Case Law Analysis

Section 56 Income Tax Act | Notional Interest Entries in Seized Diaries Not Taxable as Real Income : ITAT Ahmedabad

ITAT Ahmedabad clarifies that notional interest entries found in seized diaries do not constitute taxable income under Section 56 of the Income Tax Act, preventing double taxation. The ruling reinforces that only real accrual of income, not hypothetical accounting entries, can be taxed, offering relief to assessees facing arbitrary additions based on seized documents.

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May 1, 2026, 6:16 PM(Updated: Nov 3, 2026)
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Section 56 Income Tax Act | Notional Interest Entries in Seized Diaries Not Taxable as Real Income : ITAT Ahmedabad

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, delivered a landmark ruling clarifying that notional interest entries recorded in seized diaries do not constitute real income under Section 56 of the Income Tax Act, 1961. The judgment underscores that income tax cannot be levied on hypothetical income, particularly when no actual receipt or accrual has occurred. This decision has significant implications for cases involving seized documents, accounting methods, and the prevention of double taxation.

Background & Facts

The Dispute

The appeals stem from a search and seizure operation conducted under Section 132 of the Income Tax Act on 23.11.2021 in the case of the Ratnamani Group and its key associates, including Shri Prakash M. Sanghvi (PMS). During the search, incriminating documents - primarily diaries containing handwritten notings of cash transactions - were seized from PMS’s premises. These diaries recorded ledger accounts of various individuals and entities, including the appellants in these appeals.

The Assessing Officer (AO) relied on these seized diaries to make additions under Section 56 (income from other sources) and Section 69/69C (unexplained investments/expenditures) for multiple assessment years (2012-13 to 2021-22). The AO treated notional interest entries in the diaries as accrued income, following the mercantile system of accounting, despite the assessees contending that they followed the cash system of accounting and that the entries were merely journal entries without actual receipts.

Key Facts

  • Search Date: 23.11.2021 (Ratnamani Group and associates).

  • Seized Documents: Diaries (Annexures A-1 to A-14) containing ledger accounts with notional interest entries.

  • Statement of PMS: Admitted that the diaries contained cash transactions not recorded in regular books of accounts.

  • Assessees Involved:

    • Babulal Mishrimal Sanghavi (BMS) - Additions of Rs. 6.61 crores to Rs. 7.55 crores under Section 56 for notional interest.
    • Dimple Manoj Sanghvi (DMS) - Additions of Rs. 7.10 lakhs to Rs. 27 lakhs under Section 69C for unexplained expenditures.
    • Mahendra Sanghvi (Legal Heir of Chunilal Mishrimal Sanghvi, CMS) - Additions of Rs. 1 lakh to Rs. 6.6 lakhs under Sections 56 and 69.
    • Ratnamani Techno Casts Pvt. Ltd. - Additions of Rs. 2.05 crores (income) and Rs. 3.84 crores (expenditure) under Sections 69 and 69C.
    • Tulsi Corp - Additions of Rs. 25.7 crores (investment), Rs. 3.9 lakhs (receipts), and Rs. 6.91 lakhs (rental mismatch).

  • Common Issue: All additions were based on notional entries in the seized diaries, with the AO presuming that these entries represented real income or unexplained transactions.

Procedural History

  • Notices u/s 148: Issued on 02.02.2023 to reopen assessments for the relevant years.
  • Assessment Orders: Passed under Section 143(3) read with Section 147, making additions based on the seized diaries.
  • First Appeals: Filed before the Commissioner of Income Tax (Appeals)-11, Ahmedabad (CIT(A))

Case Details

Babulal Mishrimal Sanghavi & Ors. v. DCIT, Central Circle-1(1)

Judgment
Court
Income Tax Appellate Tribunal, Ahmedabad "A" Bench
Date
29 April 2026
Case Number
ITA Nos. 1202 to 1307, 1224, 1225, 1265, 1266, 1346, 1376 to 1381/Ahd/2024
Bench
Dr. BRR Kumar, Vice President, Shri T. R. Senthil Kumar, Judicial Member
Counsel
Pet: Shri Vijay Mehta, A.R.
Res: Shri Alpesh Parmar, CIT-DR

Frequently Asked Questions

Section 56 of the Income Tax Act, 1961, deals with income from other sources. It taxes income that does not fall under specific heads like salary, house property, or business. However, the ITAT clarified in this case that notional interest entries, without actual receipt or accrual, cannot be taxed under this section.
No. The ITAT relied on the Supreme Court’s judgment in CIT v. Shoorji Vallabhdas & Co., which held that income tax cannot be levied on hypothetical income. Notional entries, without actual receipt or accrual, do not constitute real income and thus cannot be taxed.
- Cash System: Only actual receipts are recorded as income. Expenses are recorded when paid. - Mercantile System: Accrued income (due but not received) and accrued expenses (due but not paid) are recorded. The ITAT held that the assessee has the choice to adopt either system, and the AO cannot impose the mercantile system arbitrarily.
The Supreme Court in Excel Industries Ltd. laid down the following tests: 1. Whether the income accrued is real or hypothetical. 2. Whether there is a corresponding liability of the other party to pay the amount. 3. The probability of realization from a realistic and practical point of view. The ITAT applied these tests and held that notional interest entries failed all three criteria.
No. The ITAT held that double taxation of the same income in multiple hands is impermissible. If the same ledger entries are taxed in one assessee’s hands (e.g., PMS), parallel additions in others’ cases cannot be sustained.
#Cash vs Mercantile Accounting#Section 56#Notional Interest Income#Income Tax Act Section 56#Accounting Methods#Income Tax#Notional Income#[Banking & Finance Law]#double taxation#Seized Documents Evidence#ITAT Ahmedabad judgment
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Disclaimer

This article is for informational purposes only and does not constitute legal advice. The views expressed are based on the judgment analysis and should not be taken as professional counsel. Please consult with a qualified attorney for advice specific to your situation.

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