Corroboration required for search statements and digital chats before income-tax additions or disallowances can stand

A search statement or digital extract, by itself, cannot sustain an income-tax addition or disallowance without corroborative material and reliable verification. The article notes that director's remuneration reflected in the books and offered to tax could not be disallowed merely on the basis of a retracted section 132(4) statement, especially where the payment was not shown to be sham or excessive and operated in a revenue-neutral manner. It also states that alleged unaccounted cash sales and estimated profit drawn from WhatsApp chats could not be added without independent enquiry, authentic electronic evidence, or displacement of the assessee's books and invoices. Both additions were deleted.

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Issues: (i) Whether the disallowance of director's remuneration under section 40A(2)(b) of the Income-tax Act, 1961 was sustainable in the absence of corroborative material beyond the statement recorded during search; (ii) Whether the addition based on alleged unaccounted cash sales and estimated profit from WhatsApp chats was sustainable without independent enquiry and reliable electronic evidence.

Issue (i): Whether the disallowance of director's remuneration under section 40A(2)(b) of the Income-tax Act, 1961 was sustainable in the absence of corroborative material beyond the statement recorded during search.

Analysis: The remuneration paid to the director had been regularly reflected in the books and offered to tax by the recipient. The statement recorded under section 132(4) was later retracted, and the contrary material on record did not establish that the payment was a sham or excessive merely because the director had stated she had limited involvement. The surrounding record, including prior proceedings, showed no revenue loss and the payment operated in a revenue-neutral manner. In such circumstances, the disallowance could not rest only on an uncorroborated statement.

Conclusion: The disallowance under section 40A(2)(b) was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the addition based on alleged unaccounted cash sales and estimated profit from WhatsApp chats was sustainable without independent enquiry and reliable electronic evidence.

Analysis: The addition was founded on a reading of chat extracts, but the chats did not by themselves conclusively establish unrecorded cash sales for the year under appeal. No meaningful independent verification was undertaken from the alleged counter-party, and the assessee's books and invoices were not effectively displaced by positive evidence. The assessment order also proceeded on assumption and estimation of profit without demonstrating a trustworthy chain of custody or adequate authenticity for the digital material relied upon. On these facts, the burden cast on the Revenue was not discharged.

Conclusion: The addition on account of alleged unaccounted cash sales and estimated profit was deleted and the issue was decided in favour of the assessee.

Final Conclusion: Both appeals succeeded, with the impugned additions and disallowances removed in full on the issues actually adjudicated.

Ratio Decidendi: A search statement or digital extract, standing alone and unsupported by corroborative evidence or reliable verification, is insufficient to sustain an addition or disallowance in income-tax proceedings; the Revenue must establish the disputed income with positive material.

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