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Facts
During a search action at the assessee's residence, a diary (Annexure BS/2) was seized containing entries related to residential renovation work, which the Assessing Officer (AO) determined included unaccounted cash payments. The AO made a substantive addition of Rs. 20,10,886/- under Section 69C for A.Y. 2015-16 and a protective addition for A.Y. 2016-17 based on these entries. The CIT(A) partly confirmed the additions, restricting them to Rs. 6,00,000/- and Rs. 1,00,000/- respectively, after rejecting the assessee's valuation report due to belated submission and lack of corroboration.
Held
The Tribunal, after condoning a 153-day delay in filing appeals, held that a 25% calibrated adjustment of the net alleged unaccounted expenditure, amounting to Rs. 4,65,000/-, was fair and reasonable. This amount was directed to be added substantively for A.Y. 2015–16, and the entire protective addition for A.Y. 2016–17 was deleted. The order of the CIT(A) was modified accordingly.
Key Issues
1. Whether additions for unexplained expenditure based on seized diary entries, without comprehensive verification, are sustainable. 2. Whether the CIT(A)'s ad-hoc estimation of additions and rejection of the assessee's valuation report were justified. 3. Condonation of delay in filing appeals.
Sections Cited
250, 143(3), 153A, 139(1), 132, 69C, 271AAB, 143(2), 142(1), 131, 133(6), Rule 46A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
These two appeals by the assessee are directed against the consolidated order dated 08.09.2023 passed by the learned Commissioner of Income Tax (Appeals)–12, Ahmedabad [hereinafter referred to as “CIT(A)”], under section 250 of the Income Tax Act, 1961[hereinafter referred to as “the Act”], confirming part of the additions made by the Assessing Officer under section 143(3) of the Act in respect of Assessment Years 2015–16 and 2016–17. The 2 assessment in the case of the assessee for A.Y. 2015–16 was framed by the Income Tax Officer, Ward 3(2)(2), Vadodara [hereinafter referred to as “Assessing Officer or AO”], under section 153A r.w.s. 143(3) of the Act vide order dated 26.12.2017 and for A.Y. 2016–17, the assessment was completed under section 143(3) of the Act.
Condonation of Delay 2.1 The Registry noted delay of 153 days in filing both appeals before us. The assessee filed condonation application. It is seen that the impugned appellate order of the learned CIT(A) is dated 08.09.2023. The assessee has explained that though he became aware of the disposal of the appeals on 15.09.2023 when he visited the Income Tax Portal, he was unable to download the orders due to persistent technical glitches in the system. Grievances were duly filed before DIT-Systems (Grievance Nos. 14757788, 14757814, and others dated 12.09.2023 and 16.09.2023), but the issue remained unresolved. Subsequently, the assessee made formal written applications to the office of the CIT(A)-12, Ahmedabad, vide letters dated 02.12.2023 and 06.02.2024, requesting certified copies of the orders. As per the email communication dated 08.02.2024, the order was finally received by the assessee via email from the CIT(A)’s office on that date. The assessee has mentioned this as the date of receipt in Form 36. The present appeals were filed on 08.04.2024, i.e., within 60 days from the date of actual receipt.
2.2 The explanation so furnished is supported by evidence including the letters to CIT(A), screenshots of grievances, and the email enclosing the appeal order. The delay of 153 days is accordingly attributable to genuine procedural circumstances and technical difficulties beyond the control of the assessee. The learned 2.3 In view of the above, relying on the ratio laid down by many judicial forums including the Hon’ble Supreme Court in the case of Land Acquisition v. Mst. Katiji [(1987) 167 ITR 471 (SC)], wherein it was held that substantial justice should not be denied on the ground of technical delay when sufficient cause is shown, we are satisfied that the assessee was prevented by reasonable cause from filing the appeals within the prescribed time. Accordingly, the delay of 153 days in filing both the appeals is condoned, and the appeals are admitted for adjudication on merits.
