional interest, and made the additions which are under dispute in the present appeal(s). The assessee demonstrated, by a party-wise reconciliation, that the bulk of those entries represented mere enquiries, dropped proposals or rough estimates that never materialized, and that the transactions which did materialize stood already subsumed in the Rs.9.79 crores offered.

15. We have heard the rival contentions, perused the orders of the authorities below, the seized material to the extent placed before us, the paper book filed by the assessee and the judicial precedents relied upon by both sides. Having done so, we find ourselves in agreement with the conclusions reached by the ld.CIT(A), for the reasons that follow.

16. The single foundation of every addition presently in dispute is a set of hand-written entries appearing in the seized diaries and loose sheets. It is not the case of the Revenue that any loan agreement, promissory note, receipt, acknowledgment, letter of confirmation, cheque, cash book or bank entry was found, in respect of the years under appeal, evidencing that the sums noted against the names of Jabak, Thenappan, Kitcha, Kristopher, S.N. Raja, Sakthi, Saravanan, N. Nagarajan, Karuppiah, N.Balakrishnan or Ekaveera Creations were in fact advanced. The AO does not say so in the assessment order; he did not say so when specifically called upon to do so by the first appellate authority; and nothing to that effect has been placed before us also.

17. The AO himself records, in paragraph 5.1 of the assessment order, that the entries were made “in his own style and methods”. There is no attestation, no signature of any counterparty, no date of receipt or repayment against a large number of entries, and no indication whatsoever of the mode of any purported outflow. The documents of this description have consistently been held to be incapable, by themselves, of sustaining an addition.

18. In Common Cause (A Registered Society) v. Union of India (2017) 394 ITR 220, the Hon’ble Supreme Court, dealing with entries in diaries and loose sheets, held that such materials are not “books of account” within the meaning of section 34 of the Indian Evidence Act, 1872 and that even entries in books of account regularly kept are not, by themselves, sufficient to fasten liability upon a person in the absence of independent corroboration. The same principle was laid down earlier in CBI v. V.C. Shukla (1998) 3 SCC 410. The learned CIT(A) was, in our considered view, entirely justified in applying these principles to the facts before him.

19. Further, the reliance placed by the ld.DR upon the statutory presumption does not, with respect, carry the Revenue’s case as far as is contended. Both section 132(4A) and section 292C employ the expression “it may be presumed”. The presumption is therefore discretionary and, more importantly, rebuttable. It extends to the genuineness of the document found, to the truth of its contents and to the handwriting being that of the person from whom it was seized. It does not extend to the interpretation which the AO may choose to place upon a cryptic entry, nor does it convert a figure written against a name into proof that a loan of that amount was disbursed on a particular date out of unexplained sources.

20. As observed in various judgments, the presumption gives legal sanction for drawing such inferences as are possible, but the discretion has to be exercised judiciously and cannot be stretched without valid reason. The presumption supplements the factual evidence available on record or collected on enquiry, it does not supersede it. Once the assessee tenders an explanation which is plausible and is supported by a statement of affairs, a funds flow statement, ledger extracts and a party-wise reconciliation, the presumption spends itself and the burden reverts to the Revenue. That burden has remained wholly undischarged by the Revenue in the present case.

21. What we find most striking on the record is that the names, and in several instances the addresses, of the persons said to have been financed were fully available to the AO. The AO had at his command the entire machinery of sections 131 and 133(6) of the Act and yet no independent enquiry had been carried out to ascertain whether the sums noted were in fact received by the borrowers, or whether interest was in fact paid by them. In a case where the addition turns wholly upon whether a cryptic noting represents a real transaction, the omission is not a mere irregularity; it goes to the root of the addition.

