Mumbai ITAT: Seized Digital Material and Token Notes Cannot Be Basis for Taxing Gross Receipts — Only Embedded Profit Is Assessable
Background and Context
A significant ruling has emerged from the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, in the matter of Shaibaz Mohammadullah Khan Vs DCIT, consolidating multiple appeals filed for various assessment years. The Tribunal's decision addresses a critical question that frequently arises in search and seizure cases: whether the entire gross value reflected in seized digital material, handwritten slips, WhatsApp conversations, and Excel files can be brought to tax, or whether only the profit component embedded in such unaccounted business transactions is taxable.
The connected appeals relate to two assessees — Shri Javeed Ismail Khatri (proprietor of M/s Zeeson, a garment export business) and Shri Shaibaz Mohammadullah Khan (who operated an angadiya/money transfer business from shared premises) — covering Assessment Years 2019-20 through 2023-24.
Factual Matrix
The Assessee and Business Profile
Shri Javeed Ismail Khatri filed his regular return of income at Rs. 281.25 Lacs on 21.10.2022, declaring income from his proprietorship concern M/s Zeeson. The firm was primarily engaged in the export of readymade garments and fabrics, predominantly to Yemen, with the assessee acting as an intermediary between Indian suppliers and Yemeni customers under a valid export license. Exports were conducted predominantly on FOB basis.
On 18.01.2023, a search action was initiated under Section 132 of the Income Tax Act, 1961 at the assessee's business premises at 226, Ashoka Shopping Centre, GT Hospital Complex, LT Road, Mumbai. A survey had previously taken place on 16.01.2023. Based on the material gathered during the search, the Assessing Officer (AO) framed the assessment under Section 143(3) on 24.05.2024 and made several substantial additions to income.
Additions Made by the Assessing Officer
Addition Based on the 'Final Lala' Excel Sheet
An Excel file named 'FINAL LALA' (last modified on 08.01.2022) was found on a Samsung desktop during the search. In his statement recorded under Section 132(4), the assessee explained:
"Sir, the Worksheet has been created by my staff on my direction. Lala means Salalah port and the sheet has details of rate which is charged by us in cash from the customers. In this sheet at column number 2 and 3, no. of cartons and freight at the rate of Rs.1700 per carton has been mentioned. In last columns total amount due is recorded. In last column where "0" or "C" is mentioned, the balance has been cleared by the party."
Relying on this statement, the AO concluded that cash freight charges had been received by the assessee for exports routed through Salalah Port without any corresponding invoices. Applying a freight rate of Rs. 1,700/- per carton on 1,696 cartons exported through that port, the AO made an addition of Rs. 28,83,200/- under Section 69A. An additional amount of Rs. 50,500/- was separately added based on WhatsApp messages found on the assessee's mobile phone, resulting in a total addition of Rs. 29,33,700/-.
The assessee subsequently retracted the statement vide an affidavit dated 23.01.2023, contending that the statement was recorded under pressure and was involuntary, that the Excel file was a rough working note for maximum chargeable rates, that the assessee was an exporter (not a transporter) and actual freight charges had already been offered to tax through export invoices, and that loose papers without corroboration could not constitute cogent evidence.