Tax authority appeal on s.69C construction costs fails; uncorroborated WhatsApp, loose papers not enough evidence

ITAT Agra dismissed the Revenue's appeal and upheld the CIT(A)'s deletion of addition under s. 69C for alleged unexplained expenditure on construction of a plant. The Tribunal held that the loose papers and WhatsApp chats relied upon by the AO were uncorroborated, did not match any party's figures, and could not be validated without valuation. As the assessee had not commenced business and generated no revenue, it could not reasonably be presumed to have incurred the expenditure. Any unexplained investment, if at all, was attributable to other entities, not the assessee.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether addition under section 69C on account of alleged unexplained expenditure for construction of a plant could be sustained solely on the basis of unsigned, undated loose sheets/WhatsApp chats seized during search.

1.2 Whether such loose sheets, whose figures do not reconcile with third-party records (bank and holding company ledgers) and which lack clear linkage to the assessee or to the relevant assessment year, can constitute reliable incriminating material or are to be treated as "dumb documents".

1.3 Whether, in absence of commencement of business and any revenue generation by the assessee during the relevant previous year, unexplained expenditure in the nature alleged can be attributed and taxed in the assessee's hands.

1.4 Whether the assessee's holding company having surrendered a certain amount in its own hands in respect of the same project, and no adverse inference being drawn in that company's assessment, affects the justification for addition in the hands of the assessee.

1.5 Whether the Assessing Officer, in a search assessment, discharged the burden of making addition based on cogent, corroborated material rather than on mere presumptions or rough notings, as per the CBDT's instructions governing search assessments.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Sustainability of addition u/s 69C based on seized loose sheets / WhatsApp chats ("dumb documents")

Legal framework (as discussed)

2.1 The Tribunal considered section 69C (unexplained expenditure) in the context of a search assessment based on seized loose papers and WhatsApp chats. The order also referred to CBDT Instruction F. No. 286/161/2006-IT (Inv. II) dated 22.12.2006, which mandates that search assessments be based on marshalling facts, establishing preponderance of probability through investigation, and not on mere presumptions or "multiplication formula".

2.2 The appellate authority's reasoning, endorsed by the Tribunal, relied on settled judicial principles that unsigned, undated, uncorroborated loose sheets, inconsistent with authenticated records and not clearly relatable to the assessee or the relevant year, are "dumb documents" with no evidentiary value unless supported by cogent corroborative material.

Interpretation and reasoning

2.3 The Assessing Officer treated a loose paper and certain WhatsApp chats as the basis to infer total expenditure of Rs. 129,15,55,494/- up to 31.03.2022 on the Mewat plant, of which Rs. 39,22,83,307/- was stated as through banking channels and the balance Rs. 89,92,72,187/- as alleged unexplained cash expenditure. After giving credit for funds from the holding company (including surrendered amount), the AO added Rs. 43,71,37,934/- u/s 69C.

2.4 The CIT(A), on a detailed examination of the seized material reproduced in the assessment order, found:

(a) One excel sheet was related to an individual (with items such as Vibhav Nagar plot, Delhi Kitchen, etc.) and did not pertain to the assessee's plant at Mewat.

(b) Payment slips relied upon by the AO related to financial year 2022-23 (AY 2023-24), not to the year under consideration (AY 2022-23).

(c) A third excel sheet clearly mentioned the entity name as "HMA Agro" for financial years 2021-22 and 2022-23; entries specifically mentioning the assessee related to AY 2023-24, not to AY 2022-23.

(d) WhatsApp chats referred to (with "Miswa, Bhulu Unnao") were either not clearly linked to the assessee or not related to the relevant year and, therefore, had no evidentiary value.

2.5 The crucial loose paper on which the AO based the cash expenditure inference was held to be:

(a) Undated, unsigned, with no indication of its author or purpose.

(b) Not specifying who allegedly incurred the expenditure.

(c) Not linked by the AO to any corroborative evidence or to the assessee's regular books.

