2025 (6) TMI 1076 - AT - Income Tax

Validity of assessment u/s 143(3) - reliance on material found / seized from the possession third party - addition made on the basis of differential consideration in sale of immovable property as per the seized WhatsApp chat - HELD THAT - From the perusal of assessment order it is seen that no search was carried out in the case of the assessee and the material found / seized from the possession third party was made basis for making addition in the hands of the assessee. Such material was found in WhatsApp chat of mobile phone seized from the possession of a third party. In such situation the proper course of action as per law was that the ld. AO should initiate the proceedings u/s 153C of the Act after recording his own satisfaction upon receiving the satisfaction note and material from the AO of person searched. As the material relied upon by the AO was found and seized from the possession of third party no addition could be made in the assessment framed u/s.143(3) of the Act based on such material. no addition could be made based on any incriminating material found from the possession of third party in the order passed u/s 143(3) - Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) Whether the addition made by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 (the Act) based on incriminating material found from the possession of a third party is legally sustainable.

(b) Whether the WhatsApp chat containing an unsigned and unexecuted agreement to sell found on the mobile phone of a third party qualifies as a document under section 2(22AA) of the Act and can be used as evidence for making additions in the assessment proceedings under section 143(3) or only under section 153C.

(c) Whether the AO was required to initiate proceedings under section 153C of the Act after seizure of material from a third party before making any addition in the hands of the assessee.

(d) Whether the addition made on the basis of differential consideration in sale of immovable property, as reflected in the seized WhatsApp chat, is justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (c): Legality of addition under section 143(3) based on third-party seized material and requirement of proceedings under section 153C

The legal framework governing the use of material seized from a third party in assessment proceedings against an assessee is encapsulated in section 153C of the Act. This provision mandates that when a search is conducted on a person other than the assessee and material relevant to the assessee is found, the AO must record his satisfaction and initiate separate assessment proceedings under section 153C specifically for the assessee. The AO cannot rely on such third-party material to make additions in the normal assessment proceedings under section 143(3).

The Court examined the facts where the incriminating material, namely the WhatsApp chat containing an agreement to sell property, was found on the mobile phone of a third party, Shri Praveen Kr. Jain, during a search under section 132 of the Act. No search was conducted in the assessee's premises. The AO made additions in the assessment framed under section 143(3) relying on this material.

Relying on the coordinate bench's decision in the case of the assessee's spouse, where under identical facts the additions were deleted due to non-initiation of proceedings under section 153C, the Tribunal held that the AO's action was contrary to the statutory scheme. The Tribunal emphasized that the proper course was to invoke section 153C after recording satisfaction based on the third-party seized material before making any additions.

The Court reasoned that since no such proceedings under section 153C were initiated, the additions made under section 143(3) were not sustainable in law. The Tribunal quoted the coordinate bench's observations that "once the above alleged agreements formed part of the seized material, the impugned 'normal' assessment could not be held as sustainable in law since not framed as per the specific provisions of section 153C(1) of the Act."

The competing argument of the Revenue that the AO was justified in treating the WhatsApp chat as a document and making additions under section 143(3) was rejected on the ground that the statutory procedure prescribed for third-party material was not followed.

Issue (b): Status of WhatsApp chat as a document under section 2(22AA) and its evidentiary value

The WhatsApp chat containing an unsigned and unexecuted agreement to sell was argued by the Revenue as a document under section 2(22AA) of the Act, which defines "document" to include electronic records. The AO relied on this to treat the agreement as evidence of actual sale consideration.

The assessee's representative contended that the document was neither signed nor executed and was found only as a photo in a third party's mobile phone. Further, if treated as a document under section 2(22AA), it could only be used in proceedings initiated under section 153C, which was not done.

The Tribunal agreed with the assessee's contention, observing that the WhatsApp chat was an unsigned and unexecuted document found in the possession of a third party. The Tribunal held that the evidentiary value of such material cannot override the statutory requirement of initiating proceedings under section 153C before making any additions based on it. The Tribunal's reliance on the coordinate bench decision further reinforced this position.

Issue (d): Justification of addition based on differential sale consideration

The AO alleged that the actual sale consideration for the residential property was Rs. 1.85 crores as per the WhatsApp chat, whereas the registered sale deed recorded only Rs. 61.00 lacs. The AO treated the differential amount of Rs. 1.24 crores as cash paid out of undisclosed sources and made an addition of Rs. 62.00 lacs (50% share of the assessee) in the income.

The Tribunal noted that this addition was based solely on the third-party material found in the WhatsApp chat without following the proper procedure under section 153C. Since the addition was made in violation of statutory procedure, the Tribunal held that the addition was not justified and was liable to be deleted.

The Tribunal also noted that the coordinate bench had deleted a similar addition made in the spouse's case on identical facts, further supporting the deletion in the present case.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning is encapsulated in the following verbatim excerpt from the coordinate bench's decision:

"We are of the considered view in this factual backdrop that once the above alleged agreements formed part of the seized material, the impugned 'normal' assessment could not be held as sustainable in law since not framed as per the specific provisions of section 153C(1) of the Act. We thus quash the same for this precise reason and the assessee's all other remaining pleadings stand rendered academic in very terms."

The core principles established are:

(i) Material seized from a third party during search cannot be used to make additions in the normal assessment proceedings under section 143(3) against the assessee. The AO must initiate separate proceedings under section 153C after recording satisfaction.

(ii) An unsigned and unexecuted document found in electronic form on a third party's device, even if qualifying as a document under section 2(22AA), cannot be used to bypass the procedural safeguards mandated under section 153C.

(iii) Additions based on such third-party material without following the statutory procedure are liable to be deleted.

Accordingly, the Tribunal allowed the appeal and deleted the addition of Rs. 62.00 lacs made in the hands of the assessee under section 143(3) of the Act.