Court affirms that seized diary found at partner's office cannot be wholly attributed to firm; directs taxation only on specific unaccounted investment credited to partner, dismissing Revenue's appeals
In a significant ruling dated September 8, 2026, the Gujarat High Court dismissed appeals filed by the Principal Commissioner of Income-Tax (Central), Ahmedabad, against Expert Particle Board and its partner, Shri Bhagwanjibhai P. Amrutiya, relating to income tax additions based on documents seized during survey proceedings.
The dispute arose from a survey conducted under Section 133A of the Income Tax Act, 1961, at the office of a partner/accountant associated with the Coral Group of Morbi, which included Expert Particle Board. The survey led to the impounding of a diary/notebook and a satakhat (agreement to sale) related to land transactions. The Income Tax Department made substantial additions to the firm's and partner's taxable income, alleging unexplained cash receipts totaling over Rs. 6.77 crore, unexplained investment of Rs. 1.48 crore in land, and bogus purchases of over Rs. 54 lakh, contending these were unaccounted transactions reflected in the impounded diary.
However, the Gujarat High Court bench comprising Justices Bhargav D. Karia and Pranav Trivedi upheld the concurrent findings of fact recorded by the Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Appeals) [CIT(A)] that the entire impounded diary could not be attributed to the partnership firm. The diary was found not at the firm's premises but at the office of Shri Bhagwanjibhai Amrutiya, a professional accountant and partner managing accounts for multiple entities including the Coral Group. The firm had not commenced commercial production during the relevant period, making such large cash transactions implausible for the firm.
The Court noted that the additions made by the Assessing Officer on substantive basis were not sustainable because the documents were not found on the firm's premises, and the partners, including the firm, denied involvement in the transactions recorded in the diary. The AO had already made additions against Shri Bhagwanjibhai Amrutiya individually for these amounts, discharging the presumption under Section 292C of the Act.
Regarding the land purchase valued at Rs. 1.55 crore but registered for Rs. 7 lakh only, the Court accepted the CIT(A)'s finding that the balance amount shown as payable in cash was not conclusively proven to have been paid, and the higher valuation was to secure bank loans. The partners' admissions and documentary evidence showed no final payment of the alleged on-money, and thus additions on this account were rightly deleted.
The Court also upheld the deletion of additions for alleged bogus purchases because these transactions were neither recorded in the firm's books nor claimed as deductions in income tax returns, negating any ground for disallowance under Section 37 of the Act.
On the issue of the partner's unaccounted investment, the Court agreed with the ITAT's conclusion that only Rs. 97.4 lakh specifically credited in the partner's name in the diary could be treated as his unaccounted investment in the firm. This amount was to be taxed after considering set-offs against the partner's share of unaccounted income from another firm (M/s Kishan Minerals) and his commission income from Coral Group sales. The rest of the cash transactions recorded in the diary were found to be fund rotations or contributions from other persons and could not be aggregated as the partner's income.
The Court emphasized that these conclusions involved appreciation of facts and concurrent findings by the appellate authorities, which did not raise any substantial question of law under Section 260A of the Income Tax Act. The appeals by the Revenue were therefore dismissed.
This judgment clarifies the application of Sections 69A, 69B, 37, 133A, 292C, and 115BBE of the Income Tax Act in cases involving diary-based evidence of unaccounted cash transactions and unexplained investments, underscoring the necessity of concrete linkage between seized documents and the assessee's premises or books for making additions.
Bottom Line:
Income Tax - Additions based on impounded diary/notebook - Where no search or survey was conducted at assessee-firm's premises, documents were found from office of partner/accountant, firm had not commenced commercial production, and appellate authorities recorded concurrent findings that only amount specifically credited in partner's name could be taxed in his hands - No substantial question of law arises under Section 260A.
Statutory provision(s):
Income Tax Act, 1961, Sections 37, 69A, 69B, 115BBE, 133A, 260A, 292C
