ITAT Visakhapatnam: Addition of Rs. 1,05,00,000/- Based on WhatsApp Messages and Retracted Third-Party Statement Cannot Be Sustained

Case Overview

Case Name: ACIT Vs Manchukonda Shyam
Tribunal: ITAT Visakhapatnam
Appeal Number: I.T.A.No. 87/Viz/2020
Date of Order: 23/09/2020
Assessment Year: 2016-17

Background and Context

This matter arose from a challenge by the Revenue against an order passed by the Commissioner of Income Tax (Appeals)-3, Visakhapatnam, which had directed deletion of an addition of Rs. 1,05,00,000/- made in the assessment of Manchukonda Shyam (the assessee). Simultaneously, the assessee had filed cross objections before the Tribunal in support of the CIT(A)'s order.

The case presented two distinct and independently significant legal questions — one concerning an alleged undisclosed cash loan inferred from WhatsApp messages and a subsequently withdrawn third-party statement, and another concerning a claimed exemption under Section 10(38) that the Revenue alleged involved share sale proceeds from a company in which the assessee had no actual holdings.

Issue No. 1 — Addition of Rs. 1,05,00,000/- on Account of Alleged Cash Loan

Facts Surrounding the Search Proceedings

A search operation under Section 132 of the Income Tax Act, 1961 was carried out at the residential premises of the assessee on 24.11.2015. Concurrently, a search was conducted at the residence of one Shri Lanka Anil Kumar, who was employed with M/s Navaratna Estates. During this simultaneous search, WhatsApp messages extracted from Shri Lanka Anil Kumar's mobile phone were seized and brought on record as pages 31–34 of Annexure LAK/01.

Statement of Shri Lanka Anil Kumar under Section 132(4)

During the search, a statement was recorded from Shri Lanka Anil Kumar under Section 132(4) of the Income Tax Act, 1961. In that statement, he explained that the WhatsApp messages on his phone reflected conversations relating to cash loans received from the assessee (referred to as Shri Shyam Zaveri in those exchanges). He further clarified that the numeric figures appearing in the messages were denominated in lakhs, though the word "lakhs" had been intentionally omitted from the messages, and that the aggregate amount received from the assessee came to Rs. 1.05 crore.

For reference, the relevant extract from the assessment order reads:

"Pages 31 to 34 contains the data extracted from my mobile phone Whatsapp messages had with Sri Shyam Zaveri during the period 21.07.2014 to 24.11.2015
Q. 27. Please go through the specific entries from 19.05.2015 to 05.06.2015 wherein certain figures were found. Please go through the same once again and explain what it actual represents.
Ans.- I have gone through the specific entries from 19.05.2015 to 05.06.2015, 07.06.2015 to 21.06.2015 and also on 21.11.2015. The entries are conversation regarding the amounts taken as cash loan from Sri Shyam Zaveri on those days for my business purposes. The figures mentioned therein are measured in lakhs but intentionally omitted to mention in lakhs in the messages received. The aggregate amount received from Sri Shyam Zaveri is Rs. 1.05 crores as appearing the messages extracted therein."

The Assessee's Explanation

When the assessee was questioned about the same transactions, his position was materially different. He stated that the amounts reflected in those WhatsApp messages were not loans advanced by him, but rather petty cash disbursements made by M/s Navaratna Estates to Shri Lanka Anil Kumar for meeting miscellaneous expenses incurred during property registrations. He contended that the figures denoted amounts in the range of Rs. 5,000/- to Rs. 10,000/- — actual rupee amounts and not figures expressed in lakhs.

The relevant extract from the assessment order captures the assessee's recorded response: