GST Assessment Based On Entries Found In Loose Slips, Notebook & Diary

I. Introduction:

In India, many businesses still follow traditional methods of record-keeping in the form of loose slips, carbon copies, rough estimates, or handwritten diaries, note pads, notebooks, which may contain rough calculations, vague noting, scribbling and jottings, etc.  (collectively referred to as “slips” hereafter). These records are generally informal, unstandardized, and lack essential details such as the name, address, stamp, signature, etc. The continued use of such methods in the digital era is largely due to convenience, as they can be maintained with ease without requiring technical knowledge or external assistance.

During search and seizure operations, tax authorities often treat handwritten or printed slips as evidence of tax evasion. These slips may be found either at the taxpayer’s own premises or at a third party’s place, especially if the taxpayer’s name appears on them. In both situations, the entries in these slips can result in higher tax assessments and demands.

This article examines the legal rules and court decisions that govern how tax authorities utilise such slips as evidence when making assessments.

II. Legal provisions under GST:

Section 67 empowers the GST officer to search and seize such goods, documents or books or things. The legal provision of the section 67(2) is reproduced below:

(2) Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things:

Provided that where it is not practicable to seize any such goods, the proper officer, or any officer authorised by him, may serve on the owner or the custodian of the goods an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer:

Provided further that the documents or books or things so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceedings under this Act.

Thus, loose slips, carbon copies, rough estimates, or handwritten diaries, note pads, etc., are seized on the pretext of being covered under the ‘books’ or ‘documents’ by the tax department.

Further, Section 144 of the CGST Act,2017 states a presumption as to documents in certain cases. The legal provisions are reproduced as under:

Where any document––

(i) is produced by any person under this Act or any other law for the time being in force; or

(ii) has been seized from the custody or control of any person under this Act or any other law for the time being in force; or

(iii) has been received from any place outside India in the course of any proceedings under this Act or any other law for the time being in force, and such document is tendered by the prosecution in evidence against him or any other person who is tried jointly with him, the court shall-

(a) unless the contrary is proved by such person, presume-

(i) the truth of the contents of such document;

(ii) that the signature and every other part of such document which purports to be in the handwriting of any particular person or which the court may reasonably assume to have been signed by, or to be in the handwriting of, any particular person, is in that person’s handwriting, and in the case of a document executed or attested, that it was executed or attested by the person by whom it purports to have been so executed or attested;

(b) admit the document in evidence notwithstanding that it is not duly stamped, if such document is otherwise admissible in evidence.

Thus, Section 144 of the CGST Act, 2017, presumes that documents produced, seized, or received in GST proceedings are genuine and their contents true, including signatures and handwriting, unless the contrary is proved. Such documents are admissible even if not duly stamped. The burden lies on the person concerned to disprove this presumption. This aids tax authorities in relying on documents as evidence during assessments and investigations.

III. Legal provisions under the erstwhile Indian Evidence Act,1872:

3. “Document” –

“Document” means any matter expressed or described upon any substance by means of letters, figures or marks, or by more than one of those means, intended to be used, or which may be used, for the purpose of recording that matter.

34. Entries in books of account when relevant-

Entries in the books of account, including those maintained in an electronic form, regularly kept in the course of business, are relevant whenever they refer to a matter into which the Court has to inquire, but such statements shall not alone be sufficient evidence to charge any person with liability.

The definition of ‘document’ as prescribed under section 2(1)(d) of the new law Bharatiya Sakhya Adhiniyam 2023 (BNS) is also somewhat in a similar line with the inclusion of electronic and digital records. Further, section 28 of BNS is pari-materia to the above provision of section 34 of the Evidence Act.

IV. Whether loose slips are ‘books’:

The first point that needs discussion is whether such loose slips are the ‘books’ of the taxpayer?

Loose slips or sheets are not considered “books of account” under taxation laws. Books of account must be regular, systematic records, like ledgers or cash books. Loose slips are mere auxiliary notes or “dumb documents” that lack evidentiary value without corroboration. If such loose slips suggest transactions not recorded in proper books, they must be disregarded for assessment purposes. This well-established law prevents assessments based solely on unverified or non-speaking documents without corroborative evidence. In short, loose slips do not qualify as formal books of account and cannot form the sole basis for tax assessments.

