DY. COMMISSIONER OF INCOME TAX, MUMBAI vs. PRADEEP PHULCHAND AGARWAL, MUMBAI

Order under section 254(1) of Income Tax Act , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal PER ARUN KHODPIA, ACCOUNTANT MEMBER: These captioned appeals are filed by the revenue against the separate orders of Commissioner of Income Tax/NFAC, 51, Mumbai, dated 03.04.2025 for the A.Y. 2015-2016 & 2017-18 and dated 28.04.2025 for AY 2019-20, which in turn arises from the orders u/s. 143(3) r.w.s 153A for AY 2015-16 & 2017-18 and u/s 143(3) of the Act for AY 2019-20, all passed by Deputy Commissioner of Income Tax, Central Circle- 3(3), Mumbai on 11.01.2022 (in short „Ld. AO‟).

3.1 The brief facts of the case for A.Y. 2015-16 are that the appellant filed its original return of income u/s. 139(1) on 31.08.2015 declaring a total income of Rs. 4,05,08,150/-. Thereafter a search & seizure operation was conducted on the Phulchand Group on 24.10.2018, wherein the assessee was also covered. During the course of search & seizure operation at the residential premise of one of the employees of M/s Phulchand Export Pvt Ltd, namely Smt. Jyoti Laxmi Bambade‟s mobile certain WhatsApp chats with the assessee were recovered. In her statement U/s 132(4), Smt. Bambade stated that these chat messages are business communications from the assessee involving bank and cash transactions with various parties of the company. It was also confirmed by her that the appellant was indulged in paying a certain percentage of interest in cash to the loan lender parties. Although the chat messages pertained to AY 2018-19 and 2019-20, the AO on the basis of the statement recorded held that the appellant had paid interest in cash for all the AY‟s covered in the block and thus had estimated such cash interest for Rs.2,19,08,711/-, computed @ 3.5% of the total loan amount of Rs.62,59,63,163/- appearing in the balance sheet of the assessee. This amount was therefore added to the total income of the assessee U/s 69C by the AO.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal 3.2 Being aggrieved with the findings of ld. AO, assessee preferred an appeal before the first appellate authority and succeed in getting the relief in terms of following observations by the Ld. CIT(A):

6. Ground no 4 to 6 of the appeal pertains to the addition of Rs.2,19,08,711/- done by the AO on account of unexplained expenditure attributing the same to cash interest paid for the loans taken by the appellant. This issue is a repetitive issue as the AO has extrapolated the chat messages pertaining to AY 2018-19 and 2019-20 and the statement of the employee to all the AYs holding that the appellant has aid cash interest @ 3.5% for the loan taken in this year also. It has already been held by me vide detailed order for AY 2013-14 in the case of the appellant that these WhatsApp chat messages are acceptable as evidence. However, it has also been held by me that since the chat messages pertain to AY 2018-19 and 2019-20 only and no communication/evidence has been found with respect to the instant year, the finding of the AO that the appellant has paid cash interest on loan in the instant year also is not correct. For same reasons as detailed in that order the addition of Rs.2,19,08,711/- done by the AO is deleted and these grounds of appeal are partly allowed.

3.3 In the order of Ld. CIT(A), he referred to his findings in assessee‟s own case for AY 2013-14, which was the sole basis for vacating the identical addition in AY 2015-16, therefore the assessee was directed to furnish the appellate order for AY 2013-14 with such findings, which are produced before us, so culled out here under for the sake of completeness of the facts:

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal ―6.4 Decision: 6.4.1 The issue in this ground arises on account of addition of Rs.55,58,000/- made under Section 69C of the Income Tax Act, 1961, on account of alleged cash interest payments. The AO's addition was primarily based on a WhatsApp conversation retrieved from the mobile phone of Smt. Jyoti Laxman Bambade, an employee of M/s Phulchand Exports Pvt. Ltd., pertaining to Assessment Years 2018-19 and 2019-20. The AO inferred that similar cash interest payments were made in the current assessment year and computed the addition at 3.5% of the total loans recorded in the appellant's books.

6.4.2 The appellant on the other hand has contended that WhatsApp conversation from a subsequent year cannot substantiate cash interest payments in the current assessment year, especially when no corroborative evidence, such as actual cash transactions or records, was found during the course of search. It has been further submitted that no independent verification was conducted by the AO with the alleged recipients of the cash interest.

6.4.3 The appellant has also challenged the evidentiary value of the WhatsApp chats, taking recourse to the provisions of the Evidence Act, 1872. The evidentiary value of the WhatsApp chats has been discussed in detail by me in para 5.3.4 to 5.3.7 above, wherein it has been held that the rigours of Evidence Act does not apply to Income Tax proceedings and in my considered view the evidentiary value of WhatsApp chat is not disputable. As regards the merit of addition, upon careful consideration of , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal facts it is apparent that there is no direct or corroborative evidence available, either in the WhatsApp chats or otherwise, that pertains to the instant year and which indicates that cash interest has been paid by the appellant on loans taken by him in the instant year. It is seen that the WhatsApp chat pertain to the AY 2018-19 and 2019-20 only containing details of specific transactions for that period and since there was no messages or evidence relating to cash interest payment for the instant year, the veracity of the chats could only be considered for AY 2018-19 and 2019- 20 at best. It is my considered view that such extrapolation of cash interest payment for the entire duration of the block year cannot be upheld since no such evidence had either been found during the search nor brought on record in post-search investigation. Merely because one of the employee has given a statement that the appellant is in the practise of giving cash interest, is not sufficient to estimate cash interest on all loans taken by the appellant for all the years as the WhatsApp chat are specific to certain transactions carried out in AY2018-19 and 2019-20. Such an estimation has no basis, is arbitrary and has no nexus with the WhatsApp chat recovered and results in generation of fictitious income. Further, it has been held in a number of decisions that WhatsApp chats are required to be supported by corroborative evidence for any addition to be made and in this case even the WhatsApp chat does not pertain to the instant year. Thus, the addition of Rs.55,58,000/- done by the AO on account of estimated addition of cash interest paid by the appellant is deleted and these grounds of appeal are allowed.‖ , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal 3.4 Since the relief of substantive quantum addition has been granted by the Ld. CIT(A), under his impugned order, being aggrieved the revenue carried the matter in appeal before us, as per the grounds of appeal assailed (extracted supra).

