2025 (11) TMI 155 - AT - Income Tax

Additions under Section 40A(2)(b) set aside as payee declared director remuneration and tax paid made transaction revenue-neutral; chat logs inadmissible

ITAT held the additions under section 40A(2)(b) unsustainable because the payee had included the director's remuneration in her return and overall tax ... Addition u/s 40A(2)(b) - Excessive director's remuneration - burden of proof - documents in electronic form recovered from mobile phones - taxation in the hands of the payee and assessee - HELD THAT:- Once payee/Smt. Priti Singla has included the director’s remuneration in her return of income for year under consideration and it is evident from comparative chart placed in situation when remuneration is paid to her, tax burden is higher in comparison to tax saving in the hands of appellant company by making deduction of director’s remuneration, then the allegation of department of making fictitious payments to reduce liability looses ground. Infact there is no loss to revenue, on the contrary there is higher tax collection. Making it a revenue neutral situation. Thus relevant ground to this issue in both the AY stand sustained. During search, some Whatsapp chats were found and the information exchanged between Kashif and Vikas Singla - Instructions and directions of Board in the Manual do have strong persuasive value on the authorities to show that digital evidence is duly collected and relied in assessment order. Same is not the case here as nothing comes up from the assessment order in that regard. Hon’ble Supreme Court decision in Suresh Kumar and Co. Impex Pvt. Ltd. &Ors. [2025 (9) TMI 76 - SUPREME COURT] very recently, has dealt with the case of relevancy and admissibility of electronic evidences in the proceedings under the Customs Act, 1962 wherein the provisions of section 138C of the Customs Act, 1962 regarding admissibility of electronic evidences has been accepted subject to availability of certificate to be obtained in accordance with the sub-section (4) of section 138C of this Act of 1962. The Hon’ble Supreme Court observed that section 65B(4) of Indian Evidence Act is parimateria to section 138C(4) of the Act of 1962 and, further relied the decision of Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal and Others [2020 (7) TMI 740 - SUPREME COURT (LB)] and observed that in the said decision the Hon’ble Supreme Court, while explaining the mandatory nature of section 65B(4) of the Indian Evidence Act applied following two Latin maxims :- (i) impotentiaexcusatlegem; (ii) lex non cogitadimpossibilia, and thereafter held that these two maxims are the foundation with regard to admissibility of electronic evidences and though section 65B(4) of the Evidence Act is mandatory, yet, it would all depend on the facts of each case, how the same could be said to have been duly complied with. Accordingly, in the said case of Suresh Kumar (supra), considered the ‘substantial compliance’ of section 138C(4) to be sufficient and, therefore, we can firmly conclude that if, in the case of the Income-tax Act, 1961, there are no specific provisions with regard to admissibility of electronic evidences, then, the Manual issued by the Board would substantially hold the ground and the tax authorities are suppose to ensure that there is at least substantial compliance of the Manual to make the electronic evidence relevant and admissible under the law and thus pass judicial scrutiny in appellate jurisdictions. Therefore, conclusion being based on mere whatsapp chats which do not have self contained information of transaction but need interpolation could not be basis for making such sort of additions of profit earned. We are inclined to allow ground no.5 raised by the assessee in AY 2021-22. Assessee both the appeals are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a disallowance under section 40A(2)(b) can be sustained where director's remuneration has been admitted and taxed in the hands of the payee and where the director's statement recorded under section 132(4) was retracted and other corroborative incriminating material was absent. 2. Whether a statement recorded under section 132(4) of the Act, without corroborative material discovered during search, can constitute a standalone basis for additions or disallowances in assessment proceedings. 3. Whether an addition of assumed unaccounted cash sales (normal profit @10%) can be made on the basis of extracted WhatsApp chats and without further independent enquiries (for example under sections 131 or 133(6)), adequate confrontation, or proper digital-evidence handling and certification under section 65B of the Evidence Act. 4. Whether digital/electronic evidence (WhatsApp chats) relied upon to make additions is admissible and sufficiently authenticated in absence of compliance with recognised procedures (Digital Evidence Investigation Manual and/or certificates under section 65B), and whether substantial compliance is required. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of disallowance under section 40A(2)(b) where director's remuneration is taxed in the payee's hands and statement under section 132(4) was retracted Legal framework: Section 40A(2)(b) allows disallowance of payment to related persons if the payment is not for adequate consideration or is prima facie bogus; principles against double taxation and requirement that revenue not be put to .loss where income has been taxed in recipient's hands inform assessment fairness. Precedent treatment: The Court relied on authorities (including High Court decisions cited in submissions) establishing that statements recorded under section 132(4) cannot per se sustain additions absent corroboration; principles that suspicion/conjecture cannot replace proof were invoked. Interpretation and reasoning: The Tribunal examined contemporaneous material: (a) the director had included the remuneration in her return and was assessed (tax paid) at a higher marginal rate than the tax saving to the company; (b) proceedings under section 148A had been initiated earlier and later dropped with prior approval, reflecting prior quasi-judicial consideration; (c) the director retracted the section 132(4) statement and filed an affidavit asserting qualifications, involvement and documentary evidence (emails, etc.) supporting office activity. The Tribunal held that in a case of 'oath against oath' retraction requires cogent corroborative material