ASHOKA INDUSTRIAL FASTNERS, ,LUDHIANA vs. DCIT CENTRAL CIRLCE-3, , LUDHIANA

Order \nPER LALIET KUMAR, J.M:\nThese three appeals filed by the Assessee are directed against the\nrespective orders of the Ld. Commissioner of Income Tax (Appeals)-5, Ludhiana\n[hereinafter 'Ld. CIT(A)'], all dated 11/07/2025, pertaining to Assessment Years\n(Α.Υ.) 2019-20, 2020-21, and 2022-23.\n2. As the issues involved in these appeals are identical and arose out of a\ncommon factual matrix, they were heard together and are being disposed of\nby this consolidated order for the sake of convenience and brevity.\n3. We shall take up the appeal of the Assessee in for\nthe Assessment Year 2019-20 as a lead case for discussion wherein the assessee\nhas raised the following grounds:

\n1. That the Ld. CIT (Appeals) has erred in dismissing the appeal of the\nassessee without assigning any valid reasons.\n2. That the Ld. CIT(A) has erred in confirming the order of Assessing Officer\nwith regard to the application of Gross Profit rate on the alleged sales outside the\nbooks of accounts on the basis of WhatsApp chat, which has no evidentiary\nvalue.\n3. Notwithstanding the above said ground of appeal

, it is submitted that the\napplication G.P. rate is also not justified and if at all any appropriate profit was to\nbe applied that should have been the net profit rate, which in the present case is\n1.35% on the sales outside the books of accounts to the tune of Rs.57,22,229/-.\n4. That the Ld. CIT(A) has erred in not considering the judgments as cited\nbefore him, regarding the application of profit rate.\n5. That the CIT(A) has erred in applying the gross profit rate of 11.08% on the\nunrecorded sales on the basis of Whats App chat and this could not have been\ndone without rejecting the books of accounts as it is a settled law that no\naddition could be made until or unless the books of accounts are rejected.\n6. That the appellant craves leave to add or amend the grounds of appeal

\nbefore the appeal is finally heard or disposed off.\n4. The factual matrix of the case reveals that a search action under section\n132 of the Income Tax Act, 1961, was conducted on 21.10.2021. Based on\ndigital evidence recovered during this action, the case was reopened under\nsection 147. During the assessment, the AO confronted the assessee with\nWhatsApp chat conversations retrieved from the mobile device of Sh. Amarjit\nSingh Aneja. These chats were alleged to reflect sales transactions totalling Rs.\n57,22,229/-. The AO noted that the assessee failed to reconcile these entries,\ndismissing them as \"rough jottings\". Consequently, the AO treated the sum as\n\"out-of-book sales\" and applied a GP rate of 11.80% to arrive at the addition of\nRs.6,75,223/-.\n5. Feeling aggrieved by the order, the assessee preferred the appeal before\nthe Ld. CIT(A) and made elaborate submissions. However, the Ld. CIT(A) has\nnot granted the relied as sought by the assessee. Upon adjudication, the Ld.\nCIT(A) dismissed the assessee's appeal and recorded the following findings in\nseriatim:\n• The WhatsApp chats constitute reliable and admissible\nelectronic evidence under the law, as they were recovered during\na search and seizure operation and were not discredited with\nsubstantive proof.\n• The entries in the chats were detailed enough to indicate the\nphysical movement of goods rather than mere rough jottings.\n• The appellant failed to provide a credible reconciliation of\nthese entries with the regular books of accounts.\n• Following the ratio in Gurdip Cycle Industries vs. DCIT, it is\nlogical to infer that unrecorded sales arise from unrecorded\npurchases, justifying the application of a GP rate.\n• The judicial precedents cited by the assessee were\ndistinguishable as they did not involve seized digital evidence\nrecovered during a search.\n• The rejection of books of accounts under section 145(3) is not\na mandatory prerequisite for estimating income when the facts of\nthe case justify such an estimation.\n6. Feeling aggrieved by the order passed by the Ld. CIT(A) the assessee is in\nappeal before us, on various grounds mentioned in the appeal however, we\nare only adjudicating the core issue as mentioned hereinabove.