3.5 At the outset Ld. CIT DR representing the revenue submitted that Ld. CIT(A) had grossly erred in deleting the addition of Rs. 2,19,08,711/- made u/s. 69C of the Income Tax Act on account of interest on loans paid in cash @3.5% without considering the fact that said entry is based on incrementing evidence in the form of whatsapp chat of Mrs. Jyoti Laxman Bambade, a key employee in M/s. Phulchand Exports Private Limited, with the assessee found during the course of search proceeding in Phulchand Group and she has admitted in the statement recorded u/s 132(4) of the Act that the assessee routinely engages in raising loans in cash and payment of interest in cash. Ld. CIT-DR further submitted that based on application of test of preponderance of human probabilities, it can be said that same practice of providing loans was carried out in earlier year also, though the chat messages pertain to A.Y. 2018-19 and 2019-20, but possibility of such transaction in past also cannot be ruled out. He placed reliance on various judgment in support of contentions, such as CIT v. Durgaprasad More (1971) 82 ITR 540 and Bannalal Contructions v ACIT (2019) 106 taxmann.com 128(SC) along with case law of T. Lakshmi Ladha , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal and Co. v CIT (2016) 73 taxmann.com 117 (Bombay) and case of ACIT v. Hukum Chand Jain (2010) 191 taxmann 319.

3.6 Ld. CIT(A) further placed before us a report from the Ld. AO with his comments on the issues. He read the submissions from said report, asserting that as per whatsapp records of Mrs. Jyoti Laxman Bambade followed by her statement recorded u/s 132(4) of the Act, it is undoubtedly established that the assessee is in practice of paying interest partially in cash to multiple parties. Therefore, following the principle of preponderance of human probabilities, it is proved that the same practice was continuing for earlier assessment years also. With the aforesaid submissions it is prayed that the addition made by the Ld. AO deserves to be confirmed by reversing the finding of the Ld. CIT(A).

3.7 Per contra Ld.AR representing the assessee submitted that the whatsapp chat in the mobile of Mrs. Jyoti Laxman Bambade were found only for the A.Y.2018-19 and 2019-20, the same cannot be used for imposing additions in the earlier years, especially when such information was surfaced during the course of search action. It is submitted by Ld.AR that the A.Y. 2015-16 and 2017-18 are unabated years, when the search was conducted on 14.10.2018. Therefore, as per the principles laid down by Hon‟ble Supreme Court in the case of Principal Commissioner of Income-tax, Central-3 vs. Abhisar , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal Buildwell (P.) Ltd. [2023] 149 taxmann.com 399 (SC), addition cannot be made without any incrementing material surfaced during the search action. It is further submitted by the Ld. AR that even if the information in the form of whatsapp chat is considered as incriminating material, the same pertains to A.Y. 2018-19 and 2019-20, which in no case could be a relevant information for the A.Y. 2015-16 and 2017-16, the addition by Ld. AO was therefore purely based on presumption or surmises, which is not sustainable under the settled position of in law. It is argued that the addition was made without any specific material or corroborative evidence on this issue, to support such contention Ld.AR placed his reliance on the decision of Hon’ble Bombay High Court in the case of Pr. Commissioner of Income Tax, Central-2, Mumbai Vs Umesh I Ishrani 108 taxmann.com 437.

3.8 Based on aforesaid submission it was the prayer that the addition made by Ld. AO was without any corroborative material. Ld AR further referred to the impugned order stating the findings of Ld. CIT(A) that there is no direct corroborative evidence available, either in whatsapp chat or otherwise, that pertains to the instant year which indicates that cash interest has been paid by the assessee on loans taken by him for the A.Y. 2015-16. The veracity of chat could only be considered for A.Y. 2018-19 and 2019-20 at the best. Ld. CIT(A) further clarified that the extrapolation of cash interest payment for the entire duration under reopening assessment cannot be upheld since no such evidence , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal have either been found in the search nor brought on record in post search investigation. Merely because one of the employees has given a statement that the assessee is in practice of giving cash interest is not sufficient to established that cash interest was paid on all loan taken by the appellant for all the years covered under the block. It is also categorically mentioned by the Ld. CIT(A) that such an estimation has no basis, is arbitrary and has no nexus with the whatsapp messages recovered and resulted in generation of fictional income. Accordingly, it is claimed that the addition was rightly deleted by the Ld. CIT(A) and the assessee therefore had placed its strong reliance on the order of Ld. CIT(A).

3.9 We have considered the rival submission and perused the available material on record and the judicial pronouncement relied upon by parties. The issue of cash interest in the present matter has been cropped up during the search action conducted on 14.10.2018, in the premises of M/s Phulchand Group and at the residence of one of their employee Mrs. Jyoti Laxman Bambade, wherein on the basis of whatsapp conversion in her mobile phone, she admitted that the assessee Mr. Pradeep Phulchand Agarwal is involved in the activities of providing cash loans and had paid part interest to the extent of 3.5% in cash. It is observed by the AO that the information surfaced from whatsapp chat was further fortified by the statement of Mrs. Jyoti Laxman Bambade recorded on oath u/s 132(4) of the Act, thus would be a strong basis , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal for addition in the hands of assessee. Ld. AO accordingly formed the belief that the assessee was definitely engaged in the similar activities for earlier years also and accordingly based on the principal of preponderance of human probabilities, he extrapolated the effect of the cash interest paid by the assessee to instant year also.

