Additions for bogus purchases, unexplained WhatsApp cash, and ad hoc business expenses deleted for lack of proof.

By | September 24, 2026
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Additions for bogus purchases, unexplained WhatsApp cash, and ad hoc business expenses deleted for lack of proof.

Issue

Whether additions made towards alleged bogus purchases under Section 69C, unexplained cash inferred from an employee’s WhatsApp messages under Section 69A, and ad hoc disallowance of business expenses under Section 37(1) are legally sustainable without corroborative evidence or rejection of books of account.

Facts

  • Bogus Purchases: The Assessing Officer (AO) treated purchases of ~Rs. 7.64 crores from 27 vendors as non-genuine under Section 69C based on non-response to notices and vendor deficiencies. On appeal, the CIT(A) accepted the purchases as genuine but sustained an ad hoc addition of 8% on purchases.
  • Unexplained Moneys: Pursuant to a search under Section 132, the AO added ~Rs. 13.50 lakhs under Section 69A based on WhatsApp chats found on an employee’s mobile phone and statements recorded under Section 132(4). No actual cash was found or seized from the assessee.
  • Disallowance of Expenses: The AO made ad hoc disallowances under Section 37(1) for staff/labour welfare expenses, worker accommodation rent, and a 25% disallowance on vehicle running/maintenance expenses, alleging potential personal use without identifying specific non-business instances.
  • Evidence Provided: The assessee provided complete books of account, bank payment entries, tax invoices, ledger statements, GST records, E-way bills, rent agreements, and business supply receipts. The AO did not reject the books of account under Section 145 or dispute the corresponding sales.

Decision

  • In Favor of Assessee (Section 69C & Ad Hoc Profit Element): The 8% ad hoc addition sustained by CIT(A) was deleted. Since sales were undisputed, payments were through banking channels, books were not rejected, and complete documentary evidence (including E-way bills) was furnished, no addition could be sustained under Section 69C or as an ad hoc profit estimate.
  • In Favor of Assessee (Section 69A – WhatsApp Material): The addition of Rs. 13.50 lakhs was deleted. Electronic communications retrieved from an employee’s phone without Section 65B authentication, independent corroboration, or physical recovery of unexplained cash cannot sustain an addition under Section 69A. Statutory presumptions under Sections 132(4A) and 292C cannot automatically fix liability on a third party without direct supporting evidence.
  • In Favor of Assessee (Section 37(1) Expenses): The ad hoc disallowances for welfare, rent, and vehicle maintenance were deleted. Expenditures substantiated by business records cannot be disallowed on mere presumptions or arbitrary estimates without demonstrating non-business or personal use.

