Loading judgment…
Facts
A search operation led to the recovery of WhatsApp chats suggesting unrecorded sales. The Assessing Officer (AO) applied a Gross Profit (GP) rate on these sales, and the CIT(A) confirmed the addition. The assessee appealed, arguing the chats lacked corroboration and that the addition was based on conjecture.
Held
The Tribunal held that the mandatory requirements of Section 65B of the Evidence Act were not complied with by the Revenue. It was also noted that taxing the entire gross profit without considering indirect expenses is unrealistic. The Tribunal decided to restrict the addition to 50% of the amount sustained by the CIT(A).
Key Issues
Whether WhatsApp chats, without other corroborative evidence and without compliance with Section 65B of the Evidence Act, can form the sole basis for an addition to income, and whether the entire gross profit can be taxed.
Sections Cited
132, 147, 65B, 145(3), 69A, 292C
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: These three appeals filed by the Assessee are directed against the respective orders of the Ld. Commissioner of Income Tax (Appeals)-5, Ludhiana [hereinafter 'Ld. CIT(A)'], all dated 11/07/2025, pertaining to Assessment Years (A.Y.) 2019-20, 2020-21, and 2022-23.
As the issues involved in these appeals are identical and arose out of a common factual matrix, they were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity."
3. We shall take up the appeal of the Assessee in for the Assessment Year 2019-20 as a lead case for discussion wherein the assessee has raised the following grounds:
1. 1. 1. That the Ld. CIT (Appeals) has erred in dismissing the appeal of the assessee without assigning any valid reasons.
2. That the Ld. CIT(A) has erred in confirming the order of Assessing Officer with regard to the application of Gross Profit rate on the alleged sales outside the 2 books of accounts on the basis of WhatsApp chat, which has no evidentiary value.
3. Notwithstanding the above said ground of appeal, it is submitted that the application G.P. rate is also not justified and if at all any appropriate profit was to be applied that should have been the net profit rate, which in the present case is 1.35% on the sales outside the books of accounts to the tune of Rs. 57,22,229/-.
4. That the Ld. CIT(A) has erred in not considering the judgments as cited before him, regarding the application of profit rate.
5. That the CIT(A) has erred in applying the gross profit rate of 11.08% on the unrecorded sales on the basis of Whats App chat and this could not have been done without rejecting the books of accounts as it is a settled law that no addition could be made until or unless the books of accounts are rejected.
6. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.
4. The factual matrix of the case reveals that a search action under section 132 of the Income Tax Act, 1961, was conducted on 21.10.2021. Based on digital evidence recovered during this action, the case was reopened under section 147. During the assessment, the AO confronted the assessee with WhatsApp chat conversations retrieved from the mobile device of Sh. Amarjit Singh Aneja. These chats were alleged to reflect sales transactions totalling Rs. 57,22,229/-. The AO noted that the assessee failed to reconcile these entries, dismissing them as "rough jottings". Consequently, the AO treated the sum as "out-of-book sales" and applied a GP rate of 11.80% to arrive at the addition of Rs. 6,75,223/-.
5. Feeling aggrieved by the order, the assessee preferred the appeal before the Ld. CIT(A) and made elaborate submissions. However, the Ld. CIT(A) has not granted the relied as sought by the assessee. Upon adjudication, the Ld. CIT(A) dismissed the assessee's appeal and recorded the following findings in seriatim: The WhatsApp chats constitute reliable and admissible electronic evidence under the law, as they were recovered during a search and seizure operation and were not discredited with substantive proof.
3 The entries in the chats were detailed enough to indicate the physical movement of goods rather than mere rough jottings. The appellant failed to provide a credible reconciliation of these entries with the regular books of accounts. Following the ratio in Gurdip Cycle Industries vs. DCIT, it is logical to infer that unrecorded sales arise from unrecorded purchases, justifying the application of a GP rate. The judicial precedents cited by the assessee were distinguishable as they did not involve seized digital evidence recovered during a search. The rejection of books of accounts under section 145(3) is not a mandatory prerequisite for estimating income when the facts of the case justify such an estimation.
6. Feeling aggrieved by the order passed by the Ld. CIT(A) the assessee is in appeal before us, on various grounds mentioned in the appeal however, we are only adjudicating the core issue as mentioned hereinabove.