3.10 Having thoughtfully considered the facts, circumstances and submission of parties, we find that Ld. CIT(A) had discussed the facts of case elaborately and had deleted the entire addition of Rs. 2,19,08,711/- made on account of unexplained expenditure u/s 69C and rightly so, as the addition was made only on the basis of principle of preponderance of human probabilities on presumptive basis dehors any corroborative evidence surfaced during the search pertaining to A.Y. 2015-16, we find that the addition based on surmises and conjecture cannot survive in the eye of law in view of the settled principle of law. Accordingly, we are of the firm conviction that the order of Ld. CIT(A) and finding therein qua the merits of issue deserves to upheld. We, accordingly, approve the findings of Ld. CIT(A) in deleting the sole addition made u/s 69C of the Act on account of unexplained expenditure without any incriminating material surfaced during the search or corroborative evidence brought on record by the revenue qua such cash transactions for the A.Y. 2015-16.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal 3.11 In the result, the appeal of the revenue for A.Y. 2015-16 stands dismissed.

ITA 4181/MUM/2025 for AY 2017-18

1. "On the facts and in the circumstances of the case, the Ld CIT(A) erred in holding that assessment or re-assessment u/s 153A is invalid ignoring the fact that the during the course of search Incriminating Material' in form of digital evidence was found and seized at the residence of Mrs. Jyoti Laxman Bambade, a key employee in M/s Phulchand Exports Private Limited and during the course of search proceeding in Phulchand Group Mrs. Jyoti Laxman Bambade has admitted in the statement recorded u/s 132(4) of the Act that assessee routinely engages in raising loans in cash and payment of interest in cash.

2. "On the facts and in the circumstances of the case, the Ld CIT(A) erred in deleting the addition of Rs. 1,21,35,112/- made u/s 69C of the Income Tax Act on account of interest on loan paid in cash @ 3.5% without considering the fact that the said entry is based on the evidences in form of whatsapp conversation of Mrs. Jyoti Laxman Bambade, a key employee in M/s Phulchand Exports Private Limited found during the course of search proceeding in Phulchand Group and she has admitted in the statement recorded u/s 132(4) of the Act that assessee routinely engages in raising loans in cash and payment of interest in cash.

3. "On the facts and in the circumstances of the case, the Ld CIT(A) erred in deleting the disallowance of Rs. 30,39,964/- made u/s 14A of the Income Tax Act, 1961 ignoring the fact that Supreme Court in case of M/s Kesarwani Zarda Bhandar Sahson Allahabad (Civil Appeal Nos. 7738-7739/2021, 7732-7735/2021 and 7740/2021) has held that for unabated year once during search undisclosed income is found on unearthing the incriminating material during the search, the AO would assume jurisdiction to assess or reassess the total income even in case of 12 , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal completed/unabated assessments and addition u/s 69C of the Income Tax Act was based on statement recorded during the search u/s 132(4) of the Act of Mrs. Jyoti Laxman Bambade, a key employee of M/s Phulchand Exports Pvt Ltd wherein she concluded that the assessee routinely engages in raising loans in cash and payment of interest in cash.‖ 4.1 Briefly stated, the assessee has filed its return of income u/s 139(1) of the Act on 26/07/2017 declaring its total income of Rs. 40,310/-. A search and seizure action of u/s. 132 was carried out in Phulchand Group on 24.10.2018 and the assessee Mr. Pradeep Phulchand Agarwal has also covered under the said search. Notice u/s. 153(A) was issue and served on the assessee on 28/09/2020. Thereafter the assessment was completed u/s. 153A r.w.s. 143(3) vide order dated 11.01.2022. While completing the assessment u/s 143(3) r.w.s. 153(A). Ld.AO had made following addition/disallowances: I. Addition of Rs. 1,21,35,112/- u/s 69C on account of interest on loan paid in cash @ 3.5% II. Disallowances of Rs. 30,39,964/- made u/s 14A.

4.2 Aggrieved by the aforesaid addition of assessee preferred an appeal before the first appellate authority wherein the contention raised by the assessee are found tenable by Ld. CIT(A) and therefore he vacated the aforesaid addition. Being aggrieved with the aforesaid order of Ld. CIT(A). The revenue has filed the present appeal for our consideration.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal 4.3 Ground No 1 & 2: The addition of Rs. 1,21,35,112/- made u/s 69C of the Income Tax Act.

4.4 Apropos, the addition u/s 69C of the Act on account of alleged cash interest paid by the assessee for AY 2017-18, both the revenue and the assessee had placed similar arguments and submissions as stated on this very issue for AY 2015-16, that the addition was made based on presumption in accordance with the principle of preponderance of human probabilities as the information unearthed in the form of whatsapp chat from the phone of Smt. Jyoti Laxman Bambade, a key employee in M/s Phulchand Exports Private Limited found during the course of search proceeding in Phulchand Group and she has admitted in the statement recorded u/s 132(4) of the Act that assessee routinely engages in raising loans in cash and payment of interest in cash. It is an admitted fact that the information originated from the whatsapp chats on the mobile phone of Mrs. Jyoti Laxman Bambade, pertains to AY 2018-19 and 2019-20 and nothing incriminating for the year under consideration i.e., AY 20017-18 could be found or brought on record during the search action or post search investigation by the revenue. Accordingly, the facts of the issue in AY 2015-16 in ITA 3852/MUM/2025, are identical and at parity with the facts of present case for AY 2017-18, we thus, without hesitation answer the issue in favour of assessee on equality following our decision for AY 2015-16.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal Consequently, we approve the finding of Ld. CIT(A) in vacating the addition of Rs. 1,21,35,112/- u/s 69C of the Act.

4.5 In result Ground of appeal No. 1 & 2 of the appeal of revenue for AY 2017-18 in are rendered as dismissed.

4.6 Ground no 2. Disallowance u/s 14A Apropos, issue of disallowance u/s 14A, it is submitted by the Ld. CIT DR that Hon‟ble Apex Court in the case of Principal Commissioner of Income-tax, Central-3 vs. Abhisar Buildwell (P.) Ltd. [2023] 149 taxmann.com 399 (SC)/[2023] 293 Taxman 141 (SC)/[2023] 454 ITR 212 (SC)[24-04-2023], while dealing with the matter of M/s Kesarwani Zarda Bhandar Sahson, Allahabad Civil Appeal Nos.7738-7739/2021, 7736-7737/2021, 7732- 7735/2021 and 7740-7743/2021, had categorically held that once the assessment is reopened based on incriminating material, the scope of assessment includes assessment of total income of the assessee, thus the Ld. AO had rightly made the addition u/s 14A.

