2025 (9) TMI 791 - AT - Income Tax

Unexplained foreign travel, personal vehicle use and jewellery additions deleted after bank evidence and lack of independent enquiries

ITAT deleted additions made in a search assessment for unexplained foreign travel expenditure, personal use of vehicle and jewellery purchases. The ... Addition u/s 69C - unexplained expenditure on foreign travelling - addition has been made solely on the basis of a photocopy of a scanned agreement to sell dated 08.09.2020, allegedly retrieved from WhatsApp chats, and a slip retrieved from the mobile phone of the assessee’s husband - HELD THAT:- The fact of search and seizure operation conducted on 28.01.2021 is not in dispute. It was further explained that the daughter of the assessee is a permanent resident of Canada and that all her boarding and lodging expenses were borne by her. As submitted that the travel expenses relating to Canada were borne by the husband, Shri Sukhwinder Singh, and in support thereof, a copy of the bank statement from Indian Bank has been placed wherein the payment made to the travel agent (Grand Travelers) amounting is clearly reflected. In the absence of any cogent evidence brought on record by the Revenue to the contrary, and considering the explanation tendered by the assessee, we are of the view that the addition sustained by the CIT(A), merely on estimation basis, particularly in a search case, is not justified. Such an addition, being without supporting material, cannot be sustained in law and is accordingly directed to be deleted. Addition of personal use of vehicle - CIT(A) sustained these additions by restricting the estimation to 20% of the total vehicle expenditure - We are of the view that the additions sustained by the CIT(A) are merely on estimation basis, are not justified. The assessee has already demonstrated sufficient withdrawals to meet household requirements, and in the context of a search assessment, such ad hoc disallowances, without any supporting material, cannot be sustained in law. Accordingly, the additions sustained by the CIT(A) are directed to be deleted. Addition on account of jewellery bill - No enquiry was conducted by the AO from the buyer, and even the statement of the seller was not recorded. As in Harvinder Kaur [2025 (4) TMI 211 - ITAT CHANDIGARH] wherein it was held that no addition can be made solely on the basis of an image or document recovered from a mobile phone, in the absence of any statement recorded during the course of or post search, and without any independent enquiry being conducted to verify the authenticity of such documents. Accordingly, any addition made under such circumstances is required to be deleted. Similarly, reliance is placed on the judgment Umesh Ishrani [2019 (4) TMI 1947 - BOMBAY HIGH COURT] where it was held that no addition can be made without conducting proper enquiry and verification from the seller of the property. In the present case, no enquiry has been conducted by the department, and therefore the addition made by the AO is unsustainable and liable to be deleted. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether additions based solely on a photocopy/image of an agreement recovered from WhatsApp can sustain an assessment addition without independent corroboration or enquiries (including recording statements of buyer/seller or witnesses). 2. Whether estimation-based additions in a search-assessment (including under Section 69C for unexplained expenditure) are sustainable in the absence of incriminating material or other supporting evidence. 3. Whether vehicle running and maintenance expenses may be disallowed on an ad hoc percentage basis in the absence of specific evidence of personal use, and whether insurance, depreciation and interest can be disallowed on the same basis. 4. Whether jewellery purchases found during search can be treated as unexplained investments where family withdrawals and contemporaneous accounting entries explain the source (and whether customs/status may be relevant). 5. Whether failure of the department to follow procedures for digital evidence (including adherence to Digital Evidence Investigation Manual and principles under Section 65B Indian Evidence Act) and to conduct basic verification/inquiries vitiates reliance on digital documents for additions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility and sufficiency of a photocopy/image of an agreement recovered from WhatsApp Legal framework: Evidence must be admissible and corroborated; revenue cannot base additions solely on unverified loose papers or images without independent corroboration or inquiry; principles concerning admissibility of electronic records and requirement of verification from parties to the transaction are engaged. Precedent treatment: The Court followed and applied the line of authorities holding that mere loose papers, photocopies or images retrieved from phones, without corroboration or verification, are not a valid sole basis for additions; earlier Tribunal and High Court decisions cited support the requirement of independent enquiry and corroboration. Interpretation and reasoning: The Tribunal found the agreement to sell dated prior to constitution of the firm, the parties in the scanned document were different from parties in registered deed, the document lacked cheque numbers and clear payment particulars, and no statement of buyer, seller or witnesses were recorded. The absence of independent inquiry (no verification from alleged buyer, no corroborative banking entries directly showing cash receipts, and no witnesses examined) rendered the photocopy untrustworthy. The Tribunal reiterated that reliance on such digital image absent corroboration is legally untenable. Ratio vs. Obiter: Ratio - an uncorroborated photocopy/image of an agreement retrieved from digital devices cannot, by itself, justify an addition; independent enquiries and corroborative evidence are necessary. Obiter - observations on specific documentary defects (missing cheque numbers, ambiguous slip) illustrate the application. Conclusion: Addition based solely on the unverified WhatsApp photocopy was unsustainable and deleted; revenue must obtain corroboration or conduct enquiries before treating digital images as proof of undisclosed receipts. Issue 2 - Estimation-based additions in search assessments (including invocation of Section 69C) Legal framework: In search assessments, while additions may be based on material found, any estimation must be grounded in material or incriminating evidence discovered during search, and principles of reasoned basis for estimation apply; Section 69C requires proof of expenditure and nexus to