\n7. The Ld. AR for the assessee submitted that the WhatsApp chats were\nunverified and lacked any corroborative evidence such as the names of\nparties, proof of payment, or delivery records. It was argued that no statement\nwas recorded from Sh. Amarjit Singh to confirm the nature of these\nconversations, making the addition a result of mere surmises. The AR further\ncontended that there was no evidence of corresponding unrecorded\npurchases. On a secondary plea, the AR argued that if the chats were to be\ntreated as sales, only the Net Profit (NP) rate of 1.35% should be applied, as the\ntotal sale proceeds cannot represent the taxable income of the assessee. Ld.\nAR had made the following written submission in support of the case of the\nassessee:\nThis is an appeal has been filed by the assessee and the brief facts of the case\nare as under:\n1. There was a search and seizure operation at the assessee's business\nand residential premises on 21.10.2021. Theassessee is engaged in the business of\nmanufacture and trading of cycle parts.\nII. The Ld. Assessing Officer (AO) made an addition amounting to Rs\n6,75,223 on account of GP Rate 11.80% applied on sales made outside the books\nof accounts amounting to Rs.57,22,229/- as per Para 4, Page No 2 of the AO\norder.\n///. Aggrieved by the Order of the Ld.AO, the assessee has approached\nthe first appellate Authority wherein the Worthy CIT Appeals had confirmed the\norder of the assessing officer. The findings of the CIT(A) are given in the Para 5.1.3\nof the appellate order.\nIV. Now, the assessee has filed an appeal before your honour and brief\nsynopsis in respect of the same are as under:\nBrief synopsis\n1. The assessee contests the addition of Rs.6,75,230, made by the Ld.AO by\napplying a gross profit rate of 11.80% on alleged unrecorded sales of Rs.\n57,82,229, purportedly derived from a WhatsApp chat found on the mobile\nphone of one Sh. Amarjit Singh who is a partner in the assessee firm.\n2. The assessee submits that the AO erred in treating the WhatsApp\nconversation as evidence of out-of-book sales. No corroborative material, such\nas the statement of the alleged buyer or even the partner Sh. Amarjit Singh, was\nrecorded during search, post-search enquiry, or assessment. Thus, the estimation\nlacks evidentiary foundation.\n3. It is being argued that the WhatsApp entries were merely rough jottings,\nunconnected with actual sales, and incapable of reconciliation due to\nincomplete data. No evidence of corresponding unrecorded purchases or cash\nreceipts was found during search. The assessee contends that the addition is\npurely on conjectures and assumptions.\n4. Further, the Assessing Officer, though, have relied upon the \"Whatsapp\nchat' but has not given any certificate required u/s 65. (4) of the Act, which is\nmandatory and, in this regard, the following submissions may, please, be\nconsidered:-\nSection 65B of the Evidence Act:\nDiscussion on a recent judgment of the Hon'ble Supreme Court in the case of\n[ADG (DRI) v. Suresh Kumar & Co. Impex Pvt. Ltd. (2025 INSC 1050, dt.\n20.08.2025)], elucidating the import of Section 65B of the Indian Evidence Act\nand the consequences of non-compliance.\n(a). A three-judge bench of the Hon'ble Supreme Court vide their judgment in the\ncase of Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal and others [C.A.\nNos.20825-20826 of 2017 dated 14-7-2020] gave finality to the legal conundrum\npertaining to the requirement of certificate for producing electronic evidence\nunder Section 65B of the Indian Evidence Act, 1872.\nThe Hon'ble Supreme Court clarified that certificate required under Section 65B(4)\nof the Act is mandatory and a condition precedent to the admissibility of\nevidence by way of electronic record.\n(b). Hon'ble Madras High Court in the case of SKM Animal Feeds and Foods\n(India) (P) Ltd. v. ACIT, Central Circle [2023] 156 taxmann.com385 (Madras) has\nheld that electronic evidence has to be certified in terms of Section 65B of the\nIndian Evidence Act, and order passed due to non-compliance of Section 65(B)\nof the Indian Evidence Act, were set aside.\n(c) Hon'ble ITAT Delhi Bench in the case of RituTuli v. DCIT (ITA 2016/Del/2023) -\npara 10-14 as per Section 65B of the Indian Evidence Act, 1872, read with Digital\nEvidence Investigation Manual 2014 of CBDT, the Revenue Authorities have to\nmandatorily and scrupulously follow the conditions laid down under Section\n65B(2) and (4) of the Indian Evidence Act, 1872 to render any documents to be\nvalid in the eyes of law.