Can WhatsApp chats, spreadsheets and handwritten notes prove that a taxpayer received undisclosed cash from a property sale? It depends on whether the evidence is carefully examined and the taxpayer gets a fair opportunity to challenge it.
The Delhi bench of the Income Tax Appellate Tribunal (ITAT) recently quashed the assessment and the related penalty tax notice in a case involving an individual taxpayer. The taxpayer was accused of receiving Rs 1.70 crore in cash from a property sale in Delhi.
Read the rest of this article to know how the property transaction led to the tax dispute and why the tribunal questioned the evidence.
How did the Rs 1.70-crore cash property dispute arise?
The case involved Mr. Sehgal and his wife, who jointly owned a property in Delhi, which was sold to Colorbar Cosmetics Pvt. Ltd.
The Income Tax Department alleged that the sale involved cash payments over and above the consideration recorded in the registered conveyance deed.
According to the assessing officer, the total consideration was Rs 3.30 crore, while the registered sale deed reflected Rs 1.60 crore. The department treated the alleged difference of Rs 1.70 crore as undisclosed cash receipts.
The allegations emerged from a search conducted on February 3, 2021, involving the Samir Modi and Shivani Modi group.
According to CA (Dr.) Suresh Surana, during the search, officials recovered an Excel workbook titled “BOSS - DEC 18 onwards”, handwritten notes and WhatsApp conversations that allegedly recorded cash payments connected with Mr. Sehgal's property.
The Excel records showed two amounts of Rs 1.55 crore and Rs 15 lakh, aggregating to Rs. 1.70 crore. The department also relied on a statement by Mr. Upreti, who allegedly confirmed that Rs. 1.55 crore in cash had been paid to Mr. Sehgal in connection with the transaction.
The Assessing Officer (‘AO’) further relied on WhatsApp conversations referring to payments of Rs 50 lakh, Rs 50 lakh, Rs 20 lakh, Rs 5 lakh and Rs 30 lakh, aggregating Rs 1.55 crore.
Based on these records, the AO concluded that Mr. Sehgal had received additional cash consideration of Rs. 1.70 crore over and above the disclosed sale consideration.
He therefore treated the amount as undisclosed income for FY 2018-19 and made an addition under Section 69A of the Income-tax Act, 1961, explains Surana.
Why did the taxpayer challenge the tax addition?
Mr Sehgal challenged the addition before the CIT(A), arguing that the Income Tax Department had relied on third-party WhatsApp conversations without properly verifying their contents or allowing him to question the persons involved.
According to Surana, he also pointed out that the property sale took place through a registered conveyance deed dated October 31, 2019, and he had already disclosed his share of the resulting capital gains in AY 2020-21.
The Commissioner of Income Tax (Appeals) CIT(A) granted partial relief but sustained an addition of Rs 1.1625 crore, corresponding to Mr Sehgal's alleged 75% ownership share. Dissatisfied with this decision, Mr Sehgal approached ITAT Delhi.
What did ITAT Delhi observe?
The ITAT Delhi observed that the WhatsApp conversations primarily contained figures without clearly explaining the nature or purpose of the payments.
“The WhatsApp chats and seized documents merely referred to certain figures and alleged transactions but did not conclusively establish that the assessee had received unaccounted cash,” says CA Avinash Kumar Rao, Partner at Mohindra & Associates.
According to Surana, the AO had also failed to properly examine the persons involved and did not provide Mr. Sehgal an opportunity to properly cross-examine them.
Significantly, the Income Tax Department had not even summoned Anil Upreti, although his statement and the documents recovered from him formed a major part of its case.
The Tribunal held that such material, without proper verification, created suspicion but did not conclusively establish that Mr. Sehgal had received undisclosed cash.
What legal defect did the ITAT identify in the reassessment proceedings?
The Tribunal also identified a legal defect in the reassessment proceedings.
The department had relied on a consolidated satisfaction note covering seven assessment years, including years for which it had not identified relevant incriminating material.
The ITAT held that the tax department needed to establish a proper connection between the seized material and the income of each assessment year before initiating proceedings under Section 153C, explains Surana.
Thus, the Income Tax Department failed to adequately establish the alleged cash receipts and did not follow the necessary procedural safeguards.
The ITAT allowed the appeal on both evidentiary and legal grounds, quashed the assessment and also cancelled the consequential penalty under Section 271D.
What does the ITAT ruling mean for taxpayers?
This ruling reinforces an important principle: suspicion, however strong, cannot replace evidence. WhatsApp chats, Excel sheets or handwritten records can certainly be examined by the Income Tax Department, but their existence alone does not automatically establish undisclosed income.
According to Rao, where the Income Tax Department relies on third-party statements or conversations, taxpayers should seek copies of the material being used against them, examine its relevance and context, and request an opportunity to cross-examine the persons concerned. Such requests should preferably be made in writing during assessment proceedings.
The judgment also highlights the fact that procedural safeguards under the Income-tax Act are not mere formalities.
In search-related assessments, the tax department must establish a proper connection between the seized material, the taxpayer and the relevant assessment year, Rao explains.
Ultimately, an addition must stand on credible evidence and legally valid proceedings, not merely on assumptions drawn from third-party records.