Facts of the Case 3.1 For A.Y. 2015–16, the assessee had originally filed his return of income under section 139(1) of the Act on 31.08.2015, declaring total income of Rs.1,62,04,810/-. For A.Y. 2016–17, the original return under section 139(1) was filed on 05.08.2016, declaring total income of Rs. 83,94,500/-. Subsequently, a search action under section 132 of the Act was carried out on 02.12.2015 in the case of Bipinchandra Patel Group, which included the residential premises of the assessee. In the course of the said search, a diary for the year 2013, marked as Annexure BS/2, was found and seized from the assessee’s residence at Shantivan Society. The said diary contained detailed entries relating to renovation work of the assessee’s residential bungalow, including particulars such as nature of items purchased, names of parties from whom purchases were made, labour charges, mode and dates of payments (cash/cheque), and names of contractors. According to the Assessing Officer, several entries in the diary did not 3.2 Consequent to the search, proceedings under section 153A were initiated for six assessment years including the relevant years under appeal. Notice under section 153A was issued for A.Y. 2015–16 on 24.06.2016, in response to which the assessee filed return of income on 01.08.2016, again declaring income of Rs.1,62,04,810/-. For A.Y. 2016–17, notice under section 143(2) was issued on 04.08.2017, treating the original return filed under section 139(1) as return in response to proceedings under section 153A.
3.3 During the assessment proceedings, the Assessing Officer issued notices under sections 143(2) and 142(1) along with a detailed questionnaire calling for explanation on the entries made in the seized diary. The assessee furnished written submissions and explanations along with cash book entries. The explanation of the assessee was that the diary did not reflect actual unaccounted transactions, and some of the entries were either duplicative or already recorded in the regular books.
3.4 The Assessing Officer, however, observed that certain entries in the diary relating to payments for furniture, fittings, materials, and labour were not supported by corresponding entries in the books of account. It was further noted that several payments were made in cash and not verifiable through disclosed sources. Based on the analysis of diary entries, the AO concluded that a sum of Rs.20,10,886/- represented unexplained expenditure incurred by the assessee towards renovation of his residential house. The AO held that most of the entries pertained to the financial year 2014–15 relevant to A.Y. 2015–16, though some entries extended up to 5 20.02.2016. Accordingly, the AO made an addition of Rs. 20,10,886/- under section 69C on a substantive basis in A.Y. 2015–16 and on a protective basis in A.Y. 2016–17. Penalty proceedings under section 271AAB were also initiated for A.Y. 2015–16.
3.5 The CIT(A), vide order dated 14.11.2023, partly allowed the appeal of the assessee and restricted the addition to Rs. 6,00,000/- on substantive basis in A.Y. 2015–16 and Rs. 1,00,000/- on substantive basis in A.Y. 2016–17, holding that such partial additions would meet the ends of justice, while treating the remaining amount as not conclusively established. The CIT(A) also upheld the AO’s reasoning that certain payments reflected in the diary were not supported by the assessee’s books and were made in cash.
Aggrieved by the order of CIT(A), the assessee has preferred the present appeals before us. In A.Y. 2015–16, the assessee has challenged the confirmation of addition of Rs.6,00,000/-, and in A.Y. 2016–17, the challenge is to the addition of Rs.1,00,000/-, both confirmed by the CIT(A) on the ground of unexplained expenditure incurred on house renovation. Specific common grounds except quantum, are: 1.00 Addition of Rs. 6,00,000/- (For A.Y. 2016-17 it is Rs.1,00,000/- ) towards expenditure incurred on House Renovation: 1.1 On the facts and circumstances of your appellant's case and in law, the Id. CIT (A)-12, Ahmedabad has erred in confirming addition of Rs. 6,00,000/- towards expenditure incurred on House Renovation on erroneous plea that out of addition made by Id. AO amounting to Rs. 20,10,866/-, this much addition will serve the interest of justice. 1.2 While doing so, the Id CIT(A) has erred in confirming the addition made by Id. AO holding that against entries made in diary, only cash payments were made by your appellant. The Id. CIT(A) also brushed aside the case laws relied upon by your appellant. 1.3 Your appellant prays before Your Honour to hold so now and treat the action of Id.CIT(A) as bad in law. 2.00 YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND AND / OR DELETE ALL OR ANY GROUND(S) TAKEN HEREINABOVE.
During the course of hearing before us, the learned Authorised Representative (AR) of the assessee reiterated the factual matrix of the case and submitted that the addition made by the Assessing Officer on account of unexplained expenditure towards renovation of the residential house is wholly unjustified, being based solely on uncorroborated loose notings found in a diary seized during search, marked as Annexure–BS/2. It was submitted that the said diary comprises assorted notings of varying nature, including estimates for proposed renovation works, projected expenditure, and some actual payment details, many of which had not crystallised into final payments. The AR emphasized that the mere presence of handwritten estimates or remarks in such a diary, without any supporting material or corroborative evidence, cannot constitute valid basis for making addition under section 69C or otherwise, particularly when the assessee had maintained regular books of account and has offered a plausible explanation with supporting documents.
