Additions u/ss 69A and 68 deleted where seized papers, WhatsApp chats, loans lacked corroborated unexplained income

ITAT Kolkata allowed the assessee's appeal in substantial part and dismissed Revenue's challenge. It held that amounts reflected in seized document BSIPL/01 represented investments by third parties and not undisclosed sales; consequently, addition u/s 69A and gross profit estimation by CIT(A) were deleted. ITAT further ruled that WhatsApp chats of a director, without corroborative evidence linking transactions to the assessee, could not justify addition u/s 69A. On alleged bogus purchases, ITAT upheld CIT(A)'s deletion, noting purchases and sales were accommodation entries merely inflating turnover without extra profit. Additions u/s 68 towards unsecured loans were also deleted, as identity, genuineness and repayment were duly established.

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1. ISSUES PRESENTED AND CONSIDERED

1.1. Condonation of delay: Whether delay of four days in filing one Revenue appeal should be condoned on the basis of administrative reasons for obtaining approval.

1.2. Section 69A - seized paper showing "investments" (BSIPL/01): Whether figures noted in seized document BSIPL/01, described therein as "investments"/cash advanced through intermediaries, could be treated as unexplained money or undisclosed sales of the assessee and estimated profits added.

1.3. WhatsApp chats - evidentiary value and applicability of sections 69A and 292C: (i) Whether WhatsApp chats retrieved from mobile phones of directors/employees, allegedly evidencing cash transactions, by themselves justify addition as unexplained money under section 69A, or estimation of profit thereon; (ii) in whose hands presumption under section 292C can be drawn regarding such electronic material.

1.4. Bogus purchases and circular trading - estimation of profit: Where both purchases and corresponding sales are accepted as part of circular/bogus trading routed through entry operators solely to inflate turnover, and profit thereon is already offered to tax, whether any further disallowance/estimation (e.g. a fixed percentage of alleged bogus purchases) is warranted.

1.5. Section 68 - unsecured loans later repaid: Where unsecured loans were received through banking channels, supported by confirmations and financials, and subsequently repaid through banking channels (even prior to search), whether section 68 can be invoked to treat the loan amounts as unexplained cash credits, and whether related interest can be disallowed.

1.6. Internal cash transfers / "Suraj Transfer" ledger - AY 2023-24: Whether internal movements of cash between branch/chest accounts, recorded in books and reflected in the "Suraj Transfer" ledger, can be treated as unexplained money or be subjected to gross profit estimation.

1.7. Low tax-effect appeals by Revenue: Whether Revenue appeals with tax effect below the monetary limit prescribed in CBDT Instruction No. 9 of 2024 are maintainable when no exception to the Instruction applies.

2. ISSUE-WISE DETAILED ANALYSIS

2.1. Condonation of delay in filing Revenue appeal

Interpretation and reasoning

2.1.1. The Tribunal noted a four-day delay in filing one Revenue appeal. The delay was explained as arising from the time taken to obtain administrative approval from competent authorities. The assessee did not oppose condonation.

2.1.2. Considering the short duration of delay, the administrative reasons furnished, and the absence of opposition from the assessee, the Tribunal exercised its discretion to condone the delay.

Conclusions

2.1.3. Delay of four days in filing the Revenue appeal was condoned and the appeal was admitted for hearing.

2.2. Seized document BSIPL/01 - characterization of amounts as unexplained money or undisclosed sales (section 69A)

Legal framework as discussed

2.2.1. The Assessing Officer treated cash entries aggregating Rs. 2,87,50,000/-, recorded in seized material BSIPL/01 in the names of two individuals, as unexplained money under section 69A, on the footing that such cash receipts were not recorded in the assessee's books.

2.2.2. The first appellate authority re-characterized the same figures as unaccounted/suppressed business sales and applied the assessee's gross profit rate (7.84%) to estimate income embedded therein, partly sustaining the addition.

2.2.3. The Tribunal referred to judicial principles that (i) seized documents must be read as a whole and cannot be selectively interpreted or used to make further estimates without independent material, and (ii) cash loans/investments, in the absence of evidence to the contrary, cannot be straightforwardly treated as income.