Key Takeaways

  • No Ad Hoc Profit Additions Without Book Rejection: Where sales are accepted and purchases are supported by bank channels, invoices, and E-way bills, the Revenue cannot levy an ad hoc profit addition without formally rejecting the books of account under Section 145.
  • Evidentiary Standard for Unauthenticated Digital Data: Electronic communications (such as WhatsApp chats) seized from a third party or employee cannot form the sole basis for an unexplained money addition under Section 69A unless legally authenticated (Section 65B of the Evidence Act) and backed by physical recovery of cash/assets.
  • Limits on Search Presumptions: Statutory presumptions regarding seized documents under Sections 132(4A) and 292C apply strictly to the person from whose possession or control the material was seized, not automatically to third parties.
  • Prohibition of Arbitrary Ad Hoc Disallowances: Disallowances of legitimate business operational costs (rent, labour welfare, vehicle maintenance) cannot be made on generic, ad hoc assumptions of personal use without proving specific non-business expenditure.
IN THE ITAT MUMBAI BENCH ‘B’
Brij Bihari Kaushik
v.
ACIT
Sandeep Gosain, Judicial Member
and Jagadish, Accountant Member
IT Appeal Nos. 6518 and 6728 (Mum.) of 2025
[Assessment year 2023-24]
AUGUST  31, 2026
Dinesh Shah for the Appellant. Swapnil Choudhari, Sr DR for the Respondent.
ORDER
Sandeep Gosain, Judicial Member. – These cross-appeals, one filed by the assessee and the other by the Revenue, are directed against the order dated 07.08.2025 passed by the Learned Commissioner of Income Tax (Appeals) [“Ld. CIT(A)”], arising out of the assessment order passed under section 143(3) of the Income-tax Act, 1961 (“the Act”) for Assessment Year 2023-24.
The assessee has raised the following grounds of appeal:
1. On the facts and in the circumstances of the case and in law, the Learned CIT (A) has grossly erred in confirming the addition of Rs. 60,45,707/- to the income of the Appellant on ad-hoc basis to the extent of 8 Percent of the total alleged non-genuine purchases merely on assumption, surmises and conjectures.
2. On the facts and in the circumstances of the case and in law, the Learned CIT (A) has grossly erred in confirming the addition of Rs. 60,45,707/- to the income of the Appellant being profit element at 8. Percent embedded in Purchases made from alleged non-genuine parties even after accepting the purchases and the parties as genuine.
3. On the facts and in the circumstances of the case, the Learned CIT (Appeals) has grossly erred in enhancing the addition of Rs. 13,50,000/- as made in assessment order to Rs. 22,00,000/- without issuing any show cause notice which is illegal and bad in law.
4. On the facts and in the circumstances of the case, the Learned CIT (A) has grossly erred in confirming the addition of Rs. 22,00,000/-under Section 69A of the Act on the basis of alleged WhatsApp messages, without proper authentication under section 658 of the Evidence Act and without independent corroborative evidence.
5. That the appellant craves leave to add, amend or alter all or any of grounds of appeal and relief claimed before or at the time of hearing.
The Revenue has raised the following grounds of appeal:
‘1. Whether on the facts and circumstance of the case and in law the Ld. CIT(A) erred in restricting addition to Rs.22,00,000/- made by the AO u/s 69C of the Act and thus failed to appreciate that the Assessing Officer had made the addition of Rs.7,77,71,334/- u/s 69C of the Act on account of unexplained expenditure, and once the assessee could not substantiate the genuineness of the purchases, the entire addition was liable to be sustained?
2. Whether on the facts and in the circumstances of the case and in law. the Ld. CIT(A) has erred in holding that purchases aggregating to Rs. 7,55,71,334/-[7,77,71,334(-)22,00,000) were prima facie genuine, merely on the basis of voluminous submissions made by the assessee. without appreciating the facts of the case?
3. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in restricting the disallowance of bogus purchases of Rs.7,55,71,334/- to 8% instead of confirming full disallowance made by AO, ignoring that assessee failed to prove genuineness of such purchases?
4. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in restricting the disallowance to 8% of the said purchases on an ad hoc basis, despite having noted that the assessee failed to furnish complete documentation?
5. The Ld. CIT(A) has erred in granting an undue relief of \6.95,25,62~ -to the assessee, thereby allowing unverifiable purchases as deductible expenditure, which is contrary to the settled legal position upheld in CIT v. P. Mohankala (291 ITR 278) and Sumati Dayal v. CIT (214 ITR 801).
6. Whether on the facts and in law the Ld. CIT(A) erred in deleting disallowance of Rs.31,93,147/- towards staff and labour welfare expenses despite failure of assessee to furnish verifiable supporting evidence?
7. Whether on the facts and in law the Ld. CIT(A) erred in deleting disallowance of Rs.4,39,500/- towards rent expenses without assessee furnishing rent agreements, ownership proof or proper receipts?