5.1 The AR submitted that during the assessment proceedings, the assessee placed on record complete documentary evidences to explain the renovation expenditure, including (i) cash book [P/B pgs. 236– 269], (ii) cash flow statement [P/B pgs. 133–134], (iii) bank statements [P/B pgs. 138–167], and (iv) confirmations from concerned contractors, labourers, and vendors [P/B pgs. 199–235] engaged in the renovation activity along with explanation of each item. Further, a valuation report from a registered government-approved valuer [P/B pgs. 290–299] was submitted to demonstrate that the fair estimated cost of renovation at the relevant time was Rs. 26,66,000/-, which was in fact lower than the amount actually incurred and recorded by the assessee at Rs. 36,19,050/- in his books, thereby ruling out any scope for unexplained expenditure.
7 5.2 It was further argued that the Assessing Officer and the CIT(A) have erred in relying merely on notings in the seized diary without conducting any independent verification or inquiry under sections 131 or 133(6) of the Act, and without confronting any of the contractors or parties whose confirmations were duly submitted. The AR contended that the onus cast on the assessee stood duly discharged by way of extensive documentation, and in the absence of any rebuttal by the department, the addition ought to have been deleted in toto. The CIT(A), despite noting the above evidences, proceeded to uphold part of the addition on a purely ad hoc basis, which is not legally sustainable.
5.3 Without prejudice, it was alternatively submitted that even if any estimate-based addition were to be made, it must be based on a reasonable and objective yardstick. In the present case, the action of the CIT(A) in sustaining addition of Rs. 6,00,000/- in A.Y. 2015–16 and Rs. 1,00,000/- on protective basis in A.Y. 2016–17 is wholly arbitrary and without basis, particularly in view of the settled legal position that loose papers or notings cannot form the sole foundation of addition unless substantiated by independent evidences. Reliance was placed on the judgment of the Hon’ble High Court of Gujarat in the case of Rameshchandra Rangildas Mehta v. ITO [Tax Appeal No. 1203 of 2018], wherein it was held that any estimate or projection noted on a seized document must be tested for reliability before forming the basis of addition and it cannot be mere guesswork.
5.4 In view of the above, it was urged that the addition sustained by the CIT(A) deserves to be deleted in full.
The learned Departmental Representative (DR), appearing on behalf of the Revenue, strongly supported the assessment order 8 passed by the Assessing Officer and submitted that the addition of Rs.20,10,886/- on account of unexplained expenditure was duly justified in light of the material found during the course of search proceedings. With respect to the assessee’s reliance on the valuation report of the registered valuer estimating the cost of renovation at Rs.26,66,000/-, the DR drew our attention towards para 6.1 of the order of CIT(A) and contended that such a report was an afterthought, obtained much later during the assessment proceedings and lacks evidentiary value in light of the contemporaneous and spontaneous nature of the seized diary entries. The DR emphasized that the valuation report is inherently subjective and cannot displace the concrete notings found in the diary, which directly evidences the actual payments made.
We have carefully perused the assessment order, the seized material marked as Annexure BS/2, the tabulated analysis appearing at para 4 of the order of Assessing officer, the valuation report filed by the assessee, and the respective orders of the Assessing Officer and the ld. CIT(A). We have also considered the contentions of the assessee's AR and the DR. 7.1 The material fact in this case is that during the course of search action under section 132 of the Act carried out on 02.12.2015 in the case of the Bipinchandra Patel, a diary of 2013 was seized from the residence of the assessee, marked as Annexure BS/2. The said diary contained notings in respect of cash payments made to various persons, allegedly for the purpose of interior and renovation work carried out at the residential premises of the assessee. Based on an exhaustive page-wise analysis of such notings, the Assessing Officer prepared a summary table, classifying the names of recipients, gross amount of work done, accounted payments, and the residual 7.2 The Assessing Officer arrived at the said amount by adopting a selective approach—he considered only positive figures in the "balance payment" column of the working sheet, discarding negative figures (which indicated excess payments). This sum of Rs.20,10,886/- was accordingly treated as unexplained expenditure under section 69C for A.Y. 2015–16 on a substantive basis and for A.Y. 2016–17 on a protective basis, given the lack of clarity as to the exact timing of such payments across financial years.
7.3 In response to the show cause notice and during assessment as well as appellate proceedings, the assessee contended that the seized diary was merely a rough internal record, unsupported by independent corroboration, and that the actual renovation expenses had been incurred through verifiable banking channels. The assessee also furnished a registered valuer's report, estimating the total cost of renovation at Rs. 26,66,000/-. It was further submitted that many entries were repetitive, some were exaggerated, and the tabulated version prepared by the Assessing Officer ignored reconciliations with books of accounts.