22. It is trite law that the suspicion, however strong, cannot take the place of proof, and that an assessment cannot be founded upon conjecture or surmise. In the present case, during the appellate proceedings, the ld.CIT(A), by letter dated 14.11.2022, specifically directed the AO to furnish page-wise references to the seized material supporting each addition. The AO’s response dated 14.06.2023 merely reiterated the aggregate figures without correlating a single entry to any seized page, and without conducting any independent enquiry. On a careful appraisal of the seized material, the reconciliations and the remand response, the ld.CIT(A) held that the impugned additions were “purely presumptive and unsustainable in law”; that the AO had established no tangible nexus between the diary entries and any actual undisclosed investment or income and that the additions rested on assumptions and generalisations bereft of corroboration. The ld.CIT(A) accordingly directed deletion of the additions and, in respect of the income that had in fact materialised, found it already taxed as part of the admitted income (computed based on the fund flow) which we find to be a plausible view taken. Hence, we find that the uncorroborated diary notings cannot be the basis for making an addition and we concur with the reasons given by the ld.CIT(A) for deleting the addition made.

23. A further and independent infirmity, correctly noticed by the ld.CIT(A), is that the AO has not read the seized record as a whole. On the AO’s own finding in paragraph 5.2 of the assessment order, the diaries record debits and credits, arrive at net amounts, carry forward closing balances as opening balances, and bear the notation “A/c closed”. Having so found, the AO proceeded to extract only the debit side, the alleged disbursals and the alleged interest while disregarding the corresponding credits representing repayments received from the very same parties.

24. This is impermissible and it is a settled rule that a document recovered in the course of a search must be accepted or rejected in its entirety; it is not open to the AO to pick and choose the entries which are favourable to the Revenue and to discard the remainder. The consequence of the course adopted here was an inflated and artificial computation which took no account of the assessee’s explanation, never controverted, that his is a rolling fund business in which repayments received from earlier borrowers are immediately redeployed as fresh advances, so that the aggregate of gross disbursals in a year bears no relation whatever to the capital employed.

25. The assessee computed his undisclosed income for the years under consideration under the net asset accretion method, supported by a year-wise statement of affairs and funds flow statement, and offered Rs.9,79,51,811/- for A.Ys.2010-11 to 2013-14. That method is a recognised and accepted method of quantification in search assessments where regular books have not been kept. Significantly, the said methodology has been accepted for the subsequent assessment years by the Interim Board for Settlement (IBS) for the purpose of quantifying the assessable income in the hands of the Assessee vide order dated 27.12.2023 after examining seized material of an identical nature for A.Ys 2014-15 to 2016-17, accepted the assessee’s reconciliation and made no further addition. The assessee’s methodology for the earlier years cannot be treated differently on the same set of facts and the ld.CIT(A) rightly drew support from this for the rule of consistency.

26. We further note that the AO neither rejected the assessee’s books or computation u/s.145(3) nor disproved the net asset accretion method. The interest additions, moreover, were estimated on a notional basis without any evidence of actual receipt; the assessee following the cash system, income is taxable only on receipt, and the bringing to tax of hypothetical interest is contrary to provisions of section 145 of the Act. Even before us, the Revenue’s Grounds of Appeal do not allege let alone establish a single error, defect, inconsistency or discrepancy in the assessee’s net asset accretion computation, the statements of affairs, the funds-flow statements or the party-wise reconciliation that the ld.CIT(A) accepted. The Grounds confine themselves to an abstract re-assertion of the statutory presumption and of the onus on the assessee, the very propositions which the ld.CIT(A) has, on facts, found to have been rebutted. A Ground that re-states a presumption, without pointing any infirmity in the material that displaced it, cannot disturb a finding of fact. The methodology adopted by the assessee and accepted by the ld.CIT(A) thus remains wholly unassailed on the record.

27. Even leaving aside the legal infirmities, the computation adopted by the AO for A.Y. 2013-14 does not withstand scrutiny. The reconciliation placed on record, which has not been controverted by any remand report, discloses errors of three distinct kinds.

