In the case of Designers Point (India) P. Ltd. v. ACIT, New Delhi[i], the Income Tax Appellate Tribunal – Delhi (‘ITAT’) allowed the appeal in favour of the Appellant, wherein the ITAT ordered to delete the addition made under s. 69C of the Income Tax Act, 1961 (‘ITA’) by the assessing officer (‘AO’) based on the WhatsApp chats and statements of two employees without affording the opportunity of cross-examination.
Brief Facts
In this case, the Appellant filed the appeal against the order issued by CIT(A) on 22.09.2022 for the assessment year 2020-21. The Appellant raised several grounds for challenging the decision as follows:
The Appellant contended that the CIT(A) made an error by upholding addition under s. 69C of the ITA pertaining to a portion of the alleged cash salaries paid to employees, solely based on unsubstantiated WhatsApp conversations between two employees. The Appellant submitted that WhatsApp chats hold no evidentiary value. The Appellant further contended that the CIT(A) did not allow the Appellant to cross-examine these witnesses, despite a request to that effect.
The Appellant contended that the AO did not have any other evidence to support the claim of cash salary payments to employees and no corroborative evidence was discovered during the search and seizure operation.
The Appellant denied making any cash salary payments and stated that salaries were paid in accordance with the appointment letter and further argued that the addition should be deleted due to the absence of substantial and positive evidence and the lack of evidentiary value solely on WhatsApp conversations.
The Respondent supported the decision made by the lower authorities, arguing that there is sufficient evidence of unaccounted salary payments to the company's employees.
Held
After hearing the parties, the ITAT passed the order in favour of the Appellant and held that the AO made the addition for unaccounted cash salary payments to employees under s. 69C of the ITA on erroneous grounds. However, there was no substantial evidence supporting cash payments to the two employees. There was an absence of cross-examination for these employee's statements.
The AO made the addition u/s. 69C of the ITA by solely relying upon the WhatsApp chats and statements but lacked other documentary evidence. The AO failed to provide any substantive evidence. It was noted by the ITAT that WhatsApp chats alone do not constitute valid evidence to support the addition under s. 69C.
It was further pointed out by the ITAT that the CIT(A) had deleted a similar addition relating to two other employees due to the absence of sustainable and reliable evidence, hence, highlighting that there was no distinction between the cases where the addition was made as against those where such addition was deleted.
Consequently, the ITAT upheld and allowed the Appellant’s grievance and directed the AO to delete the addition.
Analysis
The decision by the ITAT to overturn the addition under s. 69C of the ITA, based solely on WhatsApp chats, underscores the pivotal role of substantiated evidence in taxation matters. Notably, the absence of corroborative evidence, coupled with the lack of cross-examination of witnesses, proved detrimental to the tax authority's case. This ruling sets a significant precedent, emphasizing the necessity for the tax authorities to meet a stringent burden of proof, particularly when relying on digital communications as the primary evidence. It highlights the importance of a robust evidentiary foundation in upholding tax assessments.
End Notes:
[i] ITA No. 2517/Del/2022; Date of Decision: 06.09.2023
Authored by Purvi Garg, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.