Alsorg Interiors India Pvt. Ltd. vs DCIT

PER SHRI ANUBHAV SHARMA, JUDICIAL MEMBER :

These appeals are preferred by the Assessee and revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-27, New Delhi (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in appeals filed before him against the orders of the ld. Assessing Officer (hereinafter referred to as the Ld. AO, for short) passed u/s 143(3) r.w.s 147 of the Income-tax Act, 1961 (hereafter referred to as ‘the Act’). Further details of the orders of the lower authorities are as under: -

The appeals were heard together as they involved common question of law and facts.

At the time of argument ld. Counsel for the assesse has mentioned at Bar that the grounds corresponding to the issue of challenge of the assessment proceedings on the basis of alleged mechanical approval granted u/s 153D of the Act or the issue of assessment to be conducted by JAO/FAO are not pressed.

The brief background to the cases before us is that consequent to a search and seizure operation on the assesse covering its various premises the cases were centralized by order dated 27.05.2022. The assessment order records that subsequently, case was selected for compulsory scrutiny as per Explanation 2of Section 148 of the Act and accordingly, notice u/s 148 of the Act dated 16.01.2023 was issued. The assesse had responded and had filed return of income and thereupon the assessments are completed.

At the time of hearing, we find that in regard to AYs: 2016-17 to 2018-19 additional ground No. 2 has been raised by assessee that the impugned notice dated 16.01.2023 u/s 148 of the Act is without fulfilling requirement of law as they should be express description of nature of the asset, expenditure or entries in the books of accounts to show the escapement of income and ld. Senior counsel submits that in the reason so recorded the same had not been mentioned.

The copy of notice u/s 148 of the Act has been provided in the paper book from page No. 26-42 and for AY: 2016-17 the copy of the notice available at page No. 26-30. This notice u/s 148 of the Act has one Annexure A2 which provided proforma for approval by the specified authority. The quantum of income which has escaped attention is shown to be Rs.24,18,29,696/- and in reasons for the belief for the income that allegedly has escaped assessment, ld. AO observes as follows:

Now, though ld. DR as defended the proposition in favour of department with regard to the AYs: 2016-17 to 2018-19 on the basis of date of search being 09.02.2022, we find that these assessment years are beyond a period of 3 assessment years from the end of relevant assessment year which is the search year and the conditions prescribed u/s 149(1)(b) as stood incorporated in the Act after Finance Act, 2022 required that the escapement should be reflected out of asset, expenditure in respect of transactions or relevant event or occasion or an entry or entries in the books of account and in addition the escaped income represented in the aforesaid must amount to or be likely to be Rs.50 lakhs or more.

We are of the considered view that when the Act provides that a particular provision can be invoked on establishing a primary fact that escapement is arising out of one of the three limbs mentioned, in Sectioin 149(1)(b), then merely referring in the reasons for belief that income has escaped assessment that there are unaccounted receipts and unaccounted expenses does not fulfil the jurisdictional condition. The seized material does refer to, doesn’t indicate if the same relates to asset or expenditure in respect of transaction or in relation to an event or occasion or an entry or entries in the books of account, as admittedly the allegations are of out of books sales. That too without any parallel accounts being maintained are found and merely the chats are relied.

The substance in contention of ld. Counsel that the jurisdictional condition for the purpose of Section 148 r.w.s 149(1)(b)(i) or (ii) of the Act requires foundation showing a live link between the reasons recorded and the corresponding limb of clause (i) to clause (iii). Thus, the attention drawn to the Coordinate Bench decision in Vintage Distillers Vs. DCIT (ITAT Delhi) in ITA No. 6435 to 6440/Del/2025; M/s Ace Tyres (P) Ltd. Hyderabad Vs. ACIT (ITAT Hyderabad) in ITA Nos. 1084 to 1088/Del/2025; Vilas Polymer Private Ltd. Vs. DCIT (ITAT Hyderabad) in ITA Nos.1870 to 1875/Hyd/2025; DCIT, Alsorg Interiors Pvt. Ltd. (ITAT Delhi) in ITA Nos. 5240 to 5242/Del/2025; Smart Chip (P) Ltd. Vs. ACIT (Delhi High Court) reported in 476 ITR 389; Mohd. Athar Anjum Vs. ACIT (Delhi High Court) reported in 476 taxmann.com 337 and Ratnagiri Gas and Power (P) Ltd. Vs. ACIT (Delhi High Court) reported in 174 taxmann.com 331 helps the assesse as we are satisfied that the reasons so recorded and the approval so recorded by the specified authority do not even have minimum description of the asset of the nature in the books of accounts so as to bring the case in the ambit of Section 149(1)(b) of the Act the extent that the conditions provided in sub-clause (i) of sub-clause (iii) of clause (b) of Section 149(i) of the Act are satisfied. In view of the aforesaid the reopening of the assessments for AY: 2016-17 to 2018-19 is vitiated and thereby allowing the additional ground raised by the assesse the corresponding appeals of the assesse are allowed.