\n(d) Hon'ble Visakhapatnam Tribunal in the case of Somasundaram v. DCIT\n(ITA Nos.172 to 180/Viz/2023) (Para 45 & 46).\n(e) Hon'ble Mumbai Tribunal in the case of Shri Anand Jaikumar Jain [2023]\n147 taxmann.com125 (Para 24).\n(f) Hon'ble Mumbai Tribunal in the case of Monika Anand Gupta v. ITO, ITA\nNo. 5561/Mum/2018; order dated 21.04.2022 (Para 6).\n(g) Hon'ble Mumbai Tribunal in the case of M/s. Simtools Pvt. Ltd. v. DCIT, ITA\nNo. 1574/Mum/2020 (Para 25 & 28).\n(h) Hon'ble Mumbai Tribunal in the case of Deputy Commissioner of Income-\ntax v. Niru Dhiren Shah (ITA No. 4294 (MUM) of 2025) - para 7.1.\n5. Further reliance is being placed on the latest judgment of the Kolkata\nBench of ITAT in the case of Balakund Sponge and Iron Pvt Ltd vs DCIT in the ITA\nNo 1396/KOL/2025 DATED 09.12.2025wherein it has been held as under:\n6.

5. After hearing the rival contentions and perusing the materials\navailable on record, we find that the addition was made only on the basis\nof Whatsapp Chats between the director of Shri Abhishek Kanodia and\nemployee of the company. We note that apart from the Whatsapp Chat\nthere is no evidence on record nor any substantive evidences have been\nbrought by the Id. AO or Id. CIT (A) on records. The Id. AO added the\nentire money as unexplained money u/S 69A of the Act, whereas as a\nmatter of fact, there was no money which could be added u/s 69A of the\nact and therefore the Provisions of Section 69A are not applicable. The Id.\nCIT (A) has gone a step further by applying GP on the said WhatsApp\nChats amount. Under these circumstances, we are of the view that unless\nthere is a corroborative material found to support the transactions\nmentioned in the the WhatsApp Chats, no addition could be made in the\nhands of the assessee, even on account of profits as done by the Id. CIT\n(A). The assessee has also made without prejudice submission that\nProvisions of Section 292C of the Act, the presumption is to be drawn in\nrespect of WhatsApp transactions in the hands of the person from whose\npossession or control the books of accounts/ documents, etc. are found.\nEven the presumption u/s 292C of the Act is rebuttable when the assessee\nproved that he has not done any such transactions even in respect of\nsuch transaction as were contained in the loose paper which were found\nduring the course of search. This was held by the Hon'ble Delhi High Court\nin case of PCIT Vs. Delco India (P.) Itd. reported in (2016) Page \ 9\nBalmukund Lease Fin Private Limited; A.Y. 15-16 to 18-19, 23-24 Balmukund\nCement & Roofings Private Limited AYs 15-16 to 21-22, 23-24 Balmukund\nSponge and Iron Private Limited; A.Y. 23-24 67 taxmann.com 357 (Delhi).\nWe note that in the present case the chats of Shri Pradeep Sahewal, who\nis one of the directors of the group companies and as such any adverse\nview should be taken in his hand and not in the hands of the assessee\nspecially on the ground that there is nothing on record to substantiate the\ntransactions belonged to the assessee. We also found that it is not\nmentioned in the WhatsApp Chat whether the amounts involved are\nreceipt or payments. Accordingly, we are inclined to set aside the order\nof Id. CIT (A) and direct the Id. AO to delete the addition as sustained by\nthe Id. CIT (A). The grounds no. 2 to 4 are allowed.\n7. In the result, the appeal of assessee in is\nallowed.\n6. Without prejudice, the assessee submits that even if the figures are treated\nas sales, only net profit-and not gross profit-can be taxed, relying on the\njudgment of Hon'ble High Court of Gujrat in the case of CIT v. President Industries\nas reported in [2002] 258 ITR 654 and judgment of Hon'ble High Court of Madhya\nPradesh in the case of CIT v. Balchand Ajit Kumar as reported in [2003] 263 ITR\n610. As the declared NP rate is 1.35%, the assessee prays that the same be\napplied and the consequential relief granted.