The Ld. AR for the assessee submitted that the WhatsApp chats were unverified and lacked any corroborative evidence such as the names of parties, proof of payment, or delivery records. It was argued that no statement was recorded from Sh. Amarjit Singh to confirm the nature of these conversations, making the addition a result of mere surmises. The AR further contended that there was no evidence of corresponding unrecorded purchases. On a secondary plea, the AR argued that if the chats were to be treated as sales, only the Net Profit (NP) rate of 1.35% should be applied, as the total sale proceeds cannot represent the taxable income of the assessee. Ld. AR had made the following written submission in support of the case of the assessee: This is an appeal has been filed by the assessee and the brief facts of the case are as under: I. There was a search and seizure operation at the assessee's business and residential premises on 21.10.2021. Theassessee is engaged in the business of manufacture and trading of cycle parts.
4 II. The Ld. Assessing Officer (AO) made an addition amounting to Rs 6,75,223 on account of GP Rate 11.80% applied on sales made outside the books of accounts amounting to Rs.57,22,229/- as per Para 4, Page No 2 of the AO order. III. Aggrieved by the Order of the Ld.AO, the assessee has approached the first appellate Authority wherein the Worthy CIT Appeals had confirmed the order of the assessing officer. The findings of the CIT(A) are given in the Para 5.1.3 of the appellate order. Now, the assessee has filed an appeal before your honour and brief IV. synopsis in respect of the same are as under: Brief synopsis The assessee contests the addition of Rs. 6,75,230, made by the Ld.AO by 1. applying a gross profit rate of 11.80% on alleged unrecorded sales of Rs. 57,82,229, purportedly derived from a WhatsApp chat found on the mobile phone of one Sh. Amarjit Singh who is a partner in the assessee firm. The assessee submits that the AO erred in treating the WhatsApp 2. conversation as evidence of out-of-book sales. No corroborative material, such as the statement of the alleged buyer or even the partner Sh. Amarjit Singh, was recorded during search, post-search enquiry, or assessment. Thus, the estimation lacks evidentiary foundation.
It is being argued that the WhatsApp entries were merely rough jottings, unconnected with actual sales, and incapable of reconciliation due to incomplete data. No evidence of corresponding unrecorded purchases or cash receipts was found during search. The assessee contends that the addition is purely on conjectures and assumptions.
Further, the Assessing Officer, though, have relied upon the "Whatsapp chat' but has not given any certificate required u/s 65 (4) of the Act, which is mandatory and, in this regard, the following submissions may, please, be considered:- Section 65B of the Evidence Act: Discussion on a recent judgment of the Hon'ble Supreme Court in the case of [ADG (DRI) v. Suresh Kumar & Co. Impex Pvt. Ltd. (2025 INSC 1050, dt. 20.08.2025)], elucidating the import of Section 65B of the Indian Evidence Act and the consequences of non-compliance. (a). A three-judge bench of the Hon'ble Supreme Court vide their judgment in the case of Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal and others [C.A. Nos. 20825-20826 of 2017 dated 14-7-2020] gave finality to the legal conundrum pertaining to the requirement of certificate for producing electronic evidence under Section 65B of the Indian Evidence Act, 1872. The Hon'ble Supreme Court clarified that certificate required under Section 65B(4) of the Act is mandatory and a condition precedent to the admissibility of evidence by way of electronic record. (b). Hon'ble Madras High Court in the case of SKM Animal Feeds and Foods (India) (P) Ltd. v. ACIT, Central Circle [2023] 156 taxmann.com385 (Madras) has held that electronic evidence has to be certified in terms of Section 65B of the 5 Indian Evidence Act, and order passed due to non-compliance of Section 65(B) of the Indian Evidence Act, were set aside. Hon'ble ITAT Delhi Bench in the case of RituTuli v. DCIT (ITA 2016/Del/2023) - (c) para 10-14 as per Section 65B of the Indian Evidence Act, 1872, read with Digital Evidence Investigation Manual 2014 of CBDT, the Revenue Authorities have to mandatorily and scrupulously follow the conditions laid down under Section 65B(2) and (4) of the Indian Evidence Act, 1872 to render any documents to be valid in the eyes of law. Hon'ble Visakhapatnam Tribunal in the case of Somasundaram v. DCIT (d) (ITA Nos. 172 to 180/Viz/2023) (Para 45 & 46). (e) Hon'ble Mumbai Tribunal in the case of Shri Anand Jaikumar Jain [2023] 147 taxmann.com125 (Para 24). (f) Hon'ble Mumbai Tribunal in the case of Monika Anand Gupta v. ITO, order dated 21.04.2022 (Para 6). (g) Hon'ble Mumbai Tribunal in the case of M/s. Simtools Pvt. Ltd. v. DCIT, (Para 25 & 28). (h) Hon'ble Mumbai Tribunal in the case of Deputy Commissioner of Income- tax v. Niru Dhiren Shah (ITA No. 4294 (MUM) of 2025) - para 7.1.