28. First, repayments of principal have been treated as receipts of interest. The illustration furnished by the ld.CIT(A) is instructive: in the case of Arulmoorthy, the Department quantified interest at Rs.11,20,000/-, whereas the interest component was only Rs.1,05,000/- and the balance of Rs.10,15,000/-was repayment of principal. The same error recurs in the cases of B Studio-Bala, Fivestar Films, Gemini Lab, Jabak, Media One Global, Prabu Salaman, Prakashraj, Radhika-Magic Frames, Sarathkumar, T.Nagar Anand, V Creations-Dhanu, Venkat Prabu, Vijay Antony Film Corporation and Vimal, and in the case of Kumaran Silks (Rs.52,00,000/-) and P.T.Selva Kumar for A.Y.2012-13. An amount received in repayment of a loan is a return of capital; it is not income at all, much less interest.

29. Secondly, items of expenditure have been assessed as interest income. The table reproduced in the impugned order shows that the AO has treated as interest receipts such entries as “Driver Salary” (Rs.5,00,000/-), “Dhanapal Salary” (Rs.10,85,000/-), “Selvaraj Salary” (Rs.8,25,000/-), “Office Expense” (Rs.3,00,000/-), “Auditor Amarnath” (Rs.15,000/-), “Engineer Suresh” (Rs.9,000/-), “Ramakrishna Madurai Office” (Rs.,00,000/-) and “Muruganandam Madurai Office” (Rs.5,25,000/-). It requires no elaboration to hold that a payment of salary or of office expenditure noted in a diary cannot be assessed as interest earned.

30. Thirdly, interest has been computed on a notional basis. In respect of a large number of parties (serial numbers 41 to 62 of the table for AY 2013-14) the reconciliation records, without contradiction, that the amounts do not appear in the seized material at all and have been arrived at by the AO on an estimated basis by applying a rate to a rough noting. It is undisputed that the assessee follows the cash system of accounting, under which interest is assessable only upon receipt. Section 145 of the Act does not permit the assessment of interest which has neither accrued in the assessee’s method of accounting nor been received. It is well settled that only real income and not hypothetical income can be brought to tax – Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC).

31. We may add that the reconciliation also discloses that in respect of some forty parties the assessee has offered more interest than the Department computed, for instance R.K.Productions (Rs.64,54,000/- against nil), K.N. Ravichandran (Rs.57,33,000/- against Rs.2,80,000/-), Krishnamoorthy (Rs.37,18,000/- against nil), Studio Green-Gnanavel (Rs.38,13,000/- against Rs.10,12,500/-) and Global Infotainment (Rs.59,21,000/- against Rs.38,42,500/-). This circumstance speaks eloquently of the bona fides of the assessee’s working and is wholly inconsistent with the theory of suppression on which the addition proceeds.

32. On the cumulative consideration of the facts and circumstances of the present case, we find that the additions in dispute suffer from the following cumulative infirmities: (i) reliance upon uncorroborated and cryptic noting; (ii) selective use of the seized material, taking the debits and ignoring the credits; (iii) a total absence of independent enquiry with the parties named; (iv) duplication of income already offered and assessed; (v) failure to reject or find fault with the statement of affairs, the funds flow statement or the reconciliation filed; (vi) computation of interest on estimate and the treatment of principal repayments and items of expenditure as income; and (vii) inability to correlate the quantification to any page of any seized document even when specifically directed to do so.

33. The ld.CIT(A) has considered each of these aspects at length, in a well-reasoned order running into sixty-eight pages, and has recorded findings of fact which are borne out by the material on record. The ld.DRe was unable to place before us any material to dislodge those findings, or to demonstrate that they are perverse or contrary to the record. We accordingly see no reason to interfere. We concur with the findings of the ld.CIT(A) and uphold the impugned order in so far as it directs the deletion of Rs.6,01,67,793/- for A.Y.2010-11 and Rs.3,13,74,214/- for A.Y.2011-12 made u/s.69 of the Act, and Rs.3,01,97,808/-for A.Y.2013-14 made as undisclosed interest and film distribution income. Accordingly, the grounds raised by the Revenue are dismissed.

34. In the result, all the three appeals filed by the Revenue for the assessment years 2010-11, 2011-12 and 2013-14 stand dismissed.

Order pronounced in the open court on 04^th August, 2026 at Chennai.