\n7. Further, it is significant that the Assessing Officer has not rejected the\nbooks of account under section 145(3). Once the books have been accepted\nand no defect has been pointed out, the AO is unjustified in substituting the\ndeclared results and applying an arbitrary GP rate. In absence of any rejection of\nbooks, estimation of income by enhancing GP is unsustainable in law. Therefore,\neven assuming (without admitting) that the alleged figures represent unrecorded\nsales, only the declared net profit rate of 1.35% can be applied, in line with\njudicial precedents, and the addition made by applying a higher GP rate\ndeserves to be deleted.\n8. The Ld. DR strongly supported the findings of the lower authorities. The\nRevenue argued that the digital records were substantive and detailed, shifting\nthe burden of proof to the assessee to explain the source and nature of the\ntransactions. The DR maintained that since the assessee failed to provide any\nreconciliation, the AO's estimation using the declared GP rate was reasonable\nand legally tenable. It was further submitted that the absence of direct\nstatements does not vitiate the validity of digital records seized during a search\nwhen the assessee offers no satisfactory explanation.\n9. We have duly considered the rival submissions, carefully examined the\nmaterial placed on record and gone through the orders of the authorities\nbelow. It is observed that though the Revenue has relied upon certain digital\nevidence, the mandatory requirement prescribed under section 65B of the Act\nhas not been complied with, nor has the Revenue demonstrated adherence to\nthe Standard Operating Procedure notified by the Board for collection and\nreliance upon digital evidence. Further, the Revenue has proceeded on the\npresumption that the entire gross profit arising from the alleged unrecorded\ntransactions is liable to be brought to tax, without establishing that the assessee\nincurred no indirect or administrative expenditure in carrying out such\ntransactions. In our considered view, the generation of turnover, whether\nrecorded or unrecorded, necessarily involves the deployment of managerial,\nadministrative, and infrastructural resources, and the taxation of the entire gross\nprofit would therefore result in an excessive and unrealistic estimation of income.\n9.1 At the same time, we find force in the contention of the Revenue that the\nnet profit rate of 1.35% adopted by the assessee is on the lower side, having\nregard to the nature of unrecorded business. However, it cannot be overlooked\nthat everyday indirect business expenses would have already been absorbed in\ncomputing the net profit on recorded sales, and such costs are likely to have\nalso facilitated transactions carried out outside the books.\n9.2 Considering the totality of the facts and circumstances of the case, and\nto strike a fair balance between the competing claims, we are of the\nconsidered opinion that a partial sustenance of the addition would meet the\nends of justice. Accordingly, we direct the Assessing Officer to restrict the\naddition to 50% of the amount sustained by the Ld. CIT(A). Consequently, the\naddition is sustained to the extent of ₹3,37,612/-, and the balance stands\ndeleted.\n10. In the result, the appeal is partly allowed.\n11. Adverting to the remaining appeals, namely for\nΑ.Υ. 2020-21 and for A.Y. 2022-23, both parties before us\nhave conceded that the facts and circumstances involved therein are pari\nmateria with those in the lead appeal, ITA No. 1139/Chd/2025 for A.Y. 2019-20.\nSince the issues arising in these two appeals are identical to the issues\nadjudicated by us in the lead case for A.Y. 2019-20, our findings and\nobservations recorded therein shall apply mutatis mutandis to these appeals as\nwell.\n12. Consequently, following the same reasoning, the addition sustained by\nthe Ld. CIT(A) in both the aforementioned years is hereby restricted to 50% of the\nvalue. The Assessing Officer is directed to grant relief to the extent of the\nremaining 50% of the addition sustained.\n13. In the result, ITA No. 1140/Chd/2025 and ITA No. 1141/Chd/2025 are partly\nallowed in terms of our decision in the lead appeal.\n14. In the result, all the above appeals filed by the assessee are partly\nallowed.\nOrder pronounced in the open Court on 29/12/2025.\nSd/-\nकृणवन्त सहाय\n(KRINWANT SAHAY)\nलेखा सदस्य / ACCOUNTANT MEMBER\nSd/-\nललित कुमार\n(LALIET KUMAR)\nन्यायिक सदस्य/JUDICIAL MEMBER\nAG\nआदेशकीप्रतिलिपि अग्रेषित/