Buying a property not only involves physical and location checks but also verifying a range of documents. But what happens when a Rs 2 crore cash payment allegedly made for a property purchase became the centre of a tax dispute?
The case centred on a digital image of a slip allegedly recovered from a third party’s mobile phone, which the tax department relied upon to claim that the buyer had paid Rs 2 crore in cash over and above the registered property consideration.
The case, however, was not merely about whether cash had actually changed hands. It turned into a larger question about how digital evidence should be collected, preserved and presented before tax authorities.
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The case
In Arti Garg v. DCIT, Central Circle-31, Delhi [ITA No. 3143/Del/2025, AY 2021-22], the Delhi ITAT considered an addition of Rs. 2 crore made in the hands of a homebuyer towards alleged cash payment for the purchase of a residential property.
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The dispute arose from the purchase of Property No. 52, Shankar Vihar, New Delhi, by Arti Garg from Naresh Arora under a sale deed dated 30 December 2020. The recorded consideration was Rs. 3.50 crore.
Following a search on a third-party property dealer, Praveen Kumar Jain, the Department recovered a digital image of a slip which allegedly indicated that the actual consideration was Rs. 5.50 crore and that Rs. 2 crore had been paid in cash over and above the registered consideration. Based substantially on this electronic material, the Assessing Officer (AO) made an addition of Rs. 2 crore under section 69 of the Income-tax Act.
The taxpayer challenged the addition primarily on the ground that the alleged digital evidence had not been collected, preserved and authenticated in the manner required for electronic evidence. The image relied upon by the Department was allegedly recovered from the mobile phone of a third-party broker.
The ITAT noticed that the corresponding WhatsApp conversation did not form part of the assessment order, there was no proper examination showing when the image had been transmitted, and the document itself contained the seller’s signature but not the taxpayer’s signature. The Tribunal also noted deficiencies in connecting the alleged image with the taxpayer and the transaction in question.
A significant aspect of the decision concerned the chain of custody and authenticity of the digital evidence. The ITAT examined the CBDT’s Digital Evidence Investigation Manual, which lays down safeguards for collection, preservation, analysis and use of electronic material during tax proceedings.
Although a certificate under section 65B of the Indian Evidence Act had been produced, the Tribunal found material deficiencies in the manner in which the electronic evidence had been handled. In particular, there was no satisfactory record demonstrating the chain of custody from seizure of the device through forensic extraction and subsequent use of the particular digital image by the AO.
The Tribunal further observed that the certificate relied upon by the Department did not contain all the particulars which the lower appellate authority had assumed it contained.
For instance, the ITAT noted that the IMEI number of the relevant iPhone was not mentioned and, more importantly, there was no evidence establishing how the master and working copies of the seized data were subsequently analysed and how the particular image eventually reached the AO for use in the assessment proceedings.
The Tribunal therefore found that the safeguards prescribed for establishing the integrity and authenticity of digital evidence had not been satisfactorily followed.
Thus, the electronic material recovered from a third party cannot automatically be treated as conclusive evidence of an unaccounted property transaction. Where a substantial tax addition is founded on digital evidence, the Revenue must establish its authenticity and integrity by demonstrating proper extraction, preservation and chain of custody.
This assumes greater importance where the statements relating to such material have subsequently been retracted. The Tribunal found that the procedural and evidentiary deficiencies in the present case materially affected the reliability of the digital image relied upon by the Department.
Accordingly, the homebuyer succeeded because the principal electronic evidence relied upon to establish the alleged Rs. 2 crore cash payment lacked the required legal sanctity and sufficient evidentiary reliability.
In the absence of properly authenticated digital evidence capable of supporting a conclusive inference of an undisclosed investment, the addition could not be sustained. The ITAT therefore allowed Arti Garg’s appeal. The connected appeal of the seller, Naresh Arora, arising from the same property transaction and evidence, was also allowed.
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Key takeaway for taxpayers
The key takeaway from Arti Garg v. DCIT is that WhatsApp chats, screenshots and other digital records recovered during a search cannot, merely by their existence, conclusively establish undisclosed income or investment. Where the Revenue relies on such electronic material, its authenticity, integrity and connection with the taxpayer must be properly established.
The Delhi ITAT particularly emphasised the importance of proper collection, forensic extraction and chain of custody of digital evidence.