Interpretation and reasoning

2.2.4. On examination of seized document BSIPL/01, the Tribunal found that the aggregate of the entries was explicitly described as "investments" made through intermediaries. There was no reference in the document to sales, turnover, or any income component of the assessee.

2.2.5. The Tribunal held that when a seized document itself identifies the nature of amounts as "investments", the revenue authorities cannot re-characterize the same as undisclosed sales or unexplained income without corroborative evidence. The document must be accepted as a whole; it is impermissible to pick and choose entries or to draw further estimates absent supporting material.

2.2.6. The Tribunal relied on precedent holding that (i) seized material should not be partially applied ignoring its clear tenor, and (ii) cash loans cannot be treated as income merely because they are recorded in seized papers.

Conclusions

2.2.7. The amounts of Rs. 83,00,000/- and Rs. 2,04,50,000/- reflected in seized document BSIPL/01 were held to be in the nature of investments/loans advanced through intermediaries, not assessee's undisclosed sales or unexplained money.

2.2.8. Section 69A was held inapplicable to these entries in the absence of evidence that the assessee owned unexplained cash or that these represented its unrecorded sales.

2.2.9. The approach of the first appellate authority in treating the figures as suppressed turnover and applying gross profit rate was rejected as being without evidentiary foundation.

2.2.10. The entire addition of Rs. 2,87,50,000/-, including the part sustained by the first appellate authority, was directed to be deleted.

2.3. WhatsApp chats - evidentiary status; section 69A; section 292C; profit estimation

Legal framework as discussed

2.3.1. The Assessing Officer relied on WhatsApp chats extracted from mobile phones of directors/employees, showing notional "cash" figures, to make additions under section 69A for various years on the footing that such chats evidenced unaccounted cash receipts.

2.3.2. In some years, the first appellate authority treated the aggregate chat figures as unaccounted turnover/suppressed transactions and applied a gross profit rate to estimate income.

2.3.3. The assessee invoked section 292C, submitting that any presumption regarding contents of a document or electronic record arises in the hands of the person from whose possession or control such material is found, and that even such presumption is rebuttable. Reliance was placed on judicial authority recognizing that mere loose papers or documents, unsupported by corroborative evidence and duly rebutted, cannot by themselves justify additions.

Interpretation and reasoning

2.3.4. The Tribunal noted that the only material relied upon by the Assessing Officer was the text of WhatsApp chats between a director and employees; no supporting evidence such as cash books, bank transactions, confirmations, or other seized documents substantiating actual cash movement was brought on record.

2.3.5. The Tribunal recorded that the chats did not even specify clearly whether the amounts mentioned were receipts or payments, or whether they related to the assessee or to personal/other entities' transactions.

2.3.6. It was held that section 69A contemplates ownership of unexplained money, bullion, jewellery or other valuable article; mere references in chats, without any seized cash or corroborative primary evidence, do not establish that the assessee possessed, received, or retained unexplained money.

2.3.7. As regards section 292C, the Tribunal accepted the assessee's contention that any statutory presumption concerning documents/electronic records arises in the case of the person from whose possession/control the material was found and, in any event, remains rebuttable. Given that the chats were on the device of a director of a group concern and there was no independent material linking the specific transactions to the assessee-company, no adverse presumption could be safely drawn against the assessee.

2.3.8. The Tribunal further held that once the basic premise for invoking section 69A failed (i.e. non-establishment of actual unexplained money in the hands of the assessee), the first appellate authority could not convert the same chat figures into alleged turnover and estimate profits by applying gross profit rate. There was no foundational fact of business receipts relatable to the assessee.

Conclusions

2.3.9. WhatsApp chats, standing alone and lacking corroboration, were held insufficient to justify additions under section 69A or to estimate business income by application of gross profit rate.

2.3.10. Presumption under section 292C regarding seized documents/electronic records was held to arise, if at all, in the hands of the person from whose custody the material is found, and is rebuttable upon explanation; no such presumption could be extended automatically to group entities without evidence.

2.3.11. All additions made or sustained on the basis of WhatsApp chats, whether as unexplained money under section 69A or as estimated profit on alleged suppressed turnover, were directed to be deleted in the assessee's appeals; corresponding Revenue grounds challenging reduction of such additions were dismissed.