As with regard to issue for AY: 2021-22 we find that admittedly no notice u/s 147/148 of the Act was issued and the assessment has been completed u/s 143(3) of the Act. Now, admittedly the search was conducted on 09.02.2022 which is related to Assessment Year 2022-23 thus, as far as AY: 2021-22 is concerned it falls year prior to the year of search and the assessment should have been completed u/s 147/148 of the Act and thus, the assessment so completed u/s 143(3) of the Act is vitiated reliance rightly placed by ld. Counsel in the case of Vintage Distillers (supra).

Now coming to merits of addition in regard to all the AYs involved, after going through the material on record and the observations of ld. Tax authorities in the assessment orders we find that primarily on the basis of whatsapp chat alone all the inferences have been drawn or the statements recorded in context to these chats have been relied. However, what is relevant is that all the four directors had retracted the statements by filing affidavit before investigation wing. Both authorities have failed to appreciate the fact that all the four directors on whose statements reliance was placed, had retracted their statements before the Investigation Wing which were never rebutted neither investigated further by learned AO. At pages 331 to 338 of the paper book.

To examine the merits of the alleged unaccounted receipts on the basis of whatsapp chats we are of the considered view that the nature of business of the assesse is of vital consequences and admittedly the assesse is said to be engaged in the business of interior decoration, sale, purchase, manufacturing and designing of furniture and modular kitchens. As we examined the whatsapp chats relied by ld. AO we find that there are only communication with regard to amounts and figures. That too most of it is not in terms of currency denominations. But, there is no material whatsoever as to what was the nature of goods or services sold or rendered by the assesse which became basis of these alleged transactions referred in the chats. Admittedly, no books of accounts or any cash sales have been found in the search and no discrepancy whatsoever have been found in the physical stock, manufacturing records, purchases or assets of the company nor any payments on account of expenditure qua alleged sales outside the books have been found.

It is relevant to note that the basis of additions with regards to aforesaid assessment years are following digital documents, as discussed in all the said years by learned AO in the assessment orders:

On behalf assessee it is submitted that where the Revenue relies on secondary computer output-screenshots, printouts, extracts chats, cloned data, Excel/software extracts or reports-authentication under section 65B of the Indian Evidence Act is a substantial evidentiary safeguard and the genuineness of digital evidences should be established. Ld. Sr. Counsel relied decision in Anvar P.V. v. P.K. Basheer (2014) 10 SCC 473 and Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal (2020) 7 SCC 1 submitting that Hon’ble Supreme Court has explained the importance of certificate requirement for secondary electronic evidence. Reliance was also placed on Dinesh Jaiprakash Baheti, ITA No. 5607/Mum/2024.

In this context we are of considered view that though assessment proceedings are not governed in every respect by strict rules of Evidence Act. However, with regards to any evidence, including digital evidences, if are being relied by tax authority to draw conclusive inference of facts, the rules of prudence with regard to relevancy, admissibility and veracity of the evidences need to be assured on principles on which the provisions of Evidence Act are codified. Provision of certificate u/s 65B of Indian Evidence Act 1972, as now enforced by way of Section 63(4)(c) of Bharatiya Sakshya Adhiniyam, we can be that veracity and conclusiveness of digital evidence depends on the manner of collection of digital devices, their safe custody, cloning, forensic extraction of documents, hash values records, chain of custody of handling the digital evidences. These factors will be more relevant and have material consequences in case of lack of compliances in handling digital evidences if the digital evidences are in the form of documents and in case of chats apart from foresaid factors, the context of chats, their complete script, parties in conversation and subject are also relevant to ensure that based on chats alone conclusive inference can be drawn. However, otherwise independent corroboration is necessary.

