Digital Evidence Alone Insufficient For Section 69A Addition, Tangible Assets Must Be Found: ITAT Delhi

The New Delhi Bench of the Income Tax Appellate Tribunal on 26 May held that authorities cannot sustain additions under Section 69A of the Income Tax Act in the absence of recovery of unexplained money, bullion, jewellery or other valuable articles from the taxpayer, and cannot invoke the provision merely on the basis of digital material indicating alleged transactions.

Judicial Member Sudhir Kumar and Accountant Member Manish Agarwal partly allowed the appeal filed by Sham Sunder Dhingra for Assessment Year 2020–21 and directed the Assessing Officer to tax only 20% of the alleged commission receipts instead of treating the entire amount as unexplained income. The Bench stated that "..in the absence of any unexplainedmoney or article, the provisions of section 69A cannot be invoked…”

The case arose from a search and seizure operation conducted on the ALM Group on 3 January 2023.

During the search at the premises of ALM Industries Ltd. former director Mujeeb Malik, investigators forensically cloned a mobile phone and recovered WhatsApp chats, Excel sheets and emails that allegedly indicated commission transactions involving several persons, including the taxpayer. Malik filed his return of income declaring Rs. 5.16 lakh for the relevant year. Following the search findings, the Assessing Officer reopened the assessment under Sections 147 and 148 of the Income Tax Act.

Based on the seized digital material and statements recorded during investigation, the department alleged that the taxpayer received undisclosed commission income of Rs. 20.92 lakh in connection with export sales facilitated through commission agents.

The Assessing Officer added Rs. 20.92 lakh under Section 69A, treating the alleged commission receipts as unexplained money, and assessed the total income at Rs. 26.08 lakh. The Commissioner of Income Tax (Appeals) upheld the reassessment and the addition.

Before the Tribunal, the taxpayer argued that the Assessing Officer wrongly invoked Section 69A since no unexplained cash, bullion, jewellery or valuable articles were found in his possession. He further submitted that the addition rested solely on unverified digital evidence, including WhatsApp chats and Excel sheets, without certification under Section 65B of the Indian Evidence Act and without granting an opportunity for cross-examination.

The Tribunal noted that Section 69A applies only where a taxpayer owns unexplained money, bullion, jewellery or other valuable articles not recorded in the books of account. The Bench observed that the statutory precondition for invoking Section 69A did not exist in the present case. It held:

“...In the present case, certain documents found which contains the details of commission received by the assessee. Thus applying the provisions of section 69A in the case of the assessee is not appropriate and bad in law…”

It further held that no unexplained money or valuables were recovered from the taxpayer and that the department relied only on documents allegedly reflecting commission receipts. On that basis, it found the invocation of Section 69A legally unsustainable.

At the same time, the Tribunal accepted that the material indicated commission activity. It held that authorities could not treat the entire gross receipts as income since business expenditure had to be allowed and directed the Assessing Officer to treat only 20% of the gross commission receipts as taxable income.

Accordingly, the ITAT partly allowed the appeal.

For Appellant: Sh. Salil Kapoor, Adv. & Sh. Sumit Lalchandani, Adv., Sh. Shivam Yadav, Adv, Ms. Ananya Kaoor, Adv., & Ms. Sejal Arora, Adv. 

For Respondent: Sh. Jitender Singh, CIT(DR)