to prefer the recorded admission; absent corroboration, the section 132(4) statement loses probative force. Ratio vs. Obiter: Ratio - disallowance under section 40A(2)(b) cannot be sustained where the payee has reported and paid tax on the remuneration and where the assessment relies predominantly on an uncorroborated section 132(4) statement that has been retracted. Obiter - observations on revenue neutrality and consistency of prior proceedings as persuasive, not determinative, factors. Conclusion: The disallowance under section 40A(2)(b) was unsustainable and thus deleted for the assessment years considered. Issue 2: Admissibility and evidentiary sufficiency of statements recorded under section 132(4) Legal framework: Section 132(4) statements have evidentiary value but must be corroborated by material found during search or other independent evidence before they can underpin additions; principles from section 158BB(1) and Explanation to section 132(4) apply. Precedent treatment: The Tribunal followed and applied precedents holding that admissions recorded during searches cannot by themselves justify block or other additions absent corroborative material (citing Harjeev Aggarwal reasoning and Delhi High Court decisions such as PavitraRealcon and Moon Beverages decisions relied upon by parties). Interpretation and reasoning: The Tribunal emphasized that where no incriminating material was found during search and the statement was retracted or is vague, addition cannot rest solely on such statement. The Tribunal treated the cited High Court and appellate decisions as directly applicable and followed them rather than distinguishing them. Ratio vs. Obiter: Ratio - a section 132(4) statement, standing alone and uncorroborated by material discovered during search, cannot form the sole basis for additions; corroborative evidence is required. Obiter - commentary on the evidentiary weight of statements recorded 'at odd hours' and necessity of cross-checks. Conclusion: Section 132(4) statement did not furnish adequate corroboration to sustain the impugned disallowance; reliance thereon was impermissible. Issue 3: Validity of addition of assumed unaccounted cash sales based on WhatsApp chats without independent enquiries Legal framework: Additions based on unrecorded transactions require positive evidence; burden of proof lies on revenue to establish existence of unaccounted sales. Revenue should make independent enquiries (e.g., summon counterparties under section 133(6) or 131) and link digital evidence to physical/book records before estimating undisclosed income. Precedent treatment: Tribunal relied on authorities requiring positive evidence and on cases emphasizing necessity of enquiries from alleged counterparties; the submissions cited Supreme Court and High Court decisions underscoring burden of proof principles and the inadmissibility of mere conjecture. Interpretation and reasoning: The WhatsApp chat excerpts did not constitute a self-contained, crystal-clear admission of cash sales for the year under consideration; one chat referred to transfers/NEFT, others showed denial by company representative. The AO did not perform independent enquiries of the counterparty, did not demonstrate chain of custody or forensic extraction steps, and estimated profit @10% on a speculative basis. The Tribunal also stressed that where books and invoices were produced and not falsified by the department, adverse estimation cannot rest on surmise. Ratio vs. Obiter: Ratio - additions on assumed unaccounted cash sales cannot be sustained where (i) the digital chat is ambiguous; (ii) the department has not discharged its burden of proving unrecorded transactions through independent enquiries or corroborative evidence; and (iii) the assessment does not reflect proper forensic handling or confrontation. Obiter - remarks on the relevance of Digital Evidence Investigation Manual guidance as persuasive. Conclusion: The addition of Rs. 5,00,000 as assumed profit from unaccounted cash sales was unsustainable and deleted for the assessment year in question. Issue 4: Admissibility and authentication of electronic evidence (WhatsApp chats) and requirement of section 65B certificate or substantial compliance with digital-evidence procedures Legal framework: Admissibility of electronic records is governed by the Evidence Act (section 65B) and relevant case law (Anvar, Arjun Panditrao Khotkar), requiring authentication/certification; administrative guidance (Digital Evidence Investigation Manual, 2014) prescribes chain of custody and forensic reporting steps for tax authorities. Precedent treatment: The Tribunal recognized the mandatory character of section 65B certification in principle but noted recent jurisprudence permitting consideration of 'substantial compliance' in appropriate factual contexts; it treated the Board's Manual as possessing persuasive value that authorities should substantially follow when relying on digital evidence. Interpretation and reasoning: The AO's assessment did not set out chain of custody, forensic extraction details, hash values or confrontation steps required by the Manual; absence of such reporting undermined the authenticity and reliability of the WhatsApp evidence. Given ambiguity in the chats and lack of procedural compliance, the Tribunal found the electronic material insufficient to sustain the addition. Ratio vs. Obiter: Ratio - electronic evidence must be accompanied by adequate authentication steps and, in the income-tax context, substantial compliance with forensic and evidentiary procedures (including where applicable certification under section 65B) is required before such evidence can found additions. Obiter - discussion on comparative provisions in other statutes and on proportional application of section 65B principles. Conclusion: Electronic evidence as produced was not sufficiently authenticated; reliance thereon was not permissible to make additions in the absence of substantial compliance with prescribed digital-evidence procedures. Overall Conclusion The Tribunal allowed the appeals on the grounds considered: the disallowance under section 40A(2)(b) and the addition for assumed unaccounted cash sales were deleted because they rested on uncorroborated section 132(4) statements and inadequately authenticated digital evidence, and because the revenue failed to discharge the burden of proof by independent enquiries or proper forensic authentication.