2025 (9) TMI 776 - AT - Income Tax

Additions based on WhatsApp and seized records deleted; s.69C source proved, 30% expense accepted; rent disallowed under s.37(1)

ITAT MUMBAI (AT) largely upheld the CIT(A): deletions affirmed of additions based on WhatsApp messages and seized records, and deletion of unexplained ... Unaccounted Business receipts - addition based on the Whatsapp messages - HELD THAT:- We notice that the Co-ordinate Bench while considering the issue of addition based on the Whatsapp messages in assessee's own case [2024 (3) TMI 1065 - ITAT MUMBAI] has held that as the land is transferred by MIDC to the respective unit holders through all these brokers for which the assessee has received consultancy fees of ₹ 100,000/- for each unit, the whole of the sale transaction of the land cannot be taxed in the hands of the assessee. Merely because the assessee failed to provide the documentary evidence of payment of cheque by the unit acquired to the MIDC, the whole income cannot be taxed in the hands of the assessee when assessee is not shown to be the owner of such land. In the hands of the assessee, a sum of Rs. 2.81 crores have already been taxed on basis of this document. In view of this we do not find any infirmity in the order of the CIT(A) in deleting the total addition of ₹ 13.09 crores in the hands of the assessee. Unexplained Expenditure u/s 69C - Whatapp messages, excel sheet contained in pen drive seized - CIT(A) deleted addition - HELD THAT:- As decided in own case [2024 (3) TMI 1065 - ITAT MUMBAI] provisions of section 69C of the act applies where in any financial year the assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part there of the explanation offered by him is not in the opinion of the assessing officer satisfactory, then amount covered by such expenditure or part thereof, is the case may be maybe, deemed to be the income of the assessee for such financial year. The proviso also says that when there is an addition u/s 69C of the act such unexplained expenditure, which is deemed the income of the assessee, should not be allowed as a deduction under any head of income. In the present case, assessee has incurred certain expenditure, which is found during search in the seized documents, the seized documents also show the amount of undisclosed income and the amount of expenditure incurred for earning such income. In those circumstances, the disclosure of undisclosed income shows the source of such expenditure. Therefore, naturally net income in the seized document can be assessed as income. If the approach of the ld. AO is accepted then in such case, Income and its application both are taxable as income. This is not correct. In view of this we do not find any infirmity in the order of the learned CIT(A) in deleting the addition. Claim of expenses @ 30% out of unaccounted business receipts - Assessee had offered consultancy receipts at 70% of the gross receipts thereby claiming 30% as expenses for earning the said receipts without making any separate claim for expenses though evidences of expenditure were also found along with the evidences of receipts discovered at the time of search - HELD THAT:-We notice that the AO has made a similar disallowance for AY 2021-22 [2024 (3) TMI 1065 - ITAT MUMBAI] as deleted by the CIT(A) coordinate bench upheld the order of CIT(A) on the ground that the past financial statements as examined by the CIT(A) and the seized materials supports the claim that the expenditure incurred by the assessee is around 30%. For the year under consideration the revenue did not submit any evidence to support that the said percentage cannot be applied for the year under consideration also. Disallowance of rent expenditure u/s 37(1) - AO did not accept the submissions of the assessee and held that no supporting evidence has been provided by assessee that said premises have been used for business purpose except for merely stating that same has been used as a guest house for their business purpose - HELD THAT:- The contention of the ld AR before us justifying the claim is that the premises is used as residence of the director. However even before us no evidence such as the rental agreement etc., have been produced to support the claim. Further, whether the rent free accommodation provided to the director is taxed as perquisite in the hands of the director is also not substantiated. In our view, mere fact that the payments are made by cheque towards rent cannot be the only basis for allowing the deduction u/s 37(1). In the absence of any proper evidence that the expenditure is incurred wholly and exclusively incurred for the purpose of business, we are inclined to uphold the decision of CIT(A) in confirming the disallowance. Receipts and payment out of unaccounted business receipts - during the course of search action, loose sheets were found wherein ledger of cash payments/receipts was maintained and on the top of sheet name was mentioned of Shri Shailesh Patil Kalyan and GNP sub-group was using the services of Shri Shailesh Patil for the receipt and payments of cash - HELD THAT:- Revenue has not submitted any evidence to substantiate the claim the amounts mentioned in the message belongs to the assessee. We further notice that the CIT(A) while giving relief to the assessee has given a categorical finding in this regard - Therefore we see no reason to interfere with the order of the CIT(A). CIT(A) has confirmed the addition based on the statement of Mr. Sailesh Patil who has stated that the amounts belonged to GNP group - Since the assessee cannot be asked to prove a negative fact, the revenue in our view should have made the addition based on some evidence and not based merely on the statement of Mr. Sailesh Patil. Therefore in our considered view, the ratio laid down by the