It is worthwhile to mention that the Hon’ble Supreme Court in case of CBI v. V.C. Shukla 1998 taxmann.com 2155 (SC) popularly known as Jain Hawala Case wherein it was held that any presumption of transaction on some vague, tenuous and dubious entries in a sheet of paper is not rational and hence legal unless there is corroboration by corresponding entry in regular accounts of both the parties to the transaction. In this case, it was held that entries in Jain Notebooks, based on facts admissible under Section 34, are admissible. However, a file containing loose sheets of paper is not a “book,” and hence, entries therein are not admissible under Section 34. Further, it was also held in this case that entries in books of account shall not alone be sufficient evidence to charge any person with liability. Entries, even if relevant, are only corroborative evidence. Independent evidence as to the trustworthiness of those entries is necessary to fasten the liability. In view of these facts, it was held by the Honourable Supreme Court that entries made in the Jain Hawala diaries are under Section 34, but truthfulness thereof was not proved by any independent evidence.

It was also held in this case that “books” ordinarily mean a collection of sheets of paper or other material, blank, written, printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as “book” for they can be easily detached and replaced. The Supreme Court further went on to state that even correct and authentic entries in books of account cannot, without independent evidence of their trustworthiness, fix a liability upon a person.

The above view further gathers reinforcement from the latter judgment of the Hon’ble Supreme Court in the case of Common Cause (A registered society) and others Vs. UOI, [2017] 77 taxmann.com 245-11.01.2017 popularly known Sahara dairies and Aditya Birla dairies case. In this case, the Hon’ble Supreme Court, following the judgment rendered in the case of V.C. Shukla (supra), laid down the following principles:

i. Entries in loose papers/sheets are irrelevant and not admissible under Section 34 of the Evidence Act. It is only where the entries are in the books of account regularly kept, depending on the nature of the occupation, that those are admissible;

ii. As to the value of entries in the books of account, such statement shall not alone be sufficient evidence to charge any person with liability, even if they are relevant and admissible, and that they are only corroborative evidence. Even then, independent evidence is necessary as to the trustworthiness of those entries, which is a requirement to fasten the liability.

iii. The meaning of an account book would be a spiral notebook/pad, but not loose sheets;

iv. Entries in books of account are not by themselves sufficient to charge any person with liability, the reason being that a man cannot be allowed to make evidence for himself by what he chooses to write in his own books behind the back of the parties. There must be independent evidence of the transaction to which the entries relate, and in the absence of such evidence, no relief can be given to the party who relies upon such entries to support his claim against another.

v. Even if books of account are regularly kept in the ordinary course of business, the entries therein shall not alone be sufficient evidence to charge any person with liability. It is not enough merely to prove that the books have been regularly kept in the course of business and the entries therein are correct. It is further incumbent upon the person relying upon those entries to prove that they were in accordance with facts;

vi. The Court has to be on guard while ordering an investigation against any important Constitutional functionary, officers or any person in the absence of some cogent legally cognizable material. When the material on the basis of which the investigation is sought is itself irrelevant to constitute evidence, it is not admissible in evidence.

Thus, it is clear that the loose slips are not the ‘books’ and not admissible u/s 34 of the Evidence Act,1872 (now u/s 28 of the new law of BSA,2023)

V. GST is a levy on ‘Supply’:

The taxable event under GST is the supply of goods or services made in the course or furtherance of business for a consideration, which triggers the liability to pay GST. Further, section 9 prescribes the mechanism for the levy and collection of the GST. Thus, until and unless a transaction qualifies to be a supply and falls within the four walls of sections 7 and 9, no GST can be levied.

Entries found in loose slips, note pads, handwritten diaries, etc., are not admissible u/s 34 because they are not books of accounts. However, even if it is presumed to be admissible evidence, such transactions must also be corroborated by relevant supporting materials. While the tax department may initiate proceedings based on such documents but the final conclusion depends on the entirety of the material evidence gathered.

For example, let us assume the tax department seized some handwritten loose slips/estimate slips from the business premises of a taxpayer on account of sales transactions executed. Now, to conclude such slips as a supply transaction under GST, it needs to be first established who was the author of such slips, how the goods mentioned in such slips were transported/delivered/dispatched, what was the source of goods supplied, to whom such goods were delivered, how the sales consideration was derived, how the transactions stated were actually executed, etc. etc. In this process, it is compulsory to examine all the parties to the purported transactions, viz., the person maintaining such slips, the recipient, transporter, staff, etc.  Thus, until and unless such an examination is done, mere such slips or admission by the owner in his statement per se cannot be grounds to consider the transaction as a supply. Further admission, if any, made by the owner/staff in their statement is also subject to the relevancy test laid down u/s 136 of the CGST Act,2017. Thus, unlike the Income Tax law, under GST, a mere receipt cannot be considered as ‘supply’ until and unless clinching evidence of actual supply is placed on record in the assessment.