7.4 The ld. CIT(A), after examining the seized material, the valuation report, and the assessee’s submissions, concluded that the estimate made by the Assessing Officer could not be accepted in its entirety. The CIT(A) observed that while the seized diary indicated that some cash expenses were indeed incurred outside the regular books of accounts, the entirety of the additions was not justifiable, particularly when the assessee had offered a plausible explanation supported by 10 a professional valuer’s report. The CIT(A) further noted that the AO had not summoned or examined any of the parties mentioned in the diary, no investigation was carried out to verify the actual expenditure, negative balances were mechanically ignored, part of the renovation expenditure could be reasonably considered explained through the valuation report and accounted payments.
7.5 The Ld. CIT(A) observed that while the assessee challenged the notings in the seized diary (Annexure BS/2) as being estimates or non-contemporaneous, in his rebuttals he had also accepted the correctness of some entries. The CIT(A) therefore held that all entries could not be dismissed outright as mere estimates. The Ld. CIT(A) concluded that the diary entries appeared to be real and contemporaneous, having been maintained during the renovation activity. Therefore, he did not entirely accept the assessee's plea that they were merely speculative jottings. He noted that mere denials by the assessee or confirmations filed without adequate verification were not sufficient to displace the evidentiary value of seized materials.
7.6 Based on the above considerations, the CIT(A) proceeded to adopt an estimation. The AO had made a substantive addition of Rs.20,10,886/- in AY 2015–16 and a protective addition of an identical amount in AY 2016–17. Based on the diary evidencing that the renovation began in AY 2015–16 and was completed in AY 2016– 17, the Ld. CIT(A) apportioned the additions between the two years as follows: - Rs. 6,00,000/- as substantive addition in AY 2015–16 - Rs. 1,00,000/- as substantive addition in AY 2016–17
The balance amounts of Rs.14,10,886/- and Rs.19,10,886/- respectively were directed to be deleted. The Ld. CIT(A) categorically stated that the apportionment “will serve the interest of justice,”
11 indicating that the estimate was made to strike a balance between (i) the total notings in the seized diary, (ii) the explanations and confirmations furnished by the assessee, and (iii) the possibility that not all expenses noted in the diary were unaccounted or unexplained.
7.7 We also note that the Ld. CIT(A) rejected the assessee’s plea for admission of the valuation report dated 12.06.2019 by Registered Valuer Mr. S.B. Chandra, for the following reasons: - The report was obtained one and a half years after the assessment, and the assessee failed to establish any sufficient cause under Rule 46A of the Act as to why such report could not be filed earlier. There was no refusal by AO to admit evidence nor was any explanation offered by the assessee for not furnishing the valuation report during assessment proceedings.
- The CIT(A) held that the valuation report was highly conservative in estimation and did not correspond with the actual expenditure admitted by the assessee in his own submissions. He also noted that the valuation report was prepared four years after the completion of renovation activity, thereby making it unreliable and not independently verifiable.
- The CIT(A) described the report as “an attempt to have a fresh bite of cherry,” suggesting that it was an afterthought introduced merely to negate the seized evidence without a contemporaneous basis. 7.8 The CIT(A)’s conclusion to retain only Rs.6,00,000/- and Rs.1,00,000/- as substantive additions reflects adhoc estimation approach, considering the factual ambiguity surrounding the seized diary entries and the absence of matching entries in regular books. However, his decision to reject the valuation report entirely may appear overly rigid, especially when the assessee sought to explain the recorded expenditure based on contemporaneous civil rates and activity-wise cost estimation. Even if not admissible under Rule 46A, the CIT(A) could have considered the report as an indicative corroborative aid. Notably, the CIT(A) failed to conduct independent 7.9 Thus, the CIT(A)’s reasoning for sustaining only Rs.6,00,000/- (AY 2015–16) and Rs.1,00,000/- (AY 2016–17) is grounded in a partial acceptance of diary entries, coupled with denial of full reliance due to lack of corroborative documentary evidence and partial admission by assessee. The rejection of the valuer’s report is based on procedural non-compliance and perceived lack of reliability in retrospectively estimated figures. However, even if the valuation report dated 12.06.2019 is excluded from the scope of Rule 46A, it still serves as an indicative benchmark to test the reasonableness of the overall renovation cost vis-à-vis the diary entries and accounted payments. Upon comprehensive examination of the record, the following reconciliation emerges: Particulars Amount (Rs.)