8. Whether on the facts and in law the Ld. CIT(A) erred in deleting disallowance of Rs. 1,46,794/- towards vehicle running expenses despite absence of logbooks and proof of exclusive business use?’
2. Since both appeals arise out of the same assessment proceedings and involve interconnected issues, they were heard together and are being disposed of by this consolidated order.
3. The assessee is an individual and proprietor of M/s. S R Artifact, engaged in the business of construction and fabrication. For the year under consideration, the assessee filed his return of income on 27.09.2023 declaring total income of Rs. 5,07,62,220/-. A search and seizure action under section 132 of the Act was conducted, pursuant to which the assessee’s case was selected for compulsory scrutiny. Notices under sections 143(2) and 142(1), along with questionnaires, were issued and duly complied with by the assessee.
4. During the course of assessment proceedings, the Assessing Officer (“AO”) noticed purchases aggregating to Rs. 7,64,21,334/- from 27 parties. Notices under section 133(6) of the Act were issued to the concerned parties. On the basis of non-response or incomplete responses from certain vendors, alleged deficiencies in supporting documents, non-filing of returns by some vendors and certain electronic communications/WhatsApp chats found during the search, the AO treated the purchases as non-genuine accommodation entries and made an addition of Rs. 7,64,21,334/- under section 69C of the Act.
5. The AO further made an addition of Rs. 13,50,000/- under section 69A of the Act on the basis of certain WhatsApp communications and statements recorded under section 132(4) of the Act from employees of the assessee, namely Shri Ramesh Kumar, Accountant, and Shri Satpal Singh, Purchase Head, alleging generation of cash through the aforesaid purchases.
6. The AO also made disallowances under section 37 of the Act in respect of Staff and Labour Welfare Expenses of Rs. 31,93,147/-, Rent Expenses of Rs. 4,39,500/- and Vehicle Running and Maintenance Expenses of Rs. 1,46,794/-. The assessment was accordingly completed determining total income at Rs. 12,23,13,000/-.
7. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the material placed on record, accepted the purchases as genuine and deleted the addition of Rs. 7,64,21,334/- made under section 69C. However, the Ld. CIT(A), observing that there could be an element of profit leakage, estimated the profit element at 8% of the purchases and sustained an addition of Rs. 60,45,707/-. In respect of the addition under section 69A, the Ld. CIT(A) enhanced the addition from Rs. 13,50,000/- to Rs. 22,00,000/- on the basis of the WhatsApp communications. The disallowances made under section 37 in respect of Staff and Labour Welfare Expenses, Rent Expenses and Vehicle Running Expenses were deleted.
8. Both parties are in appeal before the Tribunal against the findings adverse to them.
9. The grounds raised by the assessee in Ground Nos. 1 and 2 and by the Revenue in Ground Nos. 1 to 5 relate to the purchases aggregating to Rs. 7,64,21,334/-.
10. The learned counsel for the assessee submitted that the purchases were duly recorded in the regular books of account; payments were made through banking channels from disclosed bank accounts; and the corresponding sales had not been disputed by the Revenue. It was further submitted that the books of account had not been rejected under section 145(3) of the Act. The assessee had furnished purchase invoices, vendor ledgers, bank statements, GST returns, GST audit reports, declarations from suppliers and E-way bills, wherever applicable. It was accordingly contended that the source of the expenditure stood duly explained and that section 69C could not be invoked merely because the genuineness of certain purchases was questioned.
11. Reliance was placed, inter alia, on the judgment of the Hon’ble Bombay High Court in Pr. CIT v. Vaman International (P.) Ltd. [2020] 422 ITR 520 (Bom) and the decision of the Delhi Bench of the Tribunal in Vayam Technologies Ltd v. Dy. CIT [IT Appeal No. 1477 (Delhi) of 2023, dated 8-1-2025]. It was also submitted that in proceedings for Assessment Years 2021-22 and 2022-23 arising from the same search, purchases from the same vendors had been accepted after verification.
12. The learned DR, on the other hand, supported the assessment order and submitted that the vendors had either not responded to notices issued under section 133(6) or had failed to furnish complete supporting material. It was contended that the surrounding circumstances justified treating the purchases as non-genuine and making the entire addition under section 69C. Reliance was placed onCIT v. P. Mohanakala  214 ITR 801 (SC).
13. In this regard, we have heard the counsels for both the parties, perused the material placed on record, the judgments cited before us, and the order passed by the Revenue Authorities.