coordinate bench in AY 2021-22 that the addition based on mere statement without any evidence is not sustainable, is applicable to the impugned additions also. Therefore we hold that the CIT(A) is not correct in confirming the addition to the tune of Rs. 33,20,000/- based on the statement alone without bringing any evidence to support the said claim. Accordingly we direct the AO to delete the addition made in this regard. Ground No.1 of the assessee is allowed. Addition made towards unexplained expenditure under section 69C deleted. Additions pertaining to on money collection - During the search, an image was found from the Samsung Mobile Phone of Director of the Assessee which contained an excel sheet - Revenue has not brought anything on record to substantiate the claim that the addition made in assessee's case is different from what is offered to tax in the hands of M/s.Roshini Enterprises. Therefore in our considered view, the ratio laid down by the coordinate bench is applicable to the impugned addition since there is nothing on record to show that the amount added is not the same income already offered to tax. ISSUES PRESENTED AND CONSIDERED 1. Whether additions of alleged unaccounted business receipts based on seized WhatsApp images/excel sheets can be sustained against the assessee where the seized material originates from or is explained by third parties and the assessee has offered part of the receipts as income. 2. Whether unexplained expenditure additions under section 69C can be made where the assessing officer has accepted gross receipts from seized material as business receipts under section 28 and the assessee has offered net income (by allowing a notional deduction) or otherwise explained that the expenses are applications of those undisclosed receipts. 3. Whether an ad hoc deduction of 30% as expenses from unaccounted gross receipts offered during search can be allowed in the absence of contemporaneous vouchers, particulars (names, PANs) and direct documentary proof of each expense. 4. Whether rent claimed as business expenditure under section 37(1) is allowable when the payer produces no rental agreement or evidentiary proof that the premises were used wholly and exclusively for business (versus personal) purposes. 5. Whether additions can be sustained in the assessee's hands based solely on statements or ownership assertions by a third party (e.g. angadia/agent) when that third party's documents are said to belong to him and there is no independent evidence linking the entries exclusively to the assessee, and whether an assessee may be protected from double taxation where the same receipts have been offered in another group entity. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Additions based on seized WhatsApp images/excel sheets (receipts) Legal framework: Seized material during search can be used to determine undisclosed income; income chargeable under section 28 if business receipts are established. The assessing officer must connect seized entries to the assessee as source of income. Precedent treatment: Tribunal relied on coordinate-bench findings in earlier assessment year that where seized documents originate from or are explained by a broker/third party and the assessee is not shown to be owner of the underlying asset/transaction, entire sale consideration cannot be taxed in assessee's hands; only consultancy/service fee (if admitted) may be taxable. Interpretation and reasoning: The Court examined content and provenance of WhatsApp images (excel sheets) and accepted that many entries related to transactions between buyers and a statutory authority (MIDC) and were forwarded by brokers/third parties. Where land belonged to third-party authority and payments were to that authority, the sale consideration could not be taxed as assessee's income merely because the document recorded amounts. The assessee had offered a lump-sum consultancy fee (Rs.1 lakh/unit) for units where occupation certificate/possession was obtained; AO's approach of treating the entire sale price as assessee income was rejected as unsupported. Ratio vs. Obiter: Ratio - additions based on seized screenshots are unsustainable where material originates from third parties, the assessee is not owner, and the assessee has plausibly explained limited consultancy receipts already offered; Obiter - comments on irrelevance of rates mentioned in seized sheet when land does not belong to assessee. Conclusions: Deletion of gross-sale-based additions upheld; only the consultancy fee offered by assessee (already disclosed/assessed) represented assessable income in assessee's hands. Revenue grounds on this issue dismissed. Issue 2 - Additions under section 69C (unexplained expenditure) where receipts accepted Legal framework: Section 69C treats unexplained expenditure as deemed income if the assessee fails to satisfactorily explain the source. The proviso bars allowance of such unexplained expenditure as deduction when added as income. However, when seized documents disclose both receipts and application (expenditure), the correct approach is to assess net income by correlating source and application. Precedent treatment: Tribunal followed coordinate-bench and High Court authority (Golani Bros and other cases) holding that where receipts in seized documents are treated as business income, the corresponding expenditures disclosed in the same documents should be allowed to reduce taxable net income rather than result in separate additions which would tax both income and its application. Interpretation and reasoning: The Tribunal found that AO had added gross receipts and then separately added purported expenditures from the same seized documents, which would amount to double taxation of both income and its application. The assessee had offered net