ITAT invalidates search additions based on uncorroborated digital evidence and quashes Section 143(3) assessment.

“65B. Admissibility of electronic records. — (1) Notwithstanding anything contained in this Act, any information contained in an electronic record which is printed on a paper, stored, recorded or copied in optical or magnetic media produced by a computer (hereinafter referred to as the computer output) shall be deemed to be also a document, if the conditions mentioned in this section are satisfied in relation to the information and computer in question and shall be admissible in any proceedings, without further proof or production of the original, as evidence or any contents of the original or of any fact stated therein of which direct evidence would be admissible.

(2) The conditions referred to in sub-section (1) in respect of a computer output shall be the following, namely:—

(a) the computer output containing the information was produced by the computer during the period over which the computer was used regularly to store or process information for the purposes of any activities regularly carried on over that period by the person having lawful control over the use of the computer;

(b) during the saidperiod, information of the kind contained in the electronic record or of the kind from which the information so contained is derived was regularly fed into the computer in the ordinary course of the said activities;

(c) throughout the material part of the said period, the computer was operating properly or, if not, then in respect of any period in which it was not operating properly or was out of operation during that part of the period, was not such as to affect the electronic record or the accuracy of its contents; and

(d) the information contained in the electronic record reproduces or is derived from such information fed into the computer in the ordinary course of the said activities.

…………..

(4) In any proceedings where it is desired to give a statement in evidence by virtue of this section, a certificate doing any of the following things, that is to say, —

…………

(a) identifying the electronic record containing the statement and describing the manner in which it was produced;

(b) giving such particulars of any device involved in the production of that electronic record as may be appropriate for the purpose of showing that the electronic record was produced by a computer;

(c) dealing with any of the matters to which the conditions mentioned in subsection (2) relate,

and purporting to be signed by a person occupying a responsible official position in relation to the operation of the relevant device or the management of the relevant activities (whichever is appropriate) shall be evidence of any matter stated in the certificate; and for the purposes of this subsection it shall be sufficient for a matter to be stated to the best of the knowledge and belief of the person stating it.”

– Anwar PV v. B.K. Basheer [2014] 10 SCC 473

– Arjun Pandit Rao Khotkar v. Kailash Kushanrao Gorantyal [2020] 7 SCC 1.

• As per Chapter 6 of Digital Evidence Investigation Manual issued by CBDT, if any digital material is to be used as evidence in the case of assessee, then at the time of seizure of such material, proper Seizure Memo and seizure procedure must be drawn/ followed and following things should be reflected in the Seizure Memo:

(i) One person from the technical side, one from the assessee side and two independent witnesses are part of the search and seizure proceedings.

(ii) Unique device number should be allotted and the same should be duly reflected in the Panchnama, Chain of Custody and Digital Evidence Collection Forms.

(iii) All potential digital devices that need to be seized should be photographed along with the respective reference, like cubicle number or name room surroundings etc.

(iv) If possible, a serial number should be pasted on the digital device so that it can be related to the exact case, date and the section under which it is searched.

(v) The panchas should have some knowledge about various digital devices. A writing should be included from panchas stating that they have been explained the various digital devices that have been identified and also the various procedures used in Forensic Collection.

(vi) Digital Evidence Collection form should be properly and duly filled before seizing the digital data. Original Digital Evidence should be collected and all the entries in Digital Evidence Collection Form should be filed up and signatures should be taken by the assessee and two witnesses.

(vii) The chain of custody form should be filed up, which is a key document that should be mandatorily filed up to ensure that integrity of the data cannot be questioned by any court of law.

(viii) In case Digital Evidence is a mobile phone, the Mobile Phone Evidence Collection Form should be filed up.

(ix) The Most Important, the ‘Hash Value’ should be recorded in the panchnama and the assessee can seek a copy of the image/ clone of the hard disk.

• Further, in Chapter 2.8 of the Digital Evidence Investigation Manual, it is stated that: “Accordingly, merely gathering electronic evidence is not sufficient. Efforts have to be made to corroborate the contents therein vis-avis other evidence such as material and oral. Preliminary and detailed statements of the persons in control of computers/ electronic devices are always very important.”