“In Arti Garg’s case, the Revenue could not satisfactorily demonstrate how the relevant digital image travelled from the seized device through forensic analysis and ultimately came to be relied upon by the AO. The Tribunal therefore found that the electronic evidence lacked sufficient legal sanctity and reliability to sustain the addition,” said CA (Dr.) Suresh Surana.
Thus, the ruling does not mean that WhatsApp chats or screenshots are inherently inadmissible. Rather, taxpayers can challenge additions based on such material where the Revenue cannot adequately establish the source, authenticity, chain of custody, forensic integrity and factual linkage of the digital evidence with the taxpayer and the alleged transaction.
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Sale consideration dispute: When can Section 69 apply?
The Arti Garg ruling indicates that a mismatch between the registered sale consideration and an alleged higher actual consideration may not, by itself, justify an addition under Section 69. The Revenue must first establish, through credible evidence, that the purchaser actually made an investment over and above the recorded consideration.
In Arti Garg, the Department alleged that the property was purchased for Rs. 5.50 crore as against the registered consideration of Rs. 3.50 crore and treated the difference of Rs. 2 crore as an unexplained investment. However, the ITAT found material deficiencies in the digital evidence relied upon to establish the alleged cash component.
“The key principle is that Section 69 requires the existence of an unrecorded investment to be established as a foundational fact. A valuation difference, suspicion of on-money, or third-party material lacking adequate evidentiary reliability cannot automatically shift the burden to the homebuyer to prove that no cash payment was made. The Revenue must first substantiate the alleged additional investment with reliable evidence having a clear nexus with the taxpayer and the transaction,” stated Surana.
Digital evidence in tax cases: Key lessons for tax professionals
The Arti Garg ruling offers an important practical lesson for tax professionals dealing with additions based on digital evidence.
Where the Department relies on WhatsApp chats, screenshots, mobile-phone data or digital images, the defence should not be confined to explaining the underlying transaction. The evidentiary foundation of the electronic material itself should also be carefully examined.
In particular, professionals should verify how the electronic evidence was seized, extracted and preserved; whether an adequate forensic record exists; whether the chain of custody is demonstrable; and whether the specific material relied upon can actually be linked to the taxpayer and the transaction under assessment.
The ITAT also referred to the CBDT’s Digital Evidence Investigation Manual and stressed the importance of safeguards designed to preserve the integrity of electronic records.
“At the assessment stage, objections concerning authenticity, evidentiary deficiencies and factual linkage should preferably be placed on record promptly, together with requests for the underlying digital material and other evidence relied upon by the AO. Where third-party material or statements are involved, the taxpayer should also seek an appropriate opportunity to rebut the material,” commented Surana.
Taxpayers facing similar assessments can examine whether third-party digital material has been properly obtained and authenticated, whether its chain of custody has been maintained, whether independent evidence links it to the alleged undisclosed transaction, etc.
The ruling does not make third-party digital evidence inherently inadmissible; rather, it reinforces that such evidence must possess sufficient reliability and legal sanctity before it can support a tax addition.
“At the appellate stage, the focus should be on whether the Revenue has actually established the complete evidentiary trail, rather than merely relying on the contents of a screenshot or digital image. Arti Garg therefore reinforces that digital evidence is not immune from scrutiny: its reliability depends upon proper handling, authentication and a demonstrable nexus with the taxpayer and the alleged transaction,” added Surana.
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Property deals: Key precautions against tax scrutiny
The Arti Garg ruling highlights the importance of maintaining a clear and contemporaneous documentary trail for high-value property transactions.
Property buyers and sellers should ensure that the sale agreement/deed, payment schedule and actual movement of funds are fully aligned, with consideration preferably routed through identifiable banking channels and supported by bank statements and related transaction records.
This becomes particularly important if the Department subsequently alleges payment of unrecorded consideration or “on-money.”
Parties should also exercise care with WhatsApp messages, screenshots, payment workings, broker communications and other electronic records concerning the transaction.
The Arti Garg case demonstrates that digital material can become important evidence in a tax investigation.
Accordingly, transaction-related communications should accurately reflect the commercial arrangement, and relevant original electronic and documentary records should be preserved rather than relying only on informal or incomplete records.
Disclaimer: This article discusses the facts and observations in a specific Income Tax Appellate Tribunal (ITAT) case and is intended for informational purposes only. The outcome of a tax dispute depends on its individual facts, documents and applicable law. It should not be treated as a precedent or as professional tax advice. The information provided in this article is for general informational purposes only and should not be considered tax, legal or financial advice.
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