4.7 Before proceeding any further, the relevant finding of Hon‟ble Apex Court in the case of Abhishar (supra) are reproduced hereunder, to appreciate its applicability in facts of instant case:

Civil Appeal Nos.7738-7739/2021, 7736-7737/2021, 7732-7735/2021 and 7740- 7743/2021 15. Insofar as the aforesaid Civil Appeals preferred by the assessee – M/s Kesarwani Zarda Bhandar Sahson, Allahabad are concerned, these appeals have been preferred against the impugned judgment and order dated 6-9-2016 passed in 269/2014, 15/2015, 16/2015, 268/2014 and 17/2015, as also, against the order dated 21-9-2017 passed in the review applications.

It is required to be noted that the issue before the Allahabad High Court was, whether in case of completed/unabated assessments, the AO would have jurisdiction to re-open the assessments made under section 143(1)(a) or 143(3) of the Act, 1961 and to reassess the total income taking notice of undisclosed income even found during the search and seizure operation.

15.1 In view of the discussion hereinabove, once during search undisclosed income is found on unearthing the incriminating material during the search, the AO would assume jurisdiction to assess or reassess the total income even in case of completed/unabated assessments. Therefore, the impugned judgment(s) and order(s) passed by the High Court taking the view that the AO has the power to reassess the return of the assessee not only for the undisclosed income, which was found during the search operation but also with regard to material that was available at the time of original assessment does not require any interference. Under the circumstances, the aforesaid appeals preferred by the assessee – M/s Kesarwani Zarda Bhandar, Sahson, Allahabad deserve to be dismissed and are accordingly dismissed. In the facts and circumstances of the case, no costs.

4.8 On a thoughtful reading and appreciation of the aforesaid findings by the Hon‟ble Apex Court, we agree with the contention raised by the Ld. CIT DR that once during search undisclosed income is found on unearthing the incriminating material, the AO would assume jurisdiction to assess or reassess the total income even in case of completed/unabated assessments, but in present case since there was no incriminating material found during the search for , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal relevant AY 2017-18, as held by us while dealing with Ground 1 & 2 of the present appeal, we are unbale to persuade and subscribe to the plea of the revenue dehors any incrimination material unearthed for the relevant year, thus, the aforesaid interpretation of Hon‟ble Apex Court would be of no help to the revenue.

4.9 In backdrop of aforesaid observations and discussion, we concur with the findings of Ld. CIT(A), that the addition of Rs.30,39,964/- U/s 14A of the Act does not arise from any incriminating material. Resultantly, ground no 3 of the revenue‟s appeal for AY 2017-18 in being bereft of merits, has been treated as dismissed.

4.10 In result the appeal of revenue for AY 2017-18 in stands dismissed, in terms of our aforesaid observations.

ITA 4136/MUM/2025 for AY 2019-20

1. On the facts and in the circumstances of the case, the Ld CIT(A) erred in deleting the addition of Rs. 74,86,913/- made w/s 69C of the Income Tax Act on account of interest on loan paid ip cash without considering the fact that the said entry is based on the evidences in form of whatsapp conversation of Mrs. Jyoti Laxman Bambade, a key employee in M/s Phulchand Exports Private Limited found during the course of search proceeding in Phulchand Group and , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal she has admitted in the stätement recorded w/s 132(4) of the Act that assessee routinely engages in raising loans in cash and payment of interest in cash."

2. "On the facts and in the circumstances of the case, the Ld CIT(A) erred in deleting the addition of Rs. 71,13,899/- made u/s 69C of the Income Tax Act on account of interest on loan paid in cash @ 3.5% without considering the fact that the said entry is based on the evidences in form of whatsapp conversation of Mrs. Jyoti Laxman Bambade, a key employee in M/s Phulchand Exports Private Limited found during the course of search proceeding in Phulchand Group and sie has admitted in the statement recorded us 132(4) of the Act that assessee routinely engages in raising loans in cash and payment of interest in cash. "

3. "On facts and in circumstances of the case, the Id. CIT(A) has erred in restricting disallowance made under section I4A to the extent of tax exempt income earned by the assessee during the year by overlooking the clarification of legislative intent provided by the CBDT vide Circular No. 5/2014 dated 11.02.2014 and to this effect even an amendment was made by Finance Act, 2022 by way of insertion of Explanation to Section 14A?"

The appellant craves to leave, to add, to amend and / or to alter any of the ground of appeal, if need be.

The appellant, therefore, prays that on the ground stated above, the order of the Ld. CIT (A)-51, Mumbai, may be set aside and that of the Assessing Officer restored.

5.1 Ground No. 1: Addition U/s 69C on account of interest on loan paid in cash The fact pertaining to this issue emerging from the assessment order are that During the search action on the assessee, the residential premises of Mrs. Jyoti Laxman Bambade, employed at M/s Phulchand Export Pvt. Ltd. was also , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal covered. Statement of Ms. Jyoti Laxman Bambade was recorded u/s 132(4) of the Act at her residence, which was covered under search action u/s 132, from 24/10/2018 to 26/10/2018. Further, during the course of search proceedings at her residence the mobile phone belonging to her was found to be containing various Whatsapp communications relating to cash transactions. The Whatsapp conversations between her and the assessee were shown to her and she was asked to comment on its contents.

5.2 After going through the statement and the “Whatsapp” application messages / chats/ images, various cash transactions were found to be taking place. The revelation in the statement of Ms. Jyoti Laxman Bambade puts forth the entire modus operandi of cash transactions undertaken by Shri Pradeep Phulchand Agarwal. During the post-search proceedings, Shri Pradeep Phulchand Agarwal was confronted with the said statement and corroborative evidences to offer his comments on the same. However, Shri Pradeep Phulchand Agarwal has not offered any comments but has endorsed the statement of Ms. Jyoti L. Bambade. The said submission is reproduced herein below for ready reference:

―I, Pradeep Agarwal, acknowledge that I have received copy of statement of Ms. Jyoti Laxman Bambade recorded at her residence u/s.132(4) of the Act.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal I have gone through the contents of the statement recorded and the explanation given in respect of the loose papers found from her residence and seized and marked as Annexure A2.