• With respect to section 65B of the Act, Digital Evidence Investigation Manual had directed that while handling any digital evidence, the procedure has to be in consonance with the provisions of section 65B of the Evidence Act. The relevant para 2.7.3 of above manual is reproduced here in below:

“2.7.3 .. Further, special provisions as to evidence relating to electronic record have been inserted in the Indian Evidence Act, 1872 in the form of section 65A & 65B, after section 65. These provisions are very important. They govern the integrity of the electronic record as evidence, as well as, the process for creating electronic record. Importantly, they impart faithful output of computer the same evidentiary value as original without further proof or production of original. Accordingly, while handling any digital evidence, the procedure has to be in consonance of these provisions. ” (emphasis supplied)

(a) Firstly, 65B certificate is issued by Mr. Rakesh Chhajer, whereas the so-called pen-drive was allegedly found from possession of Mr. Sandeep Dugar and not Mr. Chhajer;

(b) Secondly, there is no question or reference to any pen-drive in the statement of Mr.Rajesh Chhajer. Further, there is nothing brought on record to allege/ suggest that Mr. Rakesh Chhajer was in lawful control or possession or occupation of such pen- drive;

(c) Thirdly, Witnesses to 65B certificate are the one who signed Panchnama for premises No. 6506 to 6508, i.e., persons (drivers) based in Haryana;

(d) Fourthly, contents of 65B certificate are vague inasmuch as it vaguely states that “was lawfully controlled and used by employee to store and process information.” without specifying who is the employee, who as in lawful control, etc.;

(a) Investigation Wing for downloading the information contained therein, for postsearch investigation and preparation of search report; and

(b) Assessing Officer at the time of framing of assessment for using the information;

– Panditrao Khotkar v. Kailash Kushanrao Gorantyal & Ors. : CA Nos. 2082520825 of 2017 (SC)

– Vetrival minerals v. ACIT, Madurai 437 ITR 178 (Mad.)

– Shri Anil Kumar Gupta v. ACIT: ITA No. 208/Del/2023 (Del Trib.)

– Smt. Abha Bansal v. Pr. CIT: ITA. No. 383/Del/2021

(a) ‘Digital Evidence Collection Form’, if any, filled by the departmental officers was confronted to the assessee and assessee was not provided with Digital Evidence Collection form (as per Annexure 7 of the ‘Digital Evidence Investigation Manual, 2014’) which contains vital information regarding seizure of digital data;

(b) Chain of Custody Form (as per Annexure 8 of the ‘Digital Evidence Investigation Manual, 2014’) has not been provided, which is vital to ensure integrity of the seized digital data;

(c) Photographing of device: Even the basic procedural safeguard of photographing the device at the time of search was not followed;

(d) Seizure Memo: has not been made;

(e) Witness: Witness were not independent and merely signed on dotted lines; they were not competent to understand the process followed and hence, were incompetent to sign as witness – the entire process was thus compromised;

(f) 65B Certificates: have not been prepared.

“29. We are of considered view that these instructions and directions of Board in the Manual do have strong persuasive value on the authorities to show that digital evidence is duly collected and relied in assessment order. Same is not the case here as nothing comes up from the assessment order in that regard. Hon’ble Supreme Court decision in Addl. Director General Adjudication v. Suresh Kumar and Co. Impex Pvt. Ltd. &Ors. In Civil Appeal Nos.11339-11342 of 2018 dated 20^th August, 2025 very recently, has dealt with the case of relevancy and admissibility of electronic evidences in the proceedings under the Customs Act, 1962 wherein the provisions of section 138C of the Customs Act, 1962 regarding admissibility of electronic evidences has been accepted subject to availability of certificate to be obtained in accordance with the sub-section (4) of section 138C of this Act of 1962. The Hon’ble Supreme Court observed that section 65B(4) of Indian Evidence Act is parimateria to section 138C(4) of the Act of 1962 and, further relied the decision of the Hon’ble Supreme Court in Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal and Others (2020) 7 SSC 1,and observed that in the said decision the Hon’ble Supreme Court, while explaining the mandatory nature of section 65B(4) of the Indian Evidence Act applied following two Latin maxims :- (i) impotentiaexcusatlegem; (ii) lex non cogitadimpossibilia, and thereafter held that these two maxims are the foundation with regard to admissibility of electronic evidences and though section 65B(4) of the Evidence Act is mandatory, yet, it would all depend on the facts of each case, how the same could be said to have been duly complied with. Accordingly, in the said case of Suresh Kumar (supra), the Hon’ble Supreme Court considered the ‘substantial compliance’ of section 138C(4) to be sufficient and, therefore, we can firmly conclude that if, in the case of the Income-tax Act, 1961, there are no specific provisions with regard to admissibility of electronic evidences, then, the Manual issued by the Board would substantially hold the ground and the tax authorities are supposed to ensure that there is at least substantial compliance of the Manual to make the electronic evidence relevant and admissible under the law and thus pass judicial scrutiny in appellate jurisdictions. Therefore, conclusion being based on mere whatsapp chats which do not have self contained information of transaction but need interpolation could not be basis for making such sort of additions of profit earned. We are inclined to allow ground no.5 raised by the assessee in AY 2021-22.”

