2023 (9) TMI 1664 - AT - Income Tax

Addition u/s. 69C - unaccounted payment of salary in cash to four employees - CIT confirmed the addition on account of alleged cash payment to said two employees while deleted for other two - HELD THAT - We are in agreement with the contention of ld. AR that in absence of providing cross examination on the said two employees whose statements have been relied by the Assessing Officer such statements cannot be used against the assessee for making addition on account of part payment of salary in cash to the said two employees only on the basis whatsapp chats which has no evidentiary value in absence of other collaborative adverse material against the assessee showing part payment of salary in cash to the said two employees. AO has proceeded to make addition on the basis of whatsapp chats between two employees and their statements only and no other documentary evidence or adverse positive material has been found and searched during the course of search and seizure operation. We are unable to see any distinction between both the sets of employees. The whatsapp chats standalone basis is not having valid evidence to support the action of making addition u/s. 69C - Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the addition of Rs. 5,75,000/- under Section 69C of the Income Tax Act, based on alleged cash payments to employees, is justified when primarily supported by WhatsApp conversations and employee statements without corroborative evidence.
• Whether the failure to provide the opportunity for cross-examination of employees whose statements were used against the assessee constitutes a violation of procedural fairness.
• Whether WhatsApp conversations can be considered valid evidence for substantiating claims of unaccounted cash payments in the absence of other corroborative evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Addition under Section 69C

• Relevant legal framework and precedents: Section 69C of the Income Tax Act pertains to unexplained expenditure, allowing additions to income if the taxpayer cannot satisfactorily explain the source of such expenditure.
• Court's interpretation and reasoning: The court noted that the addition was based on WhatsApp conversations and statements of employees, without any corroborative evidence. The lack of substantial evidence led to questioning the validity of the addition.
• Key evidence and findings: The Assessing Officer (AO) initially made an addition of Rs. 9,50,000/- for unaccounted salary payments, which was partly confirmed by the CIT(A) for Rs. 5,75,000/-. The evidence relied upon included WhatsApp chats and employee statements, but no additional documentary evidence was found during the search and seizure operations.
• Application of law to facts: The court applied the principle that without corroborative evidence, such as documentary proof or third-party verification, WhatsApp chats alone do not suffice to substantiate claims of unaccounted cash payments.
• Treatment of competing arguments: The assessee argued that WhatsApp chats have no evidentiary value and that procedural fairness was violated due to the lack of cross-examination. The Revenue contended that sufficient evidence existed to justify the addition.
• Conclusions: The court concluded that the addition was not justified due to the absence of corroborative evidence and directed the deletion of the addition.

Issue 2: Procedural Fairness and Right to Cross-Examination

• Relevant legal framework and precedents: The principles of natural justice require that parties be given a fair opportunity to present their case, including the right to cross-examine witnesses whose statements are used against them.
• Court's interpretation and reasoning: The court emphasized that the denial of cross-examination rights undermined the procedural fairness owed to the assessee.
• Key evidence and findings: The statements of employees were used to support the addition without offering the assessee the opportunity to cross-examine these employees, despite a specific request.
• Application of law to facts: The court found that the failure to allow cross-examination was a significant procedural lapse, impacting the reliability of the evidence used for the addition.
• Treatment of competing arguments: The assessee's argument on the lack of cross-examination was upheld, while the Revenue's position was weakened by this procedural oversight.
• Conclusions: The court ruled that the procedural lapse contributed to the unjustified nature of the addition, supporting its decision to delete the addition.

Issue 3: Evidentiary Value of WhatsApp Conversations

• Relevant legal framework and precedents: The evidentiary value of electronic communications, such as WhatsApp chats, is generally contingent on corroboration by other evidence.
• Court's interpretation and reasoning: The court held that WhatsApp conversations, in isolation, lack sufficient evidentiary value to substantiate claims of financial transactions, particularly in the absence of corroborative evidence.
• Key evidence and findings: The WhatsApp chats between employees were the primary basis for the addition, but no additional supporting evidence was presented.
• Application of law to facts: The court applied the principle that electronic evidence must be supported by corroborative documentation or testimony to have probative value.
• Treatment of competing arguments: The court sided with the assessee's view that WhatsApp chats alone do not have the evidentiary weight required to justify such an addition.
• Conclusions: The court concluded that the reliance on WhatsApp conversations was insufficient for the addition, further supporting the decision to delete it.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "WhatsApp chats standalone basis is not having valid evidence to support the action of the Assessing Officer making addition u/s. 69C of the Act on account of alleged part payment of salary in cash."
• Core principles established: The judgment reinforces the principle that electronic evidence must be corroborated by additional documentation or testimony to be considered valid. It also underscores the importance of procedural fairness, particularly the right to cross-examination.
• Final determinations on each issue: The court directed the deletion of the Rs. 5,75,000/- addition under Section 69C due to the lack of corroborative evidence and procedural lapses, thereby allowing the appeal of the assessee.