14. Section 69C of the Act is attracted where an assessee has incurred expenditure and either offers no explanation regarding the source of such expenditure or the explanation offered is not satisfactory. In the present case, the purchases are recorded in the regular books of account and the payments have been made through disclosed banking channels. The source of the payments is therefore identifiable from the books and bank accounts maintained by the assessee.
15. Further, the books of account have not been rejected under section 145(3) of the Act and the corresponding sales have not been disputed by the Revenue. The Ld. CIT(A) has also recorded a finding, on examination of the material furnished by the assessee, that the purchases and the concerned vendors were genuine. Once the source of the expenditure is duly recorded and explained, an addition under section 69C cannot be sustained merely on the ground that the Revenue entertains doubts regarding the genuineness of the underlying purchases. The ratio of the judgment of the Hon’ble Bombay High Court in Vaman International (P.) Ltd. (supra) supports this position.
16. On facts also, the assessee has furnished substantial documentary evidence in support of the purchases, including invoices, ledger accounts, banking details and GST-related documents. The existence of E-way bills, wherever applicable, is also a relevant piece of corroborative material regarding movement of goods. No specific defect in the documentary evidence has been demonstrated before us which would justify treating the entire purchases as unexplained expenditure.
17. More importantly, the Ld. CIT(A), while deleting the substantive addition of Rs. 7,64,21,334/- under section 69C, has recorded a finding accepting the purchases as genuine. Having reached such a finding, there is no apparent basis for sustaining a further ad-hoc addition of 8% towards alleged profit leakage in the absence of any specific defect in the purchase records or books of account. An estimation of income cannot be made merely on conjecture or surmise, particularly when the books have not been rejected and the corresponding sales have been accepted.
18. We also take note of the assessee’s submission that the gross profit disclosed in the earlier years was in the range of approximately 7% to 7.5%. No material has been brought on record by the Revenue to establish that the assessee earned an additional profit of 8% on the purchases in question.
19. In view of the foregoing, the addition of Rs. 60,45,707/- sustained by the Ld. CIT(A) is deleted. Consequently, Ground Nos. 1 and 2 of the assessee are allowed, whereas Ground Nos. 1 to 5 of the Revenue are dismissed.
20. Ground Nos. 3 and 4 of the assessee’s appeal relate to the addition of Rs. 22,00,000/- sustained/enhanced by the Ld. CIT(A) under section 69A of the Act.
21. The learned counsel for the assessee submitted that the original addition made by the AO was Rs. 13,50,000/-, which was enhanced by the Ld. CIT(A) to Rs. 22,00,000/- without issuing a notice under section 251(2) of the Act. It was further submitted that no cash or other valuable article representing the alleged undisclosed amount was found or seized during the search. According to the assessee, the addition was based substantially on WhatsApp communications retrieved from the mobile phone of an employee and statements recorded under section 132(4), without independent corroboration.
22. It was also submitted that the electronic material relied upon by the Revenue had not been established in accordance with the applicable evidentiary requirements and that the statutory presumptions under sections 132(4A) and 292C could not automatically be extended to material found from the possession of an employee so as to fasten liability upon the assessee.
23. The learned DR supported the order of the lower authorities and submitted that the material found during the search, read with the statements recorded under section 132(4), established the existence of undisclosed cash generation. It was contended that the strict provisions of the Indian Evidence Act are not, in their entirety, applicable to income-tax proceedings.
24. We have heard the counsels for both the parties, perused the material placed on record, the judgments cited before us, and the order passed by the Revenue Authorities.
25. The first issue is with regard to the enhancement made by the Ld. CIT(A). Section 251(2) specifically requires the appellate authority to provide the assessee a reasonable opportunity of being heard before enhancing an assessment or penalty. The record, as placed before us, does not establish that the mandatory opportunity contemplated under section 251(2) was granted before the addition was enhanced from Rs. 13,50,000/- to Rs. 22,00,000/-. An enhancement made without complying with the statutory requirement of section 251(2) cannot be sustained.
26. Quite apart from the procedural infirmity, the substantive basis of the addition also does not, in our considered view, justify the addition under section 69A.