unexplained sources. Precedent treatment: The Tribunal followed precedents holding that in absence of incriminating material discovered during search, ad hoc estimations are not sustainable; several Tribunal decisions were relied upon to the same effect. Interpretation and reasoning: The Tribunal accepted assessee's bank evidence showing payment to travel agent and the explanation that daughter/husband funded travel and boarding; no evidence was found in search to counter the claimed source. For vehicle expenses, the assessee exhibited capital withdrawals sufficient to meet household requirements. The Tribunal emphasized that mere assumption of personal use or unexplained expenditure without supporting material cannot justify addition under Section 69C or otherwise in a search case. Ratio vs. Obiter: Ratio - estimation-based additions in a search case require supporting incriminating material or corroborative evidence; absent such material, additions under Section 69C or ad hoc estimates must be deleted. Obiter - specific assessment of quantum (e.g., why 20% was not acceptable) illustrates application. Conclusion: Estimation-based additions relating to foreign travel and vehicle expenses (and any Section 69C invocation without proof of actual incurrence by the assessee) were deleted for lack of supporting material. Issue 3 - Disallowance of vehicle expenses: personal use estimation and treatment of insurance/depreciation/interest Legal framework: Disallowances for personal use of vehicles require evidence of personal use; estimations should be reasonable, based on material, and limited to running/maintenance to the extent personal; treatment of insurance, depreciation and interest follows the nature of their relation to business usage and requires specific justification for disallowance. Precedent treatment: Tribunal relied on authorities that additions for personal use cannot be sustained without evidence; principles recognized that where capital withdrawals and accounting indicate availability of funds and no incriminating evidence, ad hoc disallowances are inappropriate. Interpretation and reasoning: The CIT(A) had restricted disallowance to 20% (reduced from AO's 50%) but did so on estimation without cogent supporting material indicating personal use. Assessee demonstrated capital withdrawals sufficient to meet personal needs and separate entries for other private vehicle expenses. Tribunal held that the AO/CIT(A) failed to produce evidence showing actual personal use; consequently, ad hoc disallowances (including of insurance, depreciation, interest) were not justified. Ratio vs. Obiter: Ratio - ad hoc percentage disallowances for personal use are unsustainable absent evidence of personal use; disallowance must be connected to proven personal consumption. Obiter - comment that insurance/depreciation/interest typically should not be disallowed on the same ad hoc basis absent proof. Conclusion: Additions/ disallowances for vehicle expenses for both years, being estimation-based and unsupported, were deleted; the Tribunal rejected disallowance of insurance/depreciation/interest on ad hoc grounds. Issue 4 - Jewellery additions and explanation from withdrawals/status/customs Legal framework: Unexplained investments can be added unless adequately explained by source; family withdrawals, contemporaneous accounting and social customs (e.g., stree-dhan) may legitimately explain jewellery holdings; threshold for additions depends on material sufficiency. Precedent treatment: Tribunal applied established jurisprudence that small or non-substantial jewellery found in search need not be treated as unexplained where withdrawals and customary practices explain acquisition; relied on High Court and Tribunal decisions to this effect. Interpretation and reasoning: The assessee produced capital account entries and evidence of substantial family withdrawals over years (aggregating amounts significantly exceeding jewellery value), and submitted consistent tax filing history and customary context. Jewellery values were below CBDT instruction thresholds. Tribunal found the explanation reliable and contemporaneous and held that additions were not warranted. Ratio vs. Obiter: Ratio - jewellery found during search is not automatically unexplained; demonstrated contemporaneous sources (withdrawals, accounting) and customary considerations can suffice to rebut claim of undisclosed investment. Obiter - the Court's reference to threshold instructions and customs is illustrative. Conclusion: Jewellery additions for both years were deleted as adequately explained by withdrawals, accounting and context. Issue 5 - Procedural compliance for digital evidence and failure to conduct basic verification Legal framework: Reliance on digital evidence requires appropriate procedures, verification and admissibility (including principles akin to Section 65B and established digital-evidence protocols); basic enquiries (statements of relevant parties, corroboration) are necessary to convert digital material into reliable evidence for additions. Precedent treatment: Tribunal relied on decisions that require corroboration of digital records and condemn reliance on unverified images without enquiries; these authorities guided the Tribunal's scrutiny of the department's failure to verify or examine essential parties. Interpretation and reasoning: The department did not record statements from buyer/seller or witnesses, did not verify genuineness of the WhatsApp image, and did not pursue enquiries against the alleged buyer. The Tribunal held that such procedural omissions fatally undermine the probative value of digital material; in a search case especially, lack of corroborative findings in search further weakens the revenue's stance. Ratio vs. Obiter: Ratio - failure to follow basic verification procedures and to obtain corroborative evidence renders reliance on digital images insufficient for additions. Obiter - remarks on Digital Evidence Investigation Manual and Section 65B principles serve as guidance. Conclusion: Procedural non-compliance and absence of independent verification rendered the digital documents inadmissible as sole basis for addition; additions founded on such material were deleted. OVERALL CONCLUSION The Tribunal held that the various additions confirmed by the CIT(A) were primarily based on uncorroborated digital documents or ad hoc estimations without incriminating material or independent verification; applying settled precedent and evidentiary principles, the Tribunal deleted the contested additions (foreign travel, vehicle disallowances, jewellery, and the alleged undisclosed sale consideration) and allowed the appeals.