2.6 The assessee produced third-party documentation (Yes Bank term loan statement and holding company ledger). The CIT(A) compared the figures in the loose sheet, AO's inference, and the actual records, and found that none of the critical figures reconciled:

(a) Amount from holding company for March 2022 in loose sheet (Rs. 12,47,19,850/-) vs. actual amount received (Rs. 6,80,00,000/-).

(b) Bank loan disbursement for March 2022 in loose sheet (Rs. 3,62,63,899/-) vs. actual Yes Bank disbursement (Rs. 5,80,48,427/-).

(c) Total investment by holding company up to 31.03.2022 in loose sheet (Rs. 129,15,55,494/-) vs. actual ledger balance (Rs. 44,03,81,860/-).

(d) Total loan amount from Yes Bank up to 31.03.2022 in loose sheet (Rs. 59,73,27,808/-) vs. actual bank outstanding balance (Rs. 61,91,02,337/-).

2.7 On this unreconciled comparison, the CIT(A) held that the loose sheet figures were not authentic or reliable; when none of its figures matched independent third-party records, it could not be treated as evidence of actual transactions. The paper was, at most, a rough jotting/estimate and therefore a classic "dumb document".

2.8 It was further observed that:

(a) The AO did not establish that the notings had materialised into real transactions yielding undisclosed income or real unexplained expenditure.

(b) The AO brought no corroborative material from banks, independent parties or valuation of the plant to support or validate the figures on the loose sheet.

(c) The AO did not even specify which component of alleged investment (building, plant and machinery, other fixed assets) the loose sheet figures related to.

2.9 Applying the CBDT Instruction, the CIT(A) concluded that the AO proceeded on presumption rather than investigation, contrary to the mandate that seized papers be corroborated by independent enquiries and not be used merely with a "multiplication formula".

2.10 The Tribunal noted and accepted the CIT(A)'s factual findings that:

(a) None of the figures in the loose sheet matched the Yes Bank statement or the holding company's ledger.

(b) The loose sheet was unsigned, undated, with unknown authorship and purpose.

(c) The AO failed to correlate the entries either with the assessee's books or with any reliable external evidence.

(d) Even the entity named in significant parts of the seized material was the holding company ("HMA Agro"), not the assessee, and where the assessee's name appeared, the period largely related to the subsequent assessment year.

2.11 On these facts, the Tribunal agreed that the loose sheet and connected material constituted a "dumb document" with no evidentiary value for making an addition, and that the AO's inference of unexplained cash expenditure was unwarranted, speculative, and unsupported.

Conclusions

2.12 The addition under section 69C was based solely on an undated, unsigned loose paper and ancillary material that neither matched third-party authenticated records nor was clearly relatable to the assessee or the relevant year.

2.13 Such loose sheets, being uncorroborated, internally inconsistent and not supported by independent enquiries, were rightly characterised as "dumb documents", incapable of forming a valid basis for addition.

2.14 The Revenue failed to discharge the burden of proof required in search assessments to establish unexplained expenditure by cogent and corroborated material. The deletion of the addition by the appellate authority was therefore upheld.

Issue 3: Absence of business commencement and capacity to incur unexplained expenditure

Legal framework (as discussed)

2.15 The appellate authority, whose reasoning was accepted by the Tribunal, referred to judicial precedents (including the principle from decisions such as CIT v. Bharat Engineering & Construction Co.) that, particularly in an initial or pre-commencement period, unexplained credits or alleged investments are not easily inferable as undisclosed income of the assessee when business operations have not started and no revenue has arisen.

Interpretation and reasoning

2.16 It was an undisputed fact that:

(a) The assessee was only in the process of establishing its plant at Mewat during the year relevant to AY 2022-23.

(b) Commercial production commenced only in December 2022, and an APEDA certificate was issued from 10.02.2023, demonstrating that there was no business activity during the relevant financial year 2021-22.

(c) No business revenue was earned by the assessee during the year under consideration.

2.17 On this factual matrix, the CIT(A) reasoned, and the Tribunal agreed, that:

(a) There was no material to show that the assessee had any source of income during the period which could fund unexplained cash expenditure of the magnitude alleged.