I have gone through the contents of statement recorded of Ms. Jyoti Laxman Bambade and I endorse the same.‖ 5.3 Further, during the assessment proceedings the assessee was asked to explain transactions as described in the statement of Mrs. Jyoti Laxman Bambade, vide notice dated 13.12.2021 and a reminder dated 20.12.2021. Thereafter, on 27.12.2021, on assessee‟s request for cross examination, summons u/s 131 were sent to the assessee and Mrs. Bambade to be present in the office of the AO on 29.12.2021. On 29.12.2021, none of the parties attended the hearing for cross examination. On behalf of assessee the AR appeared and asked for adjournment for cross examination. Summons were again issued to the assessee on 31.12.2021 to be present in the office of AO on 04.01.2022, but the assessee again failed to appear citing health issues. On 05.01.2022 it was submitted that the assessee could not attend the hearing, as his doctor has advised him to get tested for Covid.

5.4 As the assessee failed to attend the hearing on 29.12.2021, a detailed show cause along with the relevant images, was sent to the assessee on 03.01.2022, as an opportunity to submit his comments on the statement of Mrs. , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal Jyoti Laxman Bambade and the images extracted from the backup of her mobile phone. In response to the above-mentioned show cause notice, the assessee submitted his reply vide submission dated 04.01.2022 (filed on 06.01.2022) and had stated that the statement of Mrs. Jyoti was recorded on 24.10.2018 which was continued till 26.10.2018. She is an employee of M/s Phulchand Exports Pvt Ltd. since 1992. Statement was recorded for 3 days during the search proceedings in a very stressful situation at her residence, thus being scared she admitted statement which was not factual or supported by any evidence.

5.5 The argument of the assessee was not accepted by the Ld. AO, he noted that the assessee in his submission, had himself accepted that Mrs. Jyoti L. Bambade is an employee since 1992 and such an experienced employee cannot give false information against his employer just for the reason that she was in stress. Ld. AO noted that This argument of the assessee does not survive, had the case been like this, there was enough time available with Mrs. Jyoti L. Bambade to retract her statement before the concerned authority, but the same was not done by her. Also, she was given an opportunity to explain her statement vide summon dated 27.12.2021 but the same was not complied by her. It is further noted that as per the Panchnama drawn in this case at the time of conclusion of the search proceeding, the „Panchas‟ had admitted that there were no coercion or threat given to the persons giving their statements. Accordingly, based on chat images, corroborated with statement of Smt. Jyoti L. Bambade, which were accepted by the assessee also, but never retracted by her. Ld AO made the following additions, u/s 69C:

Rs. 12,46,502/- Mr. Rajneesh Agarwal Rs. 2,40,411/- Mrs. Sita Devi Jatia Rs. 60,00,000/- Mr. Arjun Bhatia Rs. 74,86,913/- Total 5.6 The aforesaid issue further carried before the Ld CIT(A) by the assessee, who decided the issue in favour of the assessee, with following reasonings:

“5.4 Decision 5.4.1 The facts of the case, the findings of the AO and the submissions of the appellant have been considered. The appellant has challenged the addition on both merits and also on the legal ground of the AO using WhatsApp chats without complying to the provisions of Evidence Act and Information Technology Act. The addition in the instant year has been done on the basis of WhatsApp chat recovered from one of the employee who admitted that the same were instructions relating to cash transaction by the appellant. In my considered view the evidentiary value of WhatsApp chat cannot be disputed. The provisions of Income Tax Act enable the authorities to seize, place identification marks, make a note or an inventory, etc. In fact, section 132(1) specifically provides that ―(iib) require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record as defined in clause (t) of subsection (1) of section 2 of the Information Technology Act, 2000 (21 of 2000), to afford the authorized officer the necessary facility to inspect such books of account or other documents‖. Besides S. 132(4) categorically states that they can be used in evidence in any proceeding under the Income Tax Act. Further, S. 132(4A) states that there is a presumption that such contents are true and they belong to such person. Apart from the above, S. 292C of the Act also categorically speaks of presumption as regards the material found in the possession or control of any person in the course of a search.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal 5.4.2 In the case of Hersh W Chadha vs DDIT, to 3098 & 3107/Del/2005, the Hon’ble ITAT held as follows: ―The tax liability in the cases of suspicious transactions, is to be assessed on the basis of the material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/ evidence available with AO." It was further held as ―6.3 Rules of evidence do not govern the income-tax proceedings, as the proceedings under the Income-tax Act are not judicial proceedings in the sense in which the phrase "judicial proceedings" is ordinarily used. The Assessing Officer is not fettered or bound by technical rules about evidence contained in the Indian Evidence Act, and he is entitled to act on material which may not be accepted as evidence in a court of law.‖ The Hon'ble Delhi High Court in Addl. CIT v. Jay Engg. Works Ltd. [1978] 113ITR 389 (Delhi) held that the Assessing Officer has, no doubt, to hear "evidence", but such evidence may consist of material which would be wholly inadmissible in a court of law. In CIT v. Metal Products of India [1984] 150 ITR 714 (Punj. & Har.), it was held that the Assessing Officer may gather information in any manner he likes, behind the back of the assessee and utilize the same against the assessee, even if it does not, in all respects satisfy the requirements of the Indian Evidence Act. What is necessary is that he should have material upon which to base the assessment; "material" as distinguished from "evidence" which includes direct and circumstantial evidence.

5.4.3 The sum and substance of the above decisions is that unlike criminal proceedings where the charge has to be proved beyond doubt, income-tax proceedings are quasi- judicial. Tax liability in cases of suspicious transactions has to be assessed on the basis of the material available on record, surrounding circumstances, human conduct and preponderance of probabilities. Rules of evidence do not govern income tax proceedings and the AO is not fettered or bound by technical rules contained in the Indian Evidence Act and is entitled to act on material which may not be accepted as evidence in a court of law.