Then Whatsapp chats are not proof of a completed taxable transaction. A chat may evidence discussion, negotiation, instruction, expectation or shorthand and unless it proves a completed transaction where money was actually received on account of an identifiable sale or purchase of goods or services, the ld. Tax authorities cannot rely chats to allege that amounts referred represents income of the assessee.

The assessment orders before us do reproduce WhatsApp on sample basis but same relate to 2021 and 2022. The same may be relied upon by the ld. AO to allege a modus operandi, but they in themselves or even by statements do not prove specific transactions. Every alleged receipt must have some corroboration and matched with the counter-party, project, invoice, delivery/installation record, corresponding cash movement and accounting treatment. Whereas, no corroboration or enquiry was ever made either by learned ld. AO or ld. CIT (A).

Reliance for aforesaid proposition is laid on decision in LSL Tools P. Ltd. vs ACIT (Delhi ITAT) in ITA No. 5643/Del/2024, where co-ordinate bench has observed that the provision of Evidence Act and specifically necessity of certificate u/s 65B(4) of the Indian Evidence Act may not be mandatory but certainly to make an addition exclusively on basis of electronic evidences like whatsapp chat, the authenticity of source and extraction of such evidences must be reflected in the assessment order. The Digital Evidence Investigation Manual, 2014 (hereinafter called 'the Manual') of the Central Board of Direct Taxes makes specific and extensive provisions for collection, extraction and validation of electronic evidences. The Coordinate Bench in which one of us was also on the Bench in the case of DCIT Vs. Balar Marketing P. Ltd. in ITA No. 3094/Del/2023 order dated 18.03.2026 has extensively examined the provision of Indian Evidence Act to give a reasoned finding that though strict provision of Indian Evidence Act, 1972, now Bharatiya Sakshya Adhiniyam may not be applicable to the assessment proceedings. However, the fundamental principles of rules of prudence enshrined in the statutes to ensure only reliable, authentic and trusted original source, information is relied for giving conclusive findings and to conclude that a fact stands proved or disproved. The Coordinate Bench has also taken into consideration the Manual of CBDT and extensively examined the intent of CBDT to lay down the procedure with regard to collection, extract and reliance of electronic and digital evidences and made some relevant observations which we also rely and for convenience we reproduce para 17 to 20 and 31-31.

The Revenue Authorities must identify the device, owner/user, file path/source, creation/modification metadata, extraction methodology and integrity of the data. Thus, Selective files recovered from a phone/hard drive do not automatically constitute regular or parallel books of account. Where the Revenue's own evidence is only sample material used to extrapolate a general modus operandi, the extrapolation cannot replace proof of AY specific transactions.

The issue before us is not whether net profit should be applied or not. The primary question is whether the evidences relied in the absence of any corroborative evidence, establish any alleged sale outside books of accounts. None of the documents relied by learned AO/ CIT (A) suggest any actual sales made outside books of accounts rather said documents were mere loose or dumb documents not corroborated at all by learned AO and CIT (A) both. The controversy before us is whether additions can be sustained merely on the basis of loose papers allegedly recording certain sales when, when no excess stock was found during search, no unexplained investment in purchases has been established, no buyer has been examined, no transporter has been examined, no delivery of goods outside books has been established, no corresponding unrecorded cash has been found, no evidence exists regarding receipt of unrecorded sale consideration.

Then for presuming that the contents of the chats or other incriminating material or document are true the same must be a speaking one. Independently they should convey existence of some fact in regard to the issues under examination. In evidences relied in assessment order same do not contain any narration of an event in respect of the various figures noted therein. The provisions of Section 132(4A) do not permit any one to presume that the figures represents a completed transaction to infer assessee's income. The presumption at the most is attracted to the figures and a further presumption that they represent the income of the assessee is not permissible under Section 132(4A). When chats or inchoate document, are only incriminating evidence and the revenue wants to make use of it, it is the duty of the revenue to collect necessary evidence which may provide an acceptable narration to the various entries. The evidence collected should be such that any reasonable man would accept, the hypothesis advanced by the revenue that the context of chant and figures found in chats represent incomes earned by the assessee. Thus in the absence of the above essential ingredients, the seized documents remain merely pieces of information and dumb documents incapable of giving rise to taxable income. Reliance is placed on the following case laws on the proposition that no addition can be made on mere hypothetical considerations and, on the basis of dumb document without any corroboration:

Ld. Sr. Counsel has also drawn our attention to that fact that in similar facts and based on similar evidences, in the case of Adrem India (P) Ltd. vs DCIT in ITA No. 5233 to 5245//Del/2025 and in the case of Esssentia Designs Pvt. Ltd. vs DCIT in ITA No. 5145/Del/2025 and also in the case of Design Workshop (India) Pvt. Ltd. vs DCIT in ITA Nos. 6237 to 6241/Del/2025, wherein, the same assessing officer with regards to same date of search and after centralization of cases had made similar additions, the co-ordinate bench deleted the additions by discarding the seized documents in the shape of digital documents, WhatsApp chats and also physical documents.