VI. Judicial precedents:

It is a settled legal position that a non-speaking document, which lacks any supporting evidence or corroboration and does not clearly show transactions leading to taxable supplies not recorded in the regular books of account, must be disregarded in assessments following search and seizure. Such non-explanatory seized documents are commonly called “Dumb Documents” from a search and seizure standpoint. Simply finding these documents cannot by itself justify any tax additions unless supported by additional evidence proving their connection to undisclosed transactions or supply. There is a catena of judgments under the Income Tax law where an assessment based on such loose slips was completely disregarded by the Courts and Tribunals. Let us analyse some of the judgements:

• The Mumbai ITAT, in the case of P. Goyal v. Dy. CIT [2002] 82 ITD 85 (Mum.) (TM) held as under:

“……………. loose papers cannot be termed as books of an assessee maintained for any previous year. Loose sheet of paper torn out of a diary could not be construed as books for the purpose of section 68. Addition could not be made simply on the basis of certain notings on loose sheets of a diary without any corroborative evidence in the form of extra cash, jewellery or investment outside the books. The loose papers appear to be part of a 1992 diary. However, these loose papers consist of pages torn out from March, April, November and December. There are no closing balances or opening balances, and there is no reconciliation of these entries. Therefore, it cannot be termed as books maintained by the assessee during the previous year. . . . The loose paper in itself has got no intrinsic value. …When it is a mere entry on a loose sheet of paper, and if the assessee claims that it was only a planning, not supported by actual cash, then there has to be circumstantial evidence to support that this entry really represents cash of Rs. 60 lakhs. There is no such evidence found by the Revenue in the form of extra cash, jewellery or investment outside the books.”

•  On the similar lines, the Mumbai ITAT in the case of Amarjit Singh Bakshi (HUF) v. Asstt. CIT [2003] 86 ITD 13 (Delhi) (TM) held that any noting in the loose sheet is no evidence by itself. An entry in the books of account maintained in the regular course of business is relevant for purposes of considering the nature and impact of a transaction, but noting on slips of paper or loose sheets of paper cannot fall in this category. Notings on loose sheets of paper are required to be supported/corroborated by other evidence, which may include the statement of a person who admittedly is a party to the notings. It was further observed in that case that the provisions of the Indian Evidence Act are not strictly applicable to the proceedings under the IT Act, but the broad principles of law of evidence do apply to such proceedings.
• The Hon’ble Supreme Court has held in Ramji Dayawala & Sons(P) Ltd. Vs. Invert Import AIR 1981 SC 2085 that the:

 “Mere proof of the handwriting of a document is not tantamount to a proof of all the contents or the facts stated in the document, if the truth of the contents stated in a document is in issue, mere proof of the handwriting and execution of the document would not furnish evidence of the truth of the fact or contents of the document. The truth or otherwise of the fact or contents so stated would have to be proved by admissible evidence, i.e., by the evidence of those persons who can vouch for the truth of the fact in issue.”

• The Hon’ble Apex court held in Yusuf (Sir) Vs. D FAIR 1968 Bom 1121,

The contents contained in the document are hearsay evidence unless the writer is examined before the court. The Hon’ble Court, thereof, held that the attempt to prove the contents of the document by proving the signatures of the handwriting of the author thereof is to set at nought the well-recognised rule that hearsay evidence cannot be admitted. If we consider the said piece of paper seized during the search in light of definition of the word “Document” as given in the Indian Evidence Act and General Clauses Act and truthfulness of the contents thereof in the light of the aforesaid decision of the Hon’ble SC, we find that said paper contains jottings of certain figures by the same dose not describe or express the substance of any transaction and even if the said paper has been seized from the possession of the assessee the contents thereof are not capable of describing the transactions the way AO has deciphered them without support of corroborative evidence of the parties attributed to alleged transaction. The said paper, therefore, does not come within the compass of the definition of “Document”, to be used as evidence. The papers seized have no evidential value and hence cannot be a basis to tax undisclosed income.”