2.4. Bogus purchases and circular trading - disallowance of purchases vs. profit already offered

Legal framework as discussed

2.4.1. The Assessing Officer, relying on search findings, investigation-wing reports and Insight portal information, treated large purchases from certain entities as bogus/accommodation entries. He proceeded to estimate income by disallowing 4% (or similar rates) of such purchases, following certain Tribunal decisions where only the profit element of non-genuine purchases was brought to tax.

2.4.2. The first appellate authority analysed those precedents and distinguished them, noting that in the cited decisions the sales were genuine, purchases were from the grey market, and the estimations were meant to bring to tax the extra profit saved by buying off-record at lower prices.

2.4.3. In the present matters, the entry operators, in sworn statements during search, admitted to engaging in circular trading, providing both purchase and sale entries via shell companies and LC/bank instruments merely to inflate gross turnover of beneficiaries, without real movement of goods.

2.4.4. The first appellate authority applied High Court and Tribunal decisions to hold that where both purchases and sales are fictitious and already reflected in the regular books, and the profit on such recorded turnover has been offered to tax, further disallowance of a percentage of purchases would amount to taxing notional income twice.

Interpretation and reasoning

2.4.5. The Tribunal noted, as a matter of fact, that both authorities below accepted that: (i) purchases and corresponding sales were routed through the same commission agents/entry operators; (ii) such transactions were circular entries used to inflate turnover; and (iii) the alleged purchases did not go into the manufacturing process and did not generate additional real profit for the assessee.

2.4.6. It was further recorded that the assessee had already declared profit on the book turnover including these circular transactions in its returned income. To the extent the same sales and purchases formed part of the trading account, disallowing a portion of purchases while keeping sales intact would artificially enlarge profit beyond what was actually earned.

2.4.7. The Tribunal endorsed the first appellate authority's reliance on binding High Court precedent holding that, if purported purchases are treated as bogus, the corresponding sales booked out of such purchases must logically also be excluded; otherwise, the resulting recomputation could produce an income figure lower than the returned income, which is impermissible.

2.4.8. In light of the entry operators' admission of circular trading and the fact that no separate profit element over and above book profit was shown to exist, the Tribunal held that there was no basis to sustain any disallowance or percentage addition on such purchases.

Conclusions

2.4.9. In cases where (i) purchases and sales are part of circular/bogus trading entries provided by entry operators solely to inflate turnover, (ii) such figures are already recorded in books, and (iii) the assessee has returned profit on the declared turnover, no further estimation or percentage disallowance of such purchases is warranted.

2.4.10. Additions made by applying a flat percentage (e.g. 4%) on alleged bogus purchases were deleted; appeals by Revenue challenging such deletion were dismissed for all relevant assessment years and group entities.

2.5. Section 68 - unsecured loans received and subsequently repaid; related interest

Legal framework as discussed

2.5.1. The Assessing Officer invoked section 68 to treat unsecured loans from various companies as unexplained cash credits, in some cases also disallowing interest paid thereon as relating to bogus loans. One factor relied upon was that certain lender entities were shown as "struck off" in ROC records in later years.

2.5.2. The assessee furnished confirmations, ledger accounts, income-tax acknowledgments, bank statements and explanations of sources of funds of the lenders, and demonstrated that the loans were received and subsequently repaid through banking channels, in some instances prior to the date of search.

2.5.3. The first appellate authority treated the loan transactions as normal business borrowings, holding that where the assessee has proved identity, creditworthiness and genuineness, and has repaid the loans through banking channels, it cannot be treated as beneficial owner of unexplained money for purposes of section 68.

2.5.4. The Tribunal referred to multiple High Court decisions holding that, where (i) the assessee furnishes primary evidence establishing the three ingredients under section 68, and (ii) the loans are later repaid through banking channels, the cash credits cannot be treated as unexplained; also, once repayment is established on the basis of documentary evidence, credit entries cannot be examined in isolation ignoring the corresponding debit entries.

Interpretation and reasoning

2.5.5. The Tribunal found that, in each disputed instance, the assessee had produced confirmations, bank statements showing receipt and repayment, and tax/financial records of the lenders; the Assessing Officer brought no cogent material to rebut these or to show that the assessee was the real beneficiary of unexplained funds.