“7.4 Thus the only evidence is images of ‘Sambhav software’, which is definitely a secondary piece of electronic evidence as the original software was not found in search and it seems AO had also not tried to get this software from Mr. Vimal Jain or the assesse by way of any notices.Then the other evidences are whatsapp chats of Mr. Vimal Kumar with some persons with he was exchanging ‘tokens’, which allegedly formed modus of payments of out of book purchases and sales. This too is electronic evidences. Thus we have to examine if these two electronic evidences were legally relevant, admissible and independently of any corroboration could have been basis of drawing conclusions and complete the assessment.

………

9. Here,at outset, we find it necessary to observe that this Manual is in the instructions though may not have been issued u/s 119 of the Act,but certainly form of atleast good practices, which Board has found fundamental and necessary to add credibility to electronic evidences. The Manual is self contained code where Board has consciously and very articulately examined various facet of collection, examining and reproducing the digital evidences in assessment orders, on the basis of judicial decisions and provisions of law as enshrined in Evidence Act or Information Technology Act, 2000, and then laid down instruction to be followed by the officers of the department.

………

16. We can further see that there are various provision under the Income Tax Act 1961 akin to provision under the Evidence Act like section 131 of the Act giving powers regarding discovery, production of evidence, section 132(4A) presumption as to books of account and documents, section 132A of the Act giving power to requisition books of account, section 136 of the Act specifically mentioning that proceedings before income-tax authorities to be judicial proceedings, provision of section 250(4) of the Act and Rule 46A of admitting additional evidences, Section 278E of the Act giving rise to presumption as to culpable mental state, section 292C of the Act giving rise to presumption as to assets, books of account definitely recognize some of the basic principles of Evidence Act by specific adoptions in the Income-tax Act, 1961. The presumption attached to statements recorded u/s 143(4) of the Act. Then, though affidavits are not included in the definition of ‘evidence’ in section 3 of the Evidence Act however, the same are frequently called for and relied in the assessment proceedings.

17. Thus we are of considered view that certain Rules of natural justice, prudence and common sense as enshrined in the Evidence Act certainly become applicable in all quasi judicial proceedings also even if there is no strict application of Evidence Act. Based on aforesaid discussion we can certainly hold that the strict principles and Rules of ‘mode of proof’ under the Evidence Act may not be applicable to assessment proceedings but the aforesaid discussion leaves us to a conclusion that even if the Evidence Act is not made strictly applicable to the tax proceedings by the Income Tax Act 1961, the fundamental principles of law of evidence defining what constitutes evidence, the relevancy of evidence for the issues under consideration, the principles of their admissibility in terms of valid mode of proof and probative value of the evidences, cannot be ignored even by quasi judicial authorities. Thus where the initial burden of proof is on the Revenue authorities to show that the receipts constitutes income, and only real income is liable to tax and more particularly in case of search assessments that addition is on the basis of incriminating material found during the search, the burden on the Revenue is of proving that the assessee has attempted to evade tax and this burden is to be discharged by establishing facts and circumstances from ‘relevant material’ driving conclusive inference that in fact assessee evade tax lawfully payable by it. Reliance can be placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Sati Oil Udyog Ltd (SC)/[2015] 372 ITR 746 (SC). Hon’ble Supreme Court in Durga Prasad More (supra) has observed that “Now coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas in others, it may be nominal. There is nothing rigid about it.”

…….

19. The incorporation of provision about necessity of having certificate u/s 65B of the Evidence Act is thus one of the elementary jurisprudential aspects which call for admission of only the best evidence and to ensure the electronic or digital evidence hold veracity to draw conclusive conclusions and to fasten a liability. This is fortified by the Hon’ble Supreme Court decision in Addl. Director General Adjudication v. Suresh Kumar and Co. Impex Pvt. Ltd. [Civil Appeal Nos.11339-11342 of 2018, dated 20-8-2025] where recently, the Hon’ble Supreme Court has dealt with the case of relevancy and admissibility of electronic evidences in the proceedings under the Customs Act, 1962 wherein the provisions of section 138C of the Customs Act, 1962 regarding admissibility of electronic evidences has been accepted subject to availability of certificate to be obtained in accordance with the sub-section (4) of section 138C of this Act of 1962. The Hon’ble Supreme Court observed that section 65B(4) of Indian Evidence Act is parimateria to section 138C(4) of the Act of 1962 and, further relied the decision of the Hon’ble Supreme Court in Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal (2020) 7 SSC 1,and observed that in the said decision the Hon’ble Supreme Court, while explaining the mandatory nature of section 65B(4) of the Indian Evidence Act applied following two Latin maxims 🙁i) impotentiaexcusatlegem; (ii) lex non cogitadimpossibilia, and thereafter held that these two maxims are the foundation with regard to admissibility of electronic evidences and though section 65B(4) of the Evidence Act is mandatory, yet, it would all depend on the facts of each case, how the same could be said to have been duly complied with.