• It shall not be out of place to mention that the Hon’ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 24 CTR (SC)358/[1981] 131 ITR 597 (SC) held that the fictional receipt cannot be deemed to be a receipt in the absence of any cogent material to support the factum of actual receipt.
• It is held in PCIT Vs. Deico (India) Pvt. Ltd. (2016) 67 Taxmann.Com 357 (Del), “no addition could be made under Section 68 on the basis of loose papers found during search in this case indicating assessee’s transaction with a company, when assesse not only denied having any dealings with the said company but also produced all necessary details for AO to make necessary inquiries and a letter from director of that company confirming that the said company did not have any transaction with assessee”.
• InA.Patel Vs. Dy. CIT 2000 72 ITD 340 Mumbai held that simply because a sheet of paper was found during the search at the premises of an assesse, he could not be saddled with a tax liability unless it could conceivably be reasonably related to the assesse.
• The Hyderabad bench of ITAT in the case of Nagarjuna Construction Co. Ltd., Vs. Dy. CIT 2012 (23) Taxmann.com 239. The basis for addition is only loose slips. These notebooks, loose slips are unsigned documents not establishing a nexus between the loose slips and with actual receipt of interest. The loose slips seized during the course of the search are a dump document having no evidentiary value; no addition can be made as material.
• The Hon’ble High Court of Judicature at Madras in Commissioner of Income Tax, Salem Vs. M/s.S. Khader Khan Son – DB, dt.. 04.07.2007 -Para 5.1, followed the decision in Pullankode Rubber Produce Co. Ltd., Vs. State of Keraia 1973 (91) ITR 18, the Apex court held that an admission is extreme to an important piece of evidence, but it cannot be said that it is conclusive, and it is open to the person who made the admission to show that it is incorrect.
• In CIT v. Krorilal Aggarwal [1994] 50 TTJ (Jab.) 393, a diary seized during a search contained certain jottings. The Tribunal held that the jottings in the diary neither represented books of account nor any document, and, therefore, the presumption under section 132 (4A) was not available, and the addition made on the basis of the said jottings was deleted
• The Mumbai ITAT in the case of ACIT V Layer Exports P. Ltd. [2017]184 TTJ 469 (MUM) held that additions are to be made based on tangible evidence and not solely on the basis of estimations and extrapolation theory. Additions could not be sustained merely on the basis of rough notings made on a few loose sheets of paper unless the AO brought on record some independent and corroborative materials to prove irrefutably that the notings revealed either unaccounted income or unaccounted investment, or unaccounted expenditure of the assessee. Additions could not be made simply on the basis of rough scribblings made by some unidentified person on a few loose sheets of paper. Since these sized papers were undated, had no acceptable narration and did not bear the signature of the assessee or any other party, they were in the nature of dumb documents having no evidentiary value and could not be taken as the sole basis for determination of undisclosed income of the assessee, thus, no addition can be made by AO on grossly inadequate material or rather no material at all and as such deserved to be deleted.

Therefore, the well-settled legal position is that a non-document referred to as a ‘Dumb Document’ without any corroborative material, evidence on record and finding that such document has materialized into transactions giving rise to income or supply made by the assessee which had not been disclosed in the regular books of account by such assessee, has to disregarded for the purposes of assessments to be framed under a taxing statute. The same principle will hold goods for the purpose of GST assessments too.

VII. Concluding remarks:

It is thus evident that loose papers or slips detected during a search proceedings should be properly arranged, authenticated, and backed by independent evidence like books of account, bank records, or a voluntary and reliable statement before any addition to be sustained. In income-tax cases, courts and tribunals have repeatedly held that loose sheets or diary notes are merely “dumb documents” unless supported by corroboration.

Under GST, although the statutory framework is different, the same principle will be applicable. Seizure of documents by itself does not automatically justify a tax demand. The department must establish a clear legal and factual nexus between the seized material and the supply actually made by the taxpayer. Further, the GST law contains specific provisions for making available copies of seized documents, thereby ensuring that the taxpayer can effectively defend their case using the very material relied upon by the authorities. Thus, the taxpayer in such cases should seek copies of the seized records to defend their case properly.

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Disclaimer: The above views are compiled by the author based on the study of various legal provisions, judicial pronouncements, etc. There may be some other views also on this subject matter. So, the readers are requested to refer to facts of each case, relevant provisions of the statute, latest judicial pronouncements, circulars, clarifications, etc., of the respective law and obtain legal opinion before acting on the above write-up.

The author is a practicing Chartered Accountant at Guwahati and can be reached at: manoj_nahata2003@yahoo.co.in.