CBDT's Digital Evidence Investigation Manual Is Mandatory For Income Tax Dept. While Conducting Searches, Seizing Electronic Evidence: Madras High Court

The Madras High Court has held that it is mandatory for the income tax department to follow the Digital Evidence Investigation Manual issued by the Central Board of Direct Taxes (CBDT) while conducting searches and seizing electronic evidence.

The bench of Justice Krishnan Ramasamy has observed that the electronic data has been collected in.txt files in violation of the provisions of the Digital Evidence Investigation Manual. Though the procedures have not been followed while collecting the electronic data in.txt files, the data collected by the respondents can be relied upon only if the said data are supported by the corroborative evidence.

The respondents' department conducted a sudden search under Section 132 of the Income Tax Act, 1961, on different dates between January 1, 2021, and January 27, 2022. In the searches, the respondent department seized the electronic data, and pursuant to the same, the show cause notices dated 21.12.2022 and 22.12.2022 were issued to the petitioner, and the reply was filed by the petitioner on 24.12.2022 and 28.12.2022.

The assessment orders were passed on December 31, 2022. As far as the subject matter relating to W.P.No.11176 of 2023 is concerned, the Show Cause Notice was issued on March 1, 2023, and the reply was filed on March 14, 2023, and March 15, 2023. Subsequently, the assessment order was passed on March 30, 2023.

The petitioner contended that the digital data evidence was collected by the respondents from unknown locations without any valid search warrant and without following the guidelines issued by the CBDT via the Digital Evidence Investigation Manual. Four non-speaking assessment orders were passed by the respondents without providing any opportunity of personal hearing to the petitioner and without any corroborative evidence to corroborate the digital data evidence as mandated in the Digital Evidence Investigation Manual. In total, the respondents intended to initiate 21 proceedings, out of which, now they have only initiated four proceedings and passed the assessment orders on December 31, 2022, in three cases and on March 30, 2023, in one case.

The petitioner contended that the search was conducted and the assessment orders were passed in a hasty manner. At the time of search and in the event of the collection of electronic data, the respondents are supposed to have followed the procedures laid down in the Digital Evidence Investigation Manual.

The department contended that the writ of declaration regarding the evidentiary value is not maintainable, and as the assessment is completed and the appeal is pending before the Appellate Authority, the petitioner has to agitate all the issues before the Appellate Authority. The admissibility, nature of evidence, and manner of proof cannot be questioned in the writ petitions.

The court relied on the decision of the Supreme Court in the case of Commissioner of Customs vs. Indian Oil Corporation Limited and noted that whatever documents, data, etc. were seized at the time of search, the same should have been mentioned in the panchanama; however, in the present case, the respondents did not do so, and hence, the seizure of electronic data is inadmissible since the hash value was not mentioned in the panchanama, which is a mandatory requirement in terms of the Digital Evidence Investigation Manual. Further, the evidence has to be sealed and signed by the assessee; however, the same was also not followed by the respondents. Therefore, the entire evidence has been collected against the procedure laid down in the Digital Evidence Investigation Manual and in violation of principles of natural justice.

The court held that Rule 46A of the Income Tax Rules only talks about the production of any additional evidence before the Deputy Commissioner (Appeals) and Commissioner (Appeals). There is no question with regard to the production of additional evidence, but the entire case revolves around the failure on the part of the respondents to supply the documents, which they have relied upon in the show cause notice, and thereafter, providing an opportunity for cross-examination of the witnesses, who had made sworn statements against the petitioner, and also with regard to the failure to provide the opportunity of personal hearing before the passing of assessment orders. Therefore, it is not that a particular piece of evidence alone needs to be produced or cross-examined by the petitioner, and to that extent alone, the Appellate Authority can ask the Assessing Officer to provide the opportunity of a personal hearing, cross-examination, etc.

Counsel For Petitioner: P.H.Arvind Pandiyan, Akhil Bhansali

Counsel For Respondent: AR.L.Sundaresan

Case Title: M/s.Saravana Selvarathnam Retails Private Limited Versus Commissioner of Income Tax Appeals

Citation: 2024 LiveLaw (Mad) 101

Case No.: W.P.Nos.9753, 9757, 9761 & 11176 of 2023 and W.M.P.Nos.11043, 9838, 9842 & 11041 of 2023

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