…….

25. We thus come to a stage where it becomes relevant to again rely the provisions of the Manual issued by the Board to find out how the Board recognizes the due procedure to be adopted to ensure the admissibility of digital evidences and we find that by virtue of para 6.8 of the Manual while giving directions as to how the forensic imaging of cloning of the devices have to be done the Manual directs that hash value should be recorded in the Panchnama and the assessee can be given the option of seeking a copy of imaged/cloned hard disk by paying the copying charges. The Manual very categorically emphasis on the importance of hash value as evidence of genuineness and completeness of the collection and examination of the digital evidences.

26. However, when we examine the Panchnama, the copy of which was file at hearing, there is absolutely no whisper of the hash value of these digital devices and evidences in the Panchnama. There is no mention of IMEI numbers of the devices shown seized in the Panchnama.

…….

30. Now, what is material is that the Manual very categorically lays down the importance of chain of custody and the Manual lays down procedure to be followed by authorities for reporting and analysis of digital evidences and as to how the AO has to deal with the digital evidences and its analyse in the assessment order and what is the importance of chain of custody of digital evidences. The relevant para 9.1 and 9.6 of the Manual which:

…….

32. As with regard to circumstance, in the case before us, which indicate the importance of chain of custody document, we find on more careful examination of the aforesaid material provided at the time of hearing and the assessment order including the annexures in the form of statement recorded, that as mentioned above, admittedly, the date of search is 23rd March, 2021 but in the mobile device collection form has left the time of preparation of this form as blank. This mobile device collection form mentions details of imaging software/version used and also the hash value calculated. It is shown to be signed by the assessee mentioning the name Vimal, while assessee is Balar Marketing and authorized official Keshaw Kishore Anand, Dy. Director of Income-tax (Inv.), Unit-2(4), Delhi along with signature of the engineer/examiner. Two witnesses are also there, however, their signatures are dated 24th March, 2021. The list of inventory is shown to be dated 24.03.2021. The so-called certificate u/s 65B are also dated 24.03.2021. In continuity to the above, as the Panchnama document are examined they are shown to be witnessed on 25.03.2021.

33. At the same time, the statement of Shri Vimal Kumar Jain was recorded u/s 132(4) of the Act and the same is shown to be recorded on 23.03.2021 at 4 PM during the search. This statement is shown to be recorded by Shri Keshaw Kishore Anand. The statement shows that after putting 14 questions on 23.03.2021 at 8.30 PM, recording of statement was closed. This statement shows that Mr. Vimal Kumar Jain was not confronted with any of the digital devices seized or any evidence extracted at time of search. It can be observed that thereafter on 24.03.2021 the statement was continued further starting at 4.30 PM and was recorded by Shri Keshaw Kishore Anand. Therein the digital devices iPhone and Panasonic were confronted and he admitted about their ownership. It can be seen that certain questions were also put up about the whatsapp messages extracted running from pages 1 to 77 in the form of print outs and SMS messages running from page 1 to 165. As observed above the so-called certificate u/s 65B are also dated 24.03.2021, but only mention of the fact that using appropriate software working copy was prepared and nothing as such about the extracted evidences and as with regard to images of sambhav software nothing was extracted up to 24.03.21, so this e-Evidence certificate has no certification about the same. While the certificate should have been taken that the extracts taken out have been taken out in compliance of the Manual.

37 Then report which assessing officer has filed and we have reproduced in para 18.1 above admits that the procedure of seizure of electronic devices as well as imaging and cloning of digital devices is carried on in accordance with the Search and seizure manual (last updated in 2025) and Digital Evidence Investigation Manual 2014 and that chain of custody was not maintained subsequent to time of search. It is certainly thus not the case of department that assessing officer had any opportunity of examining the credibility of electronic evidences and then to record of same in the assessment order. Therefore, the chain of custody form as left incomplete demolishes the case of the Department that there is no reason to doubt the electronic evidences relied by the AO.