5.4.4 In the above background, the specific safeguards of presumptions laid down in the provisions of the Income Tax Act in favour of the department cannot be ignored. In every search and seizure action, the seizure is made in the presence of independent , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal witnesses and a detailed panchnama including how the electronic evidences were handled / seized is given to the search person. Thus, I have no doubt in my mind that WhatsApp chats and other electronic evidences, loose papers etc seized during the search proceedings have ample evidentiary value to the extent they are corroborative in nature. It is therefore held that the rigours of Evidence Act does not apply to Income Tax proceedings and in my considered view the evidentiary value of WhatsApp chat is not disputable. Thus, the legal challenge to the additions done by the AO is dismissed.

5.4.5 As regards the merit of the addition on the basis of facts, I find that the AO has done the additions on the basis of statement of Smt Jyoti Laxman Bambade on certain WhatsApp chat between Smt Bambade and the appellant and also Smt Bambade and other third parties. It is also to be noted that these WhatsApp chat messages were not confronted to the appellant or to the third parties and the addition is based entirely on the statement of Smt Bambade and the statement of the appellant wherein he has endorsed this statement of Smt Bambade. Further Smt Bambade is an employee of M/s Phulchand Exports Pvt Ltd of whom the appellant is a Director. It is in this background that I proceed to decide on each of the addition done by the AO.

(a) The 1st addition done by the AO is on account of WhatsApp chat between Smt Jyoti Laxman Bambade and one Shri Rajnish Agarwal. In her statement, Smt Jyoti Bambade has identified said person as an Advocate to whom interest payment of Rs.12,46,502/- has to be paid in cash. The appellant has disputed this statement and has denied any loan from the said Shri Rajneesh Agarwal and has instead said that he has taken loan from Rajneesh Agarwal HUF which is duly reflected in the books of accounts. With respect to this addition, I find that this WhatsApp conversation is between Smt Jyoti Bambade and Shri Rajneesh Agarwal and no such instruction of cash payment or cash loan was found in the chat conversation of Smt Bambade with the appellant. The AO further relies on the appellant’s past transactions with Rajneesh Agarwal (HUF) to justify the current addition relating to Rajneesh Agarwal (individual). However, no evidence has been furnished to establish that both are the same person for tax purposes or that the current alleged transaction pertains to the HUF. In absence of such linkage, the reliance placed on earlier years’ disclosures is misplaced. The addition is made solely on the basis of an image of a chat and purported calculation of , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal interest. No corroborative evidence such as mode of generation of cash, cash trail, confirmation from the lender, or proof of interest payment was found during the course of search. In such circumstances, reliance on a chat image without any corroborative evidence is insufficient to sustain an addition under section 69C. Section 69C applies to unexplained expenditure actually incurred by the appellant. In the present case, there is no proof that the appellant has actually incurred such expenditure. No interest payment has been shown to be made by the appellant, nor is there any evidence of receipt of the alleged cash loan and even the statement of Smt Bambade states that the amount is payable and hence the transaction is not concluded. In view of the same, it is my considered view that there is no material on record to establish a link between the WhatsApp chat and the appellant and also the fact of the transaction having been concluded by way of its payment. Accordingly, the addition of Rs.12,46,502/- is deleted.

(b) The 2nd addition done by the AO is on account of WhatsApp conversation between the appellant and Smt Jyoti Laxman Bambade. As per the statement of Smt Bambade, the appellant had shared an image with calculation of interest payment to one Sitadevi Jatia, a part of which ie 3.5% is paid in cash. I have gone through the image and the statement. The image is a tabular representation of interest calculation which is reproduced as under:

Sitadevi Jatia Pradeep Agarwal Interest calculation of Rs.50,00,000/- @ 16% (new) 16% 3.5% From To Days Amount Interest Interest Dues on Days 5-Apr-18 3-Jul-18 90 50,00,000 1,97,260 43,151 07.07.18 Wednesday

The statement of Smt Jyoti Bambade with respect to the above image is as under: Image sent by Shri Pradeep Agarwal on 05.04.2018 is the calculation of interest on loan payable to Smt Sitadevi Jatia. Part interest @ 3.5% is paid in cash.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal This, it appears that Smt Jyoti Bambade in her statement has indicated that 3.5% of the interest, ie Rs.43,151/- in the image above, is to be paid in cash and the remaining interest of Rs.1,97,260/- is to be paid by cheque. The AO has made this addition solely on the basis of statement of Smt Jyoti Bambade but has added the entire amount of Rs.2,40,411/- instead of Rs.43,151/- as computed above. Further, the stated cheque payment of Rs.1,97,260/- as implied by Smt Jyoti Bambade has not been found to have taken place. Further the appellant has submitted that he has not taken any such loan from Smt Sitadevi Jatia. In my considered view, merely sharing an interest calculation does not establish the fact of an actual loan transaction. The appellant categorically denies having availed any loan from Smt. Sitadevi Jatia, and there is no substantive evidence on record, such as loan agreements, fund transfers, or acknowledgment of liability, to corroborate the alleged transaction. Further, no cheque payment, as implied in the statement of Smt. Bambade, has been traced or linked to the appellant. Therefore, the addition has been made on mere presumptions, without concrete proof of any loan being taken, is unwarranted and liable to be deleted. In addition even the statement of Smt Jyoti Bambade states that the interest is payable and there is no message or image confirming that the interest has actually been paid and that the transaction is a concluded transaction. Thus, it is held that the AO is not correct in adding the entire interest amount of Rs.2,40,411/- merely on the basis of statement of Smt Jyoti Bambade who anyways had only stated that part interest Ie, Rs.43,151/- is payable in cash. Even with respect to Rs.43,151/- there are factual inaccuracies in the statement of Smt Bambade as the stated interest payment in cheque has not been traced or linked to the appellant and there is no corroborative evidence to indicate that the alleged transaction has actually concluded. In view of these reasons, the addition of Rs.2,40,411/- done by the AO is deleted. c) The 3rd addition is on account of alleged cash interest payment of Rs.60,00,000/- to one Arjun Bhatia with respect to image dated 23.08.2018. This WhatsApp chap is between Smt Jyoti Laxman Bambade and one Arjun Bhatia who has been identified by Smt Bambade as a broker getting loan from various persons. The image is a hand written scribbling of interest to be paid to one Ms Denisha Keshwani of Rs.2,76,000/- and interest account showing balance of Rs.60,00,000/-. The AO has added this balance amount to income in view of the statement of Smt Jyoti Bambade identifying , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal Arjun Bhatia as a loan broker. The appellant on the other hand has submitted that loan has been taken from Ms Denisha Keshwani, which has been duly reflected in the books of accounts and interest has been paid by cheque. With respect to this addition, I find that this WhatsApp conversation is between Smt Jyoti Bambade and one Arjun Bhatia and no such instruction of cash payment or cash loan was found in the chat conversation of Smt Bambade with the appellant. The statement of Smt Jyoti Bambade with respect to this WhatsApp chat is reproduced below:

(xxx) Who is Arjun Bhai? I am showing you the WhatsApp chat with Arjunbhai of 23rd August 2018. Please explain the contents of the same.

Ans: He is Shri Arjun Bhatia and lives at Ahmedabad. He is broker and through him we are getting loan from various persons. On 23.08.2018 he sent one image which shows the calculation of interest to be paid by us to Denisha R Keshwani. As per the calculation interest of Rs.2,76,000/- is to be paid in cash.

I find that the statement of Smt Jyoti Bambade only refers to Rs.2,76,000/- to be paid in cash as against Rs.60,00,000/- taken by the AO. I also find that the statement of Smt Jyoti Bambade is too vague and general and lacks any specifics or verifiable facts. The AO is relying only on the oral statement of a third party (Smt. Jyoti Bambade). There is no corroborative evidence like a money trail, ledger entries, bank statements, or agreements between the appellant and Shri Arjun Bhatia. If Smt. Bambade claimed Bhatia was a broker, it doesn’t prove that the appellant paid Bhatia anything — let alone Rs. 60 lakhs in cash. There's no corroboration like cash receipts, communication with Bhatia, or any other corroborative statement/evidence reflecting anything. Therefore, the addition of Rs.60,00,000/- done by the AO is deleted.

5.4.6 As a result the addition of Rs.74,86,913/- done by the AO on the basis of various WhatsApp messages is deleted and the ground of appeal is partly allowed.‖ 5.7 Aggrieved with the above decision by the Ld. CIT(A), granting relief to the assessee, revenue is in appeal before us.

5.8 Both the parties made submissions and arguments on the same line as were made for appeals for AY 2015-16 and 2017-18. Ld CITDR relied on order of AO, where as Ld. AR supported the order of Ld CIT(A).

5.9 Having considered the rival submissions, perused the material on record, we find that the whatsapp chats revealed during the search from the mobile phone of Smt. Jyoti L. Bambade were confronted to her while recording her statement u/s 132(4) and again during the post search proceedings, Shri Pradeep Phulchand Agarwal, the assessee has not offered any adverse comment but has endorsed the statement of Mrs. Jyoti L. Bambade. Further opportunities were also granted to Smt. Bambade and the assessee but they choose not to respond or avail the opportunities. Later, during the assessment proceedings assessee contradicted and denied to accept the declaration of Smt. Bambade, stating that the statements were recorded under stress and coercion, however, the statements of Smt. Bambade were never retracted to that effect. Ld. CIT(A) deleted the addition based on his observations that there is no material on record to establish a link between the WhatsApp chat and transaction of cash payments by the assessee and to prove that such transaction having been concluded by way of its payment. He further observed that there is no corroborative evidence like a money trail, ledger entries, bank statements, or agreements between the assessee and so-called lenders. We are unable to 28 , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal fathom with such findings of Ld. CIT(A), as in present matter, the incriminating material in the form of whatsapp chat images was found from the mobile phone of a key employee of the assessee, which was further explained / clarified and proved incriminating by her statement u/s 132(4) of the Act, which were not retracted ever thereafter. The assessee also endorsed such statements in post search proceedings. Denial of assessee at later stage and seeking linkage of information with transaction by corroborative evidence, which is accepted by the Ld. CIT(A) found to be mis appreciation of facts, misplaced and illogical. We therefore, found substance in the plea of revenue that the addition made by Ld. AO was based on incriminating material and merits substance to be upheld. We thus direct to reverse the finding of Ld. CIT(A) on this issue and restore the addition of Rs. 74,86,913/- made u/s 68 of the Act on account of cash interest paid by the assessee, which is duly corroborated by whatsapp messages / images, which further explained and admitted by Smt. Bambode in her statements u/s 132(4), that could not be dislodged or contradicted by the assessee with any plausible explanation or evidence even during the post search assessment proceedings. Gorund No 1 of the revenues appeal in ITA 4136/MUM/2025, therefore, having substance to be allowed.

, 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal 5.10 Ground No. 2: Addition U/s 69C of Rs. 71,13,899/- made u/s 69C of the Income Tax Act on account of interest on loan paid in cash @ 3.5% On this issue Ld CITDR reiterated the facts from assessment order and submitted that the Ld AO had rightly made the addition assuming that the entire loan amount received by the assessee has a factor of cash interest payment to the tune of 3.5%. Ld. CIT(A) had erroneously deleted the addition under wrong appreciation of facts that the other loans also carry additional cash interest burden of 3.5% is only a presumption of the AO. It is, therefore, prayed that, the order of the Ld. CIT (A), may be set aside and that of the Assessing Officer be restored.

