Addition based on seized figures is sustainable where corroborative evidence justifies decoding them by hundredfold.

The assessee, a dealer in rough and polished diamonds and partner in M/s Shivam Exports, was subjected to a search under the Income-tax Act on 24 September 1997. Diaries and loose papers marked Annexures B-1, B-2 and B-3 were seized, recording diamond transactions and financial details.

In his block return under Section 158BC, the assessee disclosed commission income of Rs.2,00,000.

Pages 4 and 5 of Annexure B-3 contained a trial balance as on Diwali 1995, including receipts, stock, investments, liabilities and profits.

The Assessing Officer treated the figures in the seized documents as being recorded in coded form and added three zeros to them. He consequently assessed undisclosed income of Rs.6.34 crores for the block period, besides making additions for unexplained investment in rough diamonds and undisclosed profits based on Annexures B-1, B-2 and B-3.

The Commissioner (Appeals) accepted that the figures in pages 4 and 5 of Annexure B-3 required decoding, but applied two zeros and restricted the addition to Rs.63,40,000; it deleted the other additions substantially because the relevant transactions had been considered in the assessment of M/s Shivam Exports.

The Tribunal held that the Assessing Officer and the Commissioner (Appeals) had unjustifiably decoded the seized documents by adding zeros, but sustained Rs.6,34,000 without assigning a consistent basis.

The Revenue challenged the Tribunal’s decision under Section 260A of the Income-tax Act.

Whether the Tribunal erred in holding that the figures on pages 4 and 5 of Annexure B-3 should be read as recorded, rather than being decoded by adding zeros, despite the seized material, the assessee’s explanations and departmental inquiries.

Whether the Tribunal correctly restricted the addition for undisclosed profit from Rs.6.34 crores to Rs.6.34 lakhs.

Whether the Tribunal was correct in upholding deletion of the addition of Rs.5,52,20,905 for unexplained investment in rough diamonds based on Annexures B-1, B-2 and B-3.

Whether the Tribunal was correct in upholding deletion of the addition of Rs.1,64,66,870 for unexplained profit based on Annexures B-1, B-2 and B-3.

Whether the Tribunal was correct in upholding deletion of the addition of Rs.1,09,44,413 for undisclosed profit in rough-diamond transactions.

The Court applied Section 260A of the Income-tax Act, which permits interference by the High Court only on substantial questions of law.

It considered the block-assessment framework under Section 158BC and the evidentiary significance of seized material under Section 132(4A), including the principle that seized documents may be presumed to belong to the person from whose possession they are recovered and may be read according to their contents.

Relying on Bhojraj Kishanchand v. CIT, 209 ITR 500 (Bom), the Court held that the decision did not authorise an automatic addition of “hundreds” or “thousands” to figures in seized documents.

Under CIT v. C.J. Shah & Co., 246 ITR 671 (Bom), estimation in search assessments may involve reasonable latitude, but cannot be arbitrary or unsupported by material.

The Court also considered CIT v. S.M.S. Investment Corporation (P) Ltd., 207 ITR 364 (Raj.), CIT v. Khushlal Chand Nirmal Kumar, 263 ITR 77 (MP), Mahavir Woollen Mills v. CIT, 245 ITR 297 (Del.) and CIT v. Dr. S. Bharti, 254 ITR 261 (Del.), recognising that the interpretation of seized documents and the factual conclusions drawn from them ordinarily remain matters of fact unless perverse.

The Court found that the Tribunal correctly rejected the Assessing Officer’s arbitrary method of adding three zeros to the figures in Annexure B-3.

However, the Tribunal itself had sustained Rs.6,34,000 by adding one zero to the figure of Rs.63,400, without explaining why that form of decoding was justified.

The Commissioner (Appeals), in contrast, had given concrete reasons for applying two zeros: the entries concerning 284 ghanties and four generators, together with departmental inquiries regarding their market prices, indicated that the figures could not represent merely hundreds of rupees.

The Court therefore restored the addition of Rs.63,40,000 in respect of pages 4 and 5 of Annexure B-3.

As regards the remaining additions, both appellate authorities had concurrently found that the transactions reflected in Annexures B-1 and B-2, apart from pages 4 and 5 of B-3, related to M/s Shivam Exports and had already been considered in its assessment.

The Mumbai Tribunal had also examined the decoding and computation in the case of M/s Shivam Exports and substantially restricted the corresponding profit addition after allowing appropriate adjustments for purchases and expenses.

Since the assessee lacked the financial capacity to conduct the alleged large-scale transactions independently and the same seized material had been assessed in the firm’s hands, the Court found no substantial question of law warranting interference with the deletion of those additions.

The Court modified the Tribunal’s order and sustained an addition of Rs.63,40,000, rather than Rs.6,34,000, on the basis of pages 4 and 5 of Annexure B-3.

Questions E, F and H were answered in favour of the assessee and against the Revenue, thereby upholding deletion of the additions relating to unexplained investment and undisclosed profits based on the other seized documents.

Tax Appeal No. 1093 of 2009 was also partly allowed, with the two questions answered partly in favour of the Revenue and against the assessee; the addition was sustained at Rs.63,40,000.