38 More importantly, as we examined the assessment order, we find that none of the directions of the Manual have been followed by the AO except for making the extracts of digital images of SambhavSoftwareor statements annexed to the assessment order. The aforesaid directions of Board in para 9.1 and 9.6 of the Manualhave been completely ignored by the AO. It appears that at time of initiation of search the process of collection of digital evidences was very much in accordance with the directions of Manual. The preparation of chain of custody document and taking E Certificate at time of making working copy, does show that authorities were conversant with the Manual or other instructions. They were aware that only evidence found in search is in the digital form so they with all caution initiated the process of collection of digital evidences form two phones in accordance with mandate of Manual and general principles of law, regulating collection of electronic evidence and to maintain its sanctity throughout, till it is ultimately relied in assessment and if needed at stage of judicial scrutiny. However, the attempt was either half hearted, if not to be presumed to be thwarted half way to prejudice of assessee. It is established that that tax authorities applied some provisions and instructions of the Manual, at time of search but, failed to maintain the records as per the instructions in Manual for Panchnama, mobile device collection form, certificate u/s 65B of the Evidence Act and most importantly the chain of custody form.

39. More particularly, and at the cost of repetition, with regard to the certificate u/s 65B, it can be observed that the same is merely a certificate of the expert about due process adopted while data was backed up from the impugned devices to the devices in which the data was cloned. However, subsequently, as to how the data was retrieved and relevant incriminating evidences were extracted from the devices by whom, have not been certified. In fact that required maintaining correct record of chain of custody, so as to show that when the data was retrieved or any extract taken during assessment proceedings the same were corroborated by hashvalues as recorded at time of making the working copy. The purpose of section 65B of Evidence Act is to provide a certificate to the computer output stating identity of the electronic record describing the manner in which the output electronic record was produced. The certificate should indicate particulars of the electronic device involved, like in the case in hand the two phones or the working copy involved for producing the output of images relied by assessing officer. The authenticity is added by the extraction reports which forms basis of issuing the certificate. There is no extraction report of these two mobiles or of working copies though of some other devices found insearch are placed in material before us. Then the certificate u/s 65B should have shown that the output to be relied as an evidence was produced from the working copy and that the same was in lawful control of the person signing the certificate and certainly the chain of custody document would have established same. However, the chain of custody document filed is completely silent about the same.

40. Then it is also pertinent to mention that the incriminating evidences relied by the AO is not the primary evidence existing in the laptop or computer wherein the alleged Sambhav software was installed, but, are merely images of Sambhav software which allegedly Mr. Vimal Jain was sharing with counterparts for acknowledging the transactions. Similarly, on going through the Whatsapp chats as part of the annexure to the assessment order, the same do not contain any message which will narrate any transaction on its own, but, only mention some figures which are allegedly to be codes. When original Sambhav software could not be retrieved from any of the electronic devices the images in the phones of Mr. Vimal Jain were, no doubt, secondary evidences only and that all the more required thatif they were to be relied the instructions given by the Board to ensure the authenticity of evidence become material directionsto be followed. The evidences extracted from the phone howsoever relevant would become admissible only once necessary compliances required as per due course of law are made. The due course here certainly is the instructions in Manual. Even if it is claimed by ld. DR to be not binding the aforesaid discussion has firmly established that the assessment though being a quasi judicial exercise had to be on the basis of evidences whose veracity can be tested in subsequent proceedings, like appeal or judicial review.This gives us an opportunity to hold that even if the case of revenue is accepted that strict principles or rules of Evidence Act are not applicable or there is no necessity of certificate u/s 65B, still in order to give and add credibility to the conclusions drawn on the digital evidences the AO should ensure that there is substantive compliances of the Manual and not just by way of eye wash.

41. Thus we have no hesitation to hold that assessment has been framed on the basis of material, allegedly retrieved from digital devices, but which are not admissible under law so as to be relied for drawing conclusions, of fact in dispute, being proved on scales of probability even. The corresponding grounds by which assesse challenges the assessment order being framed on inadmissible electronic evidences thus deserves to be sustained.”

(a) the computer output containing the information was produced by the computer during the period over which the computer was used regularly to store or process information for the purposes of any activities regularly carried on over that period by the person having lawful control over the use of the computer;

(b) during the said period, information of the kind contained in the electronic record or of the kind from which the information so contained is derived was regularly fed into the computer in the ordinary course of the said activities;

(c) throughout the material part of the said period, the computer was operating properly or, if not, then in respect of any period in which it was not operating properly or was out of operation during that part of the period, was not such as to affect the electronic record or the accuracy of its contents; and

(d) the information contained in the electronic record reproduces or is derived from such information fed into the computer in the ordinary course of the said activities.