Further reliance is being placed on the latest judgment of the Kolkata Bench of ITAT in the case of Balakund Sponge and Iron Pvt Ltd vs DCIT in the DATED 09.12.2025wherein it has been held as under: 6.5. After hearing the rival contentions and perusing the materials available on record, we find that the addition was made only on the basis of Whatsapp Chats between the director of Shri Abhishek Kanodia and employee of the company. We note that apart from the Whatsapp Chat there is no evidence on record nor any substantive evidences have been brought by the Id. AO or Id. CIT (A) on records. The Id. AO added the entire money as unexplained money u/S 69A of the Act, whereas as a matter of fact, there was no money which could be added u/s 69A of the act and therefore the Provisions of Section 69A are not applicable. The Id. CIT (A) has gone a step further by applying GP on the said WhatsApp Chats amount. Under these circumstances, we are of the view that unless there is a corroborative material found to support the transactions mentioned in the the WhatsApp Chats, no addition could be made in the hands of the assessee, even on account of profits as done by the Id. CIT (A). The assessee has also made without prejudice submission that Provisions of Section 292C of the Act, the presumption is to be drawn in respect of WhatsApp transactions in the hands of the person from whose possession or control the books of accounts/ documents, etc. are found. Even the presumption u/s 292C of the Act is rebuttable when the assessee proved that he has not done any such transactions even in respect of such transaction as were contained in the loose paper which were found during the course of search. This was held by the Hon'ble Delhi High Court in case of PCIT Vs. Delco India (P.) ltd. reported in (2016) Page \ 9 Balmukund Lease Fin Private Limited; A.Y. 15-16 to 18-19, 23-24 Balmukund Cement & Roofings Private Limited AYs 15-16 to 21-22, 23-24 Balmukund 6 Sponge and Iron Private Limited; A.Y. 23- 24 67 taxmann.com 357 (Delhi). We note that in the present case the chats of Shri Pradeep Sahewal, who is one of the directors of the group companies and as such any adverse view should be taken in his hand and not in the hands of the assessee specially on the ground that there is nothing on record to substantiate the transactions belonged to the assessee. We also found that it is not mentioned in the WhatsApp Chat whether the amounts involved are receipt or payments. Accordingly, we are inclined to set aside the order of Id. CIT (A) and direct the Id. AO to delete the addition a s sustained by the Id. CIT (A). The grounds no. 2 to 4 are allowed.
7. In the result, the appeal of assessee in is allowed.
Without prejudice, the assessee submits that even if the figures are treated as sales, only net profit-and not gross profit-can be taxed, relying on the judgment of Hon'ble High Court of Gujrat in the case of CIT v. President Industries as reported in [2002] 258 ITR 654 and judgment of Hon'ble High Court of Madhya Pradesh in the case of CIT v. Balchand Ajit Kumar as reported in [2003] 263 ITR 610. As the declared NP rate is 1.35%, the assessee prays that the same be applied and the consequential relief granted.
7. Further, it is significant that the Assessing Officer has not rejected the books of account under section 145(3). Once the books have been accepted and no defect has been pointed out, the AO is unjustified in substituting the declared results and applying an arbitrary GP rate. In absence of any rejection of books, estimation of income by enhancing GP is unsustainable in law. Therefore, even assuming (without admitting) that the alleged figures represent unrecorded sales, only the declared net profit rate of 1.35% can be applied, in line with judicial precedents, and the addition made by applying a higher GP rate deserves to be deleted.
The Ld. DR strongly supported the findings of the lower authorities. The Revenue argued that the digital records were substantive and detailed, shifting the burden of proof to the assessee to explain the source and nature of the transactions. The DR maintained that since the assessee failed to provide any reconciliation, the AO's estimation using the declared GP rate was reasonable and legally tenable. It was further submitted that the absence of direct statements does not vitiate the validity of digital records seized during a search when the assessee offers no satisfactory explanation.
We have duly considered the rival submissions, carefully examined the material placed on record and gone through the orders of the authorities below. It is observed that though the Revenue has relied upon certain digital