We find that ld. AO has made more reliance on chats and retracted statements, rather then making some independent enquiry from the books of assessee. Ld. AO has relied more on observations of the Search Team or Investigation wing, and no independent enquiry or investigation have been made by learned AO. The alleged cash books A-2 to A-6 contain banking transactions and must be read as a whole (for AY 2016-17 to 2019-20). The assessee had specifically demonstrated that the same also carries entries by the description 'Bank'. A cash book in accounting practice can record cash and bank transactions. The mere title 'Cash Book (Rokad)' does not make every line an unaccounted cash sale. The ld. AO should have reconciled the identified 'Bank' entries with regular books/bank statements rather than rejecting the objection merely because directors had generally admitted cash dealings. The same seized books record receipts on one side and payments/application on the other. Revenue cannot rely on the receipt side as gospel and disregard the payment side as inconvenient. Whereas, in the case of AY 2016-17, the payments exceeds receipts as such, the addition on account of net profit is totally uncalled for and not justified. Ld. Sr. Counsel demonstrated that the assessee's working showed material differences between the ld. AO's figures and the actual cash-book totals. As for AY 2016-17 the assessee's working reflected receipts of Rs.13,19,34,602 and payments of Rs.13,98,22,294, i.e. a deficit of Rs.78,87,692. The assessment order ultimately used alleged receipts of Rs. 12,96,04,843 and expenses of approximately Rs.11.22 crore. These inconsistencies undermine the reliability of the gross-receipt base itself. Thus, we are of view that before any profit percentage is applied, the Revenue must reconcile duplicates, internal cash movements, bank entries, wrong-year entries, unrealised transactions and entries not pertaining to the assessee. Substantial portion of the all the aforesaid assessment order's deals with same WhatsApp illustrations which relates to 2020-21, 2021-22 and early 2022-23. Even if those chats establish a later-year practice, they cannot automatically be projected backwards. Each assessment year is separate and the Revenue must possess year-specific material for the addition made which has not been done in the instant cases.

It is further relevant that the search in the present case was extensive and continued from 09.02.2022 to 12.02.2022. If undisclosed sales of the magnitude alleged had actually taken place, the Department would ordinarily have discovered one or more of the following, excess stock, shortage of recorded stock, unaccounted raw material, unaccounted finished goods, parallel invoices, transport receipts, e-way bills, delivery challans, confirmations from customers, statements of purchasers, statements of transporters, unexplained cash, unexplained bank deposits, unaccounted purchases and most importantly considering the nature of assessee’s business, payments to professionals, artisans like carpenters and others, who would have helped assessee in delivery of goods and services of nature of interior decoration and modular kitchen. That learned AO acknowledged unaccounted expenses but selectively estimated 15%. Learned AO accepted that seized material indicated purchases, salary/wages and other cash expenses. He described a summary suggesting 45% purchases, 25% salary/wages and 20% other expenses- 90% in aggregate-but then rejected 10% as merely indicative and estimated 15% to 'protect the interests of Revenue'. The phrase 'to protect the interests of Revenue' cannot substitute a factual basis for 15%. The AO did not cite a comparable case, industry benchmark, project-wise margin or seized document establishing 15%. It is submitted that the AO's proposition that a company engages in cash sales only to earn 'supernormal profits' is an assumption, not evidence. Ld. CIT(A) expressly found that the AO had applied 15% without recording any basis and that the rate could not be considered a fair and reasonable reflection of profit. Profit estimation can be sustained when the Revenue first established actual unaccounted sales or receipts attributable to AY 2016-17 to 2022-23. Which itself failed so no profit estimation is sustainable.

In the light of aforesaid discussion we are inclined to sustain corresponding grounds on merits in favour of assesse and against the department. The appeals of assesse are allowed and of revenue stand dismissed.