2.5.6. The fact that a lending company was struck off in ROC records at a later stage was held insufficient, by itself, to negate the genuineness of loan transactions actually routed through banks and duly repaid.

2.5.7. Applying the cited High Court decisions, the Tribunal held that once repayment of the loans is established on the basis of documentary evidence, and no contrary evidence is produced, it cannot be said that the loan amounts represent unexplained cash credits of the assessee under section 68.

2.5.8. Since the principal loans themselves were held genuine and outside the ambit of section 68, the consequential disallowance of interest paid on such loans automatically failed.

Conclusions

2.5.9. Section 68 was held inapplicable where unsecured loans were (i) properly evidenced as to identity, creditworthiness and genuineness, and (ii) repaid through banking channels; such credits could not be treated as unexplained merely on suspicion or on the basis of subsequent status of the lender.

2.5.10. All additions under section 68 in respect of the disputed loans were deleted; related disallowances of interest were also deleted as purely consequential.

2.5.11. Revenue's grounds challenging deletion of such additions for all concerned years and entities were dismissed.

2.6. Internal cash movements and "Suraj Transfer" ledger - AY 2023-24

Interpretation and reasoning

2.6.1. For a later year, the Assessing Officer treated entries in a seized ledger styled "Suraj Transfer" showing internal cash transfers between locations/chest accounts (aggregating approximately Rs. 1.75 crore) as unexplained, and the first appellate authority applied the gross profit rate to a portion thereof.

2.6.2. The Tribunal recorded the factual position that the assessee's business operated across multiple states, that surplus cash from outlying locations was periodically transferred to central cash chests at Patna and Kolkata, and that such inter-location movements were duly recorded as internal transfers in the regular books.

2.6.3. On verification, the Tribunal found that the impugned ledger entries were fully reflected in the assessee's books of account as inter-branch/chest transfers and that there was no excess cash or unrecorded asset corresponding to the alleged unexplained amounts.

2.6.4. In these circumstances, treating internal, book-recorded transfers as unexplained money, or subjecting them to gross profit estimation, was held to be without basis.

Conclusions

2.6.5. Inter-location cash transfers duly recorded in books and reflected in the "Suraj Transfer" ledger do not constitute unexplained money or undisclosed sales.

2.6.6. The residual addition sustained by the first appellate authority on this account was directed to be deleted in full.

2.7. Low tax-effect Revenue appeals - maintainability in light of CBDT Instruction No. 9 of 2024

Legal framework as discussed

2.7.1. The Tribunal examined the monetary limit for filing appeals before the Tribunal as prescribed in CBDT Instruction No. 9 of 2024 dated 17.09.2024, which directs that appeals shall not be filed where the tax effect is below Rs. 60,00,000/-, except where specifically provided exceptions apply.

Interpretation and reasoning

2.7.2. In one Revenue appeal, the tax effect, computed in terms of relief granted by the first appellate authority, was found to be below Rs. 60 lakh. The Tribunal further recorded that the case did not fall within any of the enumerated exceptions to the Instruction.

2.7.3. In view of the binding nature of CBDT's litigation policy instructions on departmental authorities, the Tribunal held that such appeal was not maintainable.

Conclusions

2.7.4. The Revenue appeal with tax effect below the applicable monetary threshold, and not falling within the specified exceptions, was dismissed as not maintainable for want of tax effect.

2.8. Overall disposition linked to above issues

2.8.1. Additions based on seized "investment" papers (BSIPL/01) under section 69A were fully deleted.

2.8.2. All additions and GP-based estimations arising solely from WhatsApp chats were deleted.

2.8.3. All estimated additions on alleged bogus/circular purchases, where profit on recorded turnover was already offered, were deleted.

2.8.4. All additions under section 68 (and consequential interest disallowances) in respect of loans that were documented and repaid through banking channels were deleted.

2.8.5. Additions based on internal cash transfer ledger ("Suraj Transfer") were deleted.

2.8.6. Revenue appeals were dismissed either on merits, by application of the above principles, or on the ground of low tax effect under CBDT Instruction No. 9 of 2024; assessee appeals on the disputed issues were allowed.

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