(a) identifying the electronic record containing the statement and describing the manner in which it was produced;

(b) giving such particulars of any device involved in the production of that electronic record as may be appropriate for the purpose of showing that the electronic record was produced by a computer;

(c) dealing with any of the matters to which the conditions mentioned in subsection (2) relate,

…………

i. Evidence has to be gathered in such a way that the same would be accepted by a court of law.

ii. Every care must be taken to avoid doing anything which might corrupt or add to the data, even accidentally or cause any other form of damage.

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“Chain of custody” is the roadmap that shows how evidence was collected, analyzed and preserved in order to be presented as evidence. Establishing a clear chain of custody is critical because electronic evidence can be easily altered. A clear chain of custody would demonstrate that electronic evidence is trustworthy. Preserving a chain of custody for electronic evidence, at a minimum, requires that;

i. No data has been added, changed, deleted from the seized information evidence.

ii. The seized /information evidence was duplicated exactly and completely.

iii. A reliable and validated duplication process was used.

iv. All media were secure and safe.

…………

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• Make sure that one person from the technical side, one from the assessee side and two independent witnesses are , part of the search and seizure , proceedings

• Please refer the Pre-Investigation Assessment of Digital Devices as discussed in Chapter 5 for cross verifying and correctly documenting the technical information regarding equipment, networks and other communication equipment

• Time Zone/System Time should be carefully noted if the system is in switched on position

• Don’t switch on any devices

• Allot a unique device number and the same should be duly reflected in the Panchnama, Chain of Custody and Digital Evidence Collection Forms.

• Make sure all potential digital devices that needs to be seized are photographed along with the respective reference like cubicle number or name room surroundings etc. This is important since assessee may claim that the same was implanted without his knowledge.

• If the hard disk is removed, a photograph of the hard disk drive should be taken

• If Possible , paste a serial number on the digital device so that it can be related to the exact case , date and the section under which it is searched

• Make sure that panchas have some knowledge about various digital devices. It is advisable to include a writing from panchas that they have been explained the various digital devices that have been identified and also the various procedures used in Forensic Collection

• Document the chain of custody and Digital Evidence Collection forms which are explained in the next paragraph. Please fill all the details in the forms before seizing the same.

– ‘Margin A’ and ‘Margin’ Account [Commission set at default 3% commission with adjustment on account of various factors including sales return, etc.]

– Margin (Woolen LDH) Account [Margins for woolens]

– ‘OSIA FAB’ Account [Credit side represents additional charges (computed in form of interest) for delayed payment by customers to suppliers; debit side represents discounts offered for early payments to customers]

– ‘OSIA ENT’ Account [Mainly reversal of above interest].

– As submitted above, from the statements of certain employees, the Revenue/ assessing authority has interpreted that so-called JSK Server contains parallel book of accounts of the appellant; the assessee acts as agent for sale of goods from sellers to buyers; in respect of facilitation of transaction of purchase/ sales between vendor & sellers, invoices is raised by the seller directly in the name of the purchaser for the bank payments, and no invoice is raised for cash component- just Kachchi Parchi/ slip is issued for the cash part.

It may be noted that the so-called income recorded in the JSK Server is not at all corroborated by any tangible material, evidence, document etc. As explained above, there is nothing brought on record to corroborate the entry in the JSK Server with the regular book of accounts of the assessee. Rather, the entries in the so-called JSK Server are not at all recorded as per accepted accounting principles and even as per AO the same as incorrect.

Moreover, the transaction recorded in the JSK Server does not belong to the assessee and income cannot thus be taxed in his hands.

– Apart from journals, challans, and entries in the ledgers contained in JSK Server, there are no corroborative material/ evidence, to substantiate earning of any cash income by the appellant. Since the existence, credibility and veracity of the said source is doubtful, the futile attempt to attribute any taxable amount appears to be nothing but a failed attempt to somehow made additions of fictional amount.

– Pertinently, even as per Special Auditor and AO, there are numerous dummy accounts and the manner in which the accounts are maintained, it is not possible to arrive at any taxable income.