Total work done as per AO’s summary 54,86,291 (Net) Less: Accounted payments (through 36,19,050 books) Balance (AO’s alleged unaccounted 18,67,241 expenditure) Positive balance entries considered by AO 20,10,886 (rounded) Valuation report estimate (Registered 26,66,000 Valuer) Difference between Valuation & Accounted (–) 9,53,050 Amt.
13 7.10 The above table clearly indicates that the total accounted expenditure of Rs.36.19 lakhs was not only higher than the professional valuer’s estimate but that the so-called “unaccounted” component is, at best, inferential. The AO's working proceeds by mechanically aggregating only the positive balances while disregarding the entries with negative balances that indicated overpayments or booking errors. Moreover, confirmations were filed for most of the major entries including Fatesingh, Bhikhabhai Salat, Pappu Carpenter, K.D. Sons, and others, with varying degrees of detail. The AO failed to summon or cross-verify any of these parties under section 131 or 133(6), thereby weakening the reliability of the alleged inference of undisclosed expenditure.
7.11 Viewed holistically, and considering the totality of evidences on record, we are of the considered view that a restricted addition equivalent to 25% of the net alleged unaccounted expenditure is fair and reasonable. The Assessing Officer had computed total unaccounted expenditure at Rs. 20,10,886/- by aggregating only the positive balances from the seized diary (Annexure BS/2), while ignoring negative balances and without undertaking any third-party verification. The net differential between the AO’s estimate of gross renovation cost (Rs.54.86 lakh) and the accounted payments (Rs.36.19 lakh) stood at Rs.18,67,241/-. This figure represents the potential area of dispute, subject to appropriate discounting.
Applying a 25% estimation rate to the above amount, the sustainable addition would be Rs.4,66,810/-, rounded to Rs.4,65,000/- for convenience. This estimate strikes a balanced midpoint: it acknowledges the evidentiary value of the contemporaneous diary and the possibility of partial out-of-book expenditure, while discounting for duplications, retrospective cost 7.12 In our view, 25% represents a logically defensible threshold lower than the CIT(A)’s ad-hoc additions (which is approximately 30% of unaccounted expenses) estimate on account of the following:
• The valuation report filed by the assessee estimated the total cost at Rs.26.66 lakh, which is less than the accounted payment of Rs.36.19 lakh, suggesting no inflation or suppression prima facie;
• Substantial confirmations from vendors and cash/bank books were placed on record during appellate proceedings;
• There was no attempt by the AO to cross-verify diary entries or to summon any of the parties named therein;
• The seized diary, though contemporaneous, contained several entries without exact date linkage, leading to ambiguity in year-wise allocation;
• Negative balances in the AO's table (indicating excess or duplicate payments) were ignored, potentially leading to overestimation.
Therefore, by applying a 25% calibrated adjustment, we derive a singular addition figure of Rs.4,65,000/-, to be taxed substantively in A.Y. 2015–16, considering that most entries pertain to that period, with no separate addition warranted for A.Y. 2016–17.
7.13 By applying this calibrated percentage, we ensure that the estimate is not arbitrary or conjectural but grounded in objective material, thus aligning with the principle laid down by the Hon’ble 15 Gujarat High Court in Rameshchandra Rangildas Mehta v. ITO (supra), wherein it was held that if an authority is looking forward to estimate income of an assessee, there has to be some reasonable base. No guesswork is permissible. Unlike the facts in case of Rameshchandra (supra), where the addition was made purely on conjecture without contemporaneous evidence or working, the CIT(A) in the present case has derived a calibrated and reasonable estimate from the diary entries, corroborative documentation, and overall factual matrix, thereby obviating the risk of the estimate being struck down as arbitrary or baseless.
7.14 Before us, the assessee had also taken an alternative plea, without prejudice, that in the event the entire addition is not deleted, a reasonable estimate based on the material on record be adopted. We find merit in the said plea and proceed to restrict the addition to Rs.4,65,000/- for A.Y. 2015–16, and delete the protective addition in A.Y. 2016–17. The order of the CIT(A) is modified accordingly.
In the result the appeal of the assessee for A.Y. 2015–16 [IT(SS)A/23/Ahd/2024] is partly allowed, as the addition is restricted to Rs.4,65,000/- on a substantive basis and the appeal of the assessee for A.Y. 2016–17 [ Rs.20,10,886/- is deleted in entirety.
Order pronounced in the Court on 29th July, 2025 at Ahmedabad.