(b) Allegations of large-scale unexplained expenditure presuppose a source which, in the absence of business operations and revenue, was neither established nor even identified by the AO.

(c) In such pre-commencement circumstances, it is not proper to presume that substantial unexplained expenditure was incurred by the assessee out of undisclosed income in its own hands.

2.18 The Tribunal, referring also to analogous reasoning in cases like Khanna Infrabuild Pvt. Ltd. and Burma Electro Corporation (as cited before it), accepted that where business has not commenced and the construction is financed by capital/borrowed funds, treating alleged cash expenditure as unexplained income in the hands of the assessee company is not justified without concrete evidence of such income.

Conclusions

2.19 In the absence of any business activity or revenue during the year, and with the project financed through identifiable bank loans and holding company funds, it was untenable to attribute the alleged cash expenditure to undisclosed income of the assessee.

2.20 The alleged unexplained expenditure under section 69C could not be sustained against an entity whose business had not commenced and for which no source of such alleged undisclosed income was established.

Issue 4: Effect of holding company's surrender and its assessment outcome

Interpretation and reasoning

2.21 The AO's working implicitly treated a part of the project investment as funded by the holding company, including Rs. 41,40,35,700/- surrendered by the holding company, and gave credit for a total of Rs. 85,44,17,560/- (comprising the holding company's ledger balance and surrendered amount), while attributing the balance as unexplained expenditure of the assessee.

2.22 The CIT(A) noted, and the Tribunal accepted, that:

(a) The same AO who framed the assessee's assessment also completed the assessment of the holding company (HMA Agro Industries Ltd.).

(b) Despite the AO's contention that the investment was made by the holding company in cash, no adverse inference or addition on this issue was made in the holding company's assessment for the same assessment year.

2.23 This inconsistency underscored the lack of clarity and evidentiary support as to which entity, if any, had actually incurred the alleged cash expenditure, and militated against fastening such liability on the assessee on a presumptive basis.

Conclusions

2.24 The holding company's own surrender and the absence of any parallel addition in its assessment highlighted that the AO had not consistently or convincingly established that unexplained expenditure belonged to the assessee.

2.25 Given this lack of clarity and the AO's inconsistent approach, the attempt to tax the alleged unexplained expenditure in the assessee's hands was unsustainable.

Issue 5: Compliance with CBDT instructions and evidentiary standards in search assessments

Legal framework (as discussed)

2.26 The CIT(A) relied on CBDT Instruction F. No. 286/161/2006-IT (Inv. II) dated 22.12.2006, particularly para 2.4, which directs Assessing Officers in search cases to:

(a) Marshal facts and place them in chronological sequence.

(b) Focus on establishing preponderance of probability regarding undisclosed income by investigation.

(c) Reach logical conclusions on periods not directly covered by seized evidence through investigation, not mere presumptions or multiplication formula.

(d) Carry out independent enquiries from banks, financial institutions, independent parties, and Government departments.

Interpretation and reasoning

2.27 The CIT(A) found, and the Tribunal concurred, that the AO:

(a) Relied exclusively on a single loose paper and unsubstantiated inferences from chats, without any independent verification with banks (beyond what the assessee itself produced), contractors, or valuation of the plant.

(b) Did not demonstrate the modus operandi or the actual flow of alleged unaccounted cash.

(c) Applied a purely arithmetic difference between a rough total expenditure figure and identifiable bank/holding company funds to infer unexplained cash spending, which amounted to the kind of "presumption or multiplication formula" specifically deprecated by the CBDT.

2.28 On this basis, the appellate findings were that the search assessment was not in conformity with the evidentiary and investigative standards mandated by the CBDT for search cases, and that the addition was made on conjectures, not on properly established facts.

Conclusions

2.29 The AO failed to adhere to CBDT's search assessment guidelines requiring investigation-based conclusions and corroborated evidence. The addition under section 69C, resting on an unverified loose sheet and unsupported inferences, did not meet the requisite standard.

2.30 The Tribunal, therefore, upheld the appellate deletion of the entire addition of Rs. 43,71,37,934/- u/s 69C and dismissed the Revenue's appeal.

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