– One ‘cash in hand’ ledger in the so-called JSK Server is relied upon by the assessing authority and also the special auditor. In this regard, it submitted that – (i) the same is not credible as even the balance in the said account did not corroborate with cash in hand found during the search; (ii) there are multiple nature of entries in the said account and not merely cash which doubts the very nature of the said account; (iii) that apart, on perusal of the said account provided to the appellant, it appears that the term ‘cash’ has loosely been used even for banking or other book entries, and may not be related to cash/ currency exchange transaction. There is no corroboration, much less concrete, of cash income earned by the appellant.

– No evidence of cash receipt or payment such as any cash parchi/ receipt, rukka etc. was found during the course of search much less any document signed by the appellant or any employee or even bearing name of the appellant suggesting cash movement much less income of the appellant.

– It is also most important to note that name of the appellant is not even mentioned in the so-called JSK Server/ data and hence the same cannot be used to make addition in the hands of the appellant.

– Further, had the entries mentioned in JSK Server being in respect of actual transactions of the appellant, then during the search some tangible material would have been found to substantiate/corroborate the same. However, there is undisputedly nothing found and/ brought on record by AO to corroborate the entries.

– Pertinently, the tax department has undertaken search, the most lethal/ patent power, and had the transaction recorded in JSK Server been real and/ or related in any manner to the appellant, the Department would have discovered the same during search. Now the Revenue cannot, after undertaken search, been heard to say that there is no corroborative material and still addition is sustainable.

■ Corroboration is sought to be made inter-se between documents found in the JSK Server, authenticity of which is highly doubtful;

■ There is no corroboration whatsoever of any transaction in the JSK Server with the books of the appellant- absence of such corroboration or any linkage with movement of cash, the authenticity and creditability transactions in JSK Server cannot be proved- the same is thus not more than a dumb data for all purposes;

■ Be that as it may, even the documents referred for inter-se corroboration is unreliable inasmuch as:

? At page 33 (pg 2541 of PB) of Special Audit Report, one voucher dated 13.03.2020 is given and on page 34, corresponding ledger extract is mentioned. It would be relevant to note that the name, description, quantity etc. in the two documents do not match.

? At page 36 (pg 2544 of PB) of Special Audit Report, some loose paper is extracted wherein amount is mentioned as Rs.1,66,557 in respect of party ‘Miahave er Gangapur ‘. As regards entry in JSK Server given at extract in page 37, party is mentioned as ‘Mahavir

The inconsistency highlights that corroboration sought to be made is not proper.

■ That apart, what the special auditor/ AO has done is that some inappropriate corroboration has been attempted with respect to data in JSK Server (although not a valid) and have extrapolated the inference to all the transactions recorded in the JSK Server. Such extrapolation is impermissible and not sustainable [refer CIT v. B. Nagendra Baliga:   (Kar.), DCIT v. Indo Count Industries Ltd.: 3822/Mum/2024 (Mum Trib.), Gurdip Cycle Industries v. ACIT:  (Vhd Trib.)].

• From perusal of the above analysed/ summary trail balance stated to be found in JSK Server, it is evident that the gross debits in the Revenue (Rs.171,75,03,383) are much more than the credits (Rs.166,13,81,578); thus, in fact, there appears to be a net loss of (Rs. 5,61,21,805). While computing the revenues, the special auditor has, however, computed revenues/ income by only considering the credit balance (and making some adjustments)- the debit balance has been ignored for the purposes of revenue.

• While on the other hand and in direct contradiction to the approach as per while revenues are computed, for most of the expenses, the net balance (debit less credit) has been considered.

• Furthermore, on clarification sought by the special auditor, the assessee basis his understanding somehow tried to analyze the entries in the aforesaid so-called income related ledger accounts and submitted that debits would relate to reversal on sale returns (refer pg 2585-2586 of the PB).

• The Special Auditor however conspicuously ignored the debits, without any finding for rejection/ disregard of such debits.

“If the revenue was of the opinion that the expenses claimed towards “green boxes” was inadmissible or was excessive, or not genuine, in order to reject the entries in the books of account and other documents of the assessee, seized during the search, it ought to have relied on other materials. Having once drawn the presumption that the contents of the documents (of the assessee) taken into possession during the search were true, the revenue could not have, consistently with that presumption, proceeded to require the assessee to produce materials in support of the expenditure entries. Such an inconsistent approach in respect of the contents of the same book appears to have been founded only on suspicion that they were not genuine. However, suspicion cannot replace proof. Moreover, the full effect of the presumption should be given effect to, whenever the statute directs a particular non-existent state of affairs to be assumed. (Ref State of Bombay v. Pandurang Vinayak Chaphalkar AIR 1953 SC 244; Karnataka State Road Transport v B.A. Jayaram AIR 1984 SC 790). In these circumstances, the effect of the presumption (which bade the revenue, when it chose to invoke it, to presume that the “contents of such books of account and other documents are true. “. Therefore, in the absence of any materials, in the form of documents, the revenue could not have denied the benefit of any expenses which would otherwise have inured to the assessee, as an allowable deduction under Section 37 (1).