27. Section 69A applies where an assessee is found to be the owner of money, bullion, jewellery or other valuable article which is not recorded in the books of account, and the assessee either offers no satisfactory explanation regarding the nature and source thereof or the explanation is not satisfactory. In the present case, no cash was found or seized from the assessee during the search. The addition has instead been inferred from electronic communications found on the mobile phone of an employee.
28. The electronic communications, by themselves, do not establish that the assessee was in possession or ownership of the alleged unexplained money. Nor has any independent material been brought on record demonstrating that the amounts referred to in the communications actually came into the possession of the assessee.
29. The reliance placed upon WhatsApp communications also requires appropriate authentication and proof of the electronic record. The Hon’ble Supreme Court in Anvar P.V. v. P.K. Basheer (2014) 10 SCC 473 and Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal (2020) 7 SCC 1 has laid down the principles governing admissibility and proof of electronic records under section 65B of the Evidence Act. While the provisions of the Evidence Act are not mechanically applicable to every aspect of income-tax proceedings, where the Revenue seeks to rely upon electronic material as substantive evidence, its authenticity, integrity and evidentiary value cannot be assumed merely because screenshots or printouts have been produced.
30. In the present case, the alleged WhatsApp material has not been sufficiently corroborated by any independent evidence demonstrating actual receipt or possession of the alleged cash by the assessee. The statements recorded under section 132(4) also cannot, in the facts of the present case, substitute for such corroborative material, particularly when the alleged electronic material was found from the mobile phone of an employee and no corresponding unexplained cash or asset was found with the assessee.
31. The presumptions under sections 132(4A) and 292C are also rebuttable statutory presumptions concerning documents, books of account and other material found in the course of search and seizure. They cannot, without further corroboration, be used to conclusively establish ownership of alleged cash by a person other than the person from whose possession or control the material was found.
32. In these circumstances, we are of the considered view that the addition under section 69A is not sustainable either on account of the defective enhancement procedure or on the merits. The addition of Rs. 22,00,000/- sustained/enhanced by the Ld. CIT(A) is accordingly deleted. Ground Nos. 3 and 4 of the assessee are allowed. Ground No. 5, being general in nature, requires no separate adjudication.
33. The Revenue’s Ground Nos. 6, 7 and 8 relates to deletion of disallowances made under section 37 of the Act in respect of Staff and Labour Welfare Expenses of Rs. 31,93,147/-, Rent Expenses of Rs. 4,39,500/- and Vehicle Running and Maintenance Expenses of Rs. 1,46,794/-.
34. In respect of Staff and Labour Welfare Expenses, the assessee furnished details demonstrating payments to M/s. Kaushal Caterers towards canteen services at the BKT Bhuj site, payments to M/s. National Cycle Services towards cycles used by labourers for movement within the project site, and payments to M/s. Shiv Trading Co. towards site ration and other supplies. The expenditure is connected with the assessee’s construction and fabrication activities and relates to the requirements of employees and labourers at the project site. No material has been brought on record by the AO to establish that the expenditure was personal in nature or was not incurred for the purposes of the assessee’s business. We therefore find no infirmity in the deletion of the disallowance by the Ld. CIT(A).
35. As regards Rent Expenses of Rs. 4,39,500/-, the assessee furnished rent agreements and payment details in respect of accommodation provided to workers in labour colonies near Bhiwadi and Chopanki. Considering the nature of the assessee’s business and the requirement of maintaining labour at project sites, the expenditure cannot be regarded as personal merely because the accommodation was residential in character. In the absence of any material establishing that the expenditure was not incurred wholly and exclusively for the purposes of business, the deletion made by the Ld. CIT(A) calls for no interference.
36. With regard to Vehicle Running and Maintenance Expenses of Rs. 1,46,794/-, the AO made a disallowance of 25% on an ad-hoc basis on the presumption of possible personal use. No specific voucher or item of expenditure has been identified as being personal in nature. In a business involving construction and fabrication activities across project sites, use of vehicles for business purposes is an ordinary incident of the business. An ad-hoc disallowance, unsupported by any specific finding of personal expenditure, cannot be sustained.
37. We accordingly uphold the order of the Ld. CIT(A) deleting the aforesaid disallowances. Ground Nos. 6, 7 and 8 of the Revenue are dismissed.
38. In the result, the appeal filed by the assessee in ITA No. 6518/MUM/2025 is allowed and the appeal filed by the Revenue in ITA No. 6728/MUM/2025 is dismissed.