5.11 Per contra Ld AR placed his reliance on the reasoning‟s offered by Ld CIT(A), which are extracted as under:

6. Ground No 4 of the appeal pertains to the action of the AO in making an addition of Rs.71,13,913/- U/s 69C on account of cash interest paid. This issue is a repetitive issue as the AO has extrapolated the chat messages pertaining to AY 2018-19 and the statement of Smt Jyoti Laxman Bambade to all the AYs holding that the appellant has paid cash interest @ 3.5% for all the loan taken. It has already been held by me in the appeal for AY 2013-14 that the AO is not correct in assuming that all the loan taken by the appellant carry an additional interest burden of 3.5% to be paid in cash and that such a presumption can be made only with respect to those transactions in respect of which specific messages has been found and statement has been given by Smt Jyoti Laxman Bambade. In the instant year, specific WhatsApp messages pertaining to the instant year have already been discussed by me in the ground above and therefore further addition of Rs.71,13,913/-, assuming that the other loans also carry-on additional cash , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal interest burden of 3.5% is only based on presumption. In view of the same the addition of Rs.71,13,913/- done by the AO is deleted.

5.12 We have considered the submissions of parties, perused the material on record. The addition of Rs. Rs.71,13,913/- U/s 69C on account of cash interest paid was made by extrapolating the analogy of cash payment of interest by the assessee on remaining loan amounts also, besides the transactions found in whatsapp chat. It would have been a correct approach if such transactions could have been proved by the revenue by independent enquiries qua the remaining loans in the books of assessee, however no such evidence to establish the practice of cash payment by the assessee for remaining loans could be brough on records by the revenue, either during the search action or in post search proceedings. Accordingly, the extrapolation was only a presumption of the Ld AO, without any corroborative evidence to back the same. Such action of AO was held as incorrect and unlawful by the Ld. CIT(A) and rightly so as the tax liability cannot be imposed on the assessee merely on the basis of surmises and assumptions. We therefore accept the submissions of Ld AR and concur with the findings of Ld. CIT(A) on this issue. Ground no 2 of the instant appeal of revenue for AY 2019-20 is rejected.

5.13 Ground No. 3 disallowance made under section I4A Ld AO observed that the assessee is engaged in trading in shares and securities and has earned exempt income from the same. Further, the assessee has investments to the tune of Rs. 11.81 crores in equity shares. In this instant case, the assessee has earned dividend income of Rs. 7,17,330/- and claimed the same exempt from tax. However, the assessee has not disallowed any expenditure attributable to the income earned during the year under consideration. Query raised to the assessee, in response assessee submitted that that assessee has not claimed any expenses other than interest paid of Rs. 2,70,75,230/- against interest income of Rs. 2,62,31,516/- under the head “Other sources” and no borrowed funds are utilized for purchase of investment and assessee own funds are more than investment and as no expenses has been claimed while computing income no disallowance u/s. 14A called for. Ld. AO made disallowance U.s 14A r.w.r. 8D following the judgment in the case of Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom), stating that in this case, the assessee has not computed any disallowance u/s. 14A. It can be easily inferred that the assessee ought to have incurred expenditure for the purpose of earning exempt income from investments. The term “expenditure” occurring in Section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal administrative, managerial or financial. Ld AO added 1% of average monthly investment of the assessee at Rs. Rs.12,09,032/-.

5.14 Matter carried before Ld CIT(A), who decided the issue in favour of the assessee, with following findings: 7. Ground No 5 of the appeal pertains to the addition of Rs.12,09,032/- U/s 14A r.w.r. 8D of the Act. The appellant has submitted that no disallowance can be done since the appellant has not claimed any expense at all and hence question of attributing expenses to investment that have earned exempt income does not arise at all. The provisions of Section 14A are reproduced as under: 14A. Expenditure incurred in relation to income not includible in total income. — For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The expression ―expenditure incurred‖ refers to actual expenditure and not to some imagined/notional/presumptive expenditure. Thus, no disallowance can be made on notional or presumptive basis in the absence of any actual expenditure. The Apex Court in Maxopp Investment Ltd. v. CIT [(2018) 402 ITR 640 (SC)], while confirming applicability of Section 14A, emphasized that disallowance must be linked to actual expenditure incurred for earning exempt income. Further CBDT Circular No. 5/2014, dated 11.02.2014 clarifies that Section 14A applies only to "expenditure incurred‖ and hence if no expenditure is incurred, disallowance cannot be triggered. In the instant case, the appellant has shown no specific expenditure directly or indirectly related to earning exempt income and there is no claim of deduction for such expenses in P&L and therefore Section 14A disallowance is not applicable. The addition of Rs.12,09,032/- done by the AO is deleted and the ground of appeal is allowed.

5.15 On the issue of disallowance u/s 14A, Ld. CITDR reiterated the facts from assessment order and submitted that the Ld AO had rightly made the disallowance. Whereas, Ld. CIT(A) had erroneously deleted the disallowance under wrong appreciation of facts that the appellant has not claimed specific expenditure directly or indirectly related to earning exempt income in its P&L , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal A/c. It is, therefore, prayed that, the order of the Ld. CIT (A), may be set aside and that of the Assessing Officer be restored.

5.16 Per contra Ld. AR placed his reliance on the reasoning‟s offered by Ld. CIT(A).

5.17 We have considered the rival submissions, perused the material on record and relevant case laws. The issue of disallowance u/s 14A is no more res integra it is decided by special bench of ITAT in the case of Assistant Commissioner of Income-tax, Circle 17 (1), New Delhi vs. Vireet Investment (P.) Ltd. [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB)/[2017] 58 ITR(T) 313 (Delhi - Trib.) (SB) [16-06-2017], that Only those investments are to be considered for computing average value of investment which yielded exempt income during the relevant year, respectfully following the aforesaid analogy, we principally concur with the working of Ld. AO. However, for the purpose of verification and computation, we direct the Ld. AO to work out the disallowance following the principle laid down by Special Bench in the case of Vireet Investment (supra). However, the disallowance computed on the basis of average investment (which yielded exempt income) shall not be more than the exempt income earned by the assessee. The issue therefore restored to the file of Ld. AO for the purpose of calculation of disallowance u/s 14A in terms of our observations herein above, for which the assessee is directed to provide 34 , 4181 and 4136/MUM/2025 Pradeep Phulchand Agarwal necessary information or clarifications, if any called for by the Ld. AO. In result Ground No 3 of the appeal of revenue stands partly allowed.

Order pronounced in open court on 22.09.2025.