income by applying an ad hoc deduction (30%) during statement under section 132(4) and furnished seized-material details correlating receipts and expenditures. Given that seized documents showed receipts and attendant expenditures and the assessee's disclosure provided the source, the Tribunal accepted the CIT(A)'s approach of estimating net income and deleting separate section 69C additions. Ratio vs. Obiter: Ratio - where source of expenditure is established by disclosure of receipts from seized documents, separate additions under section 69C are not warranted; net income should be assessed. Obiter - clarification that section 69C's proviso does not mandate AO to disallow a deduction where the source of expenditure is accepted as undisclosed receipts. Conclusions: Deletion of section 69C additions sustained; revenue grounds on unexplained expenditure dismissed. Issue 3 - Allowance of ad hoc 30% expenses out of unaccounted receipts Legal framework: Deduction of expenditure requires proof that amounts are incurred wholly and exclusively for business; however, where seized evidence and past audited statements establish a reasonable pattern, the Tribunal may accept an estimated deduction. Precedent treatment: Coordinate-bench decision for prior year accepted 30% ad hoc deduction based on historical net profit margins and seized-material analysis; Tribunal followed that approach. Interpretation and reasoning: CIT(A) examined audited past financials showing average net profits and seized documents showing that unaccounted receipts and unaccounted expenditures approximated 30%; thus the 30% estimate was not arbitrary but supported by seized material and historical ratios. AO produced no contrary material for the year under consideration to rebut this factual basis. Tribunal accepted that a reasonable estimate can be made when direct vouchers/names/PANs are unavailable but corroborative data exist. Ratio vs. Obiter: Ratio - reasonable ad hoc deduction can be allowed where corroborated by historical financials and seized-material nexus; Obiter - absence of vouchers alone does not preclude an estimation if other credible evidence exists. Conclusions: Allowance of 30% deduction upheld; revenue challenge dismissed. Issue 4 - Disallowance of rent under section 37(1) Legal framework: Expenditure allowable under section 37(1) must be incurred wholly and exclusively for business; evidentiary proof (rental agreement, substantiation of business use) is material to establish nexus. Interpretation and reasoning: The assessee failed to produce rental agreement or documentary evidence showing that the premises were used wholly and exclusively for business purposes (claimed guest-house use), and did not clarify whether rent-free accommodation/perquisite tax implications for the director were addressed. Payment by cheque recorded in books was insufficient alone to establish business purpose. In absence of proof, disallowance was sustained. Ratio vs. Obiter: Ratio - rent payments without supporting documentary evidence and without showing exclusive business use are not allowable under section 37(1); Obiter - mere recording in books or cheque payment is insufficient. Conclusions: Disallowance of rent expense affirmed; assessee's ground dismissed. Issue 5 - Additions based on third-party loose papers / angadia documents and protection against double taxation Legal framework: To tax amounts in an assessee's hands, AO must establish that seized entries belong to and represent income/applications of that assessee. Article 265 principle (no tax except by law) and elementary fairness preclude taxing the same income twice in different hands absent evidence that entries are distinct. Precedent treatment: Coordinate-bench found that where third party (angadia) produced documents and owned them up in a recorded statement under section 131, and both the third party and assessee stated certain entries did not belong to the assessee, additions in assessee's hands could not be sustained. Tribunal followed and expanded that where the same income is already offered by a group entity, taxing it again in another entity would be double taxation and impermissible unless revenue demonstrates distinctness. Interpretation and reasoning: The Tribunal examined summons/section 131 statement of the third party who accepted ownership of the documents and stated transactions related to various parties including but not limited to the assessee. The assessing officer produced no cogent evidence to contradict third-party ownership or to show the entries exclusively pertained to the assessee. Where the documents and third-party statements indicated that many entries belonged to third parties and where the same receipts were already offered by a sister concern, the CIT(A) rightly deleted additions. Conversely, where the CIT(A) confirmed a small addition based solely on a vague third-party statement without additional evidence, the Tribunal found that confirmation unsustainable and directed deletion as well. Ratio vs. Obiter: Ratio - entries in third-party documents should not be attributed to the assessee merely on presumption; additions based solely on third-party statements without corroboration are unsustainable; duplicate taxation of the same receipt across entities is not permissible. Obiter - assessment officers must confront contradictions and produce evidence when relying on third-party statements. Conclusions: Additions premised on third-party loose papers were deleted where ownership/explanation by third party was accepted and no independent evidence linked entries to the assessee; an addition confirmed solely on a vague third-party assertion was set aside and directed to be deleted. Revenue grounds on these points dismissed; corresponding assessee ground allowed in part.