……….”

“21. The next question that arises whether the profitability found during those statements are required to be accepted or not. Further, if the addition is deservedly made in the hands of the 69tilized on account of Bogus purchases and scrap sale’s found in the excel sheets, then documents which are found from the same hard disk wherefrom addition on account of bogus purchases are made, cannot be ignored when same are interlinked, correlated and reconciled. We do not find any reason that when certain documents found from the hard disk are considered by the assessing officer for enhancing the income of the assessee, what could be the reason for ignoring other excels sheets found from the same hard disk. It is also not correct approach that income portion from the documents seized are taxed and closing the eyes towards the expenditure part of such expenses. Hon’ble Delhi High Court in 349 ITR 85 (del) in CIT versus Indeo Airways private limited on identical question about the allowability of the claim of the assessee of expenditure found during the course of search in seized documents but not recorded in the books of accounts where the income is also recorded which has been taxed by the revenue, has held as under

……

23. Therefore, in case of the documents found during the course of search in possession of the assessee the presumption lies for all the purposes in any proceedings under this act that contents of such books of accounts and documents are true. The law nowhere provides that such presumption is only available to the revenue. It also applies equally in favour of the assessee also. If any party either revenue or the assessee, would like to state otherwise, then they have to prove it with more credible and strong evidences to prove contrary. It is not an inviolable rule applicable to all situations and to all cases, that every seized document should be corroborated before any addition can be made based on it. If calculations and computations have been made in the seized document in such a manner that its probative value and genuineness cannot be doubted, nothing prevents the Assessing Officer from making additions on the basis of such document despite the absence of any corroboration. It must be remembered that in some cases it is difficult to obtain corroboration, particularly of the type contemplated by the revenue. It is not necessary that the seized documents should be in the form of pro-per books of account so that they can be relied upon for the purpose of making additions. They could be in any form, including loose papers on which notings or scribbling have been made. Such is the view taken by Honourable Delhi High court in case of 359 ITR 532 in CIT V Sonal Constructions. Provision of law applies on all such documents found during the course of search whether in favour of revenue or in favour of assessee. Therefore such excel sheets found during the course of search cannot be ignored even if in corroborated, incomplete etc.”

(a) Revenue – (Rs. 5,61,21,805)- negative

(b) Expenses – (Rs.2,07,59,485)- negative

Re (d): In any case, incorrect quantification of income- excess addition made by the AO

(i) Ledger account ‘Neel Ratan Sarkar’ relied by the assessing officer as extracted at page 42 is snipped as under:

Firstly, AO/ Special Auditor at Pg 3 of assessment order has held that ‘Neel Ratan Sarkar’ is a dummy account. Having so held, the appellant fails to appreciate how any reliance could be placed on the said dummy account to made any addition.

Secondly, from the said ledger account, it appears that the said account is largely used to carry forward the opening balances of the preceding year of various accounts, which fact is accepted by the special auditor and the assessing officer as no addition with respect of any other entry in the said account is proposed/ made. Thus, there cannot be any comprehensible basis to single out one entry in the said account to allege that the same represents unexplained cash credit, nature and source of which is not proved.

Further, even the assessing officer has, in the order dated 14.03.2024 (at page 15) directing Special Audit observed that “The incorporation of closing balance of last financial year results in overstatement of income and expense of the current year. In order to nullify the effect of duplication, these heads of income and expense are adjusted with dummy account ‘Neel Ratan Sarkar’ either directly or through ‘Cash in Hand’ Account.”

It is therefore reasonable to conclude that why one will put an entry for actual cash introduction/ credit/ receipt in a ledger with all adjustment/ notional entries, which per se has no impact on the income of the person.

Thus, the adverse inference drawn by the assessing officer is uncorroborated and not sustainable.

(ii) Be that as it may, the nature of the aforesaid impugned entry clearly appears to be a notional or adjustment entry as is evident from the fact that the amount in the impugned entry is the balancing figure (difference between credit and debit adjustment entries) which makes the balance of the account as Nil. Thus, the entry is clearly an adjustment or balancing entry in the so-called parallel books and cannot be given color of any explained cash credit as alleged by the assessing officer and the special auditor.

(iii) It is alleged that the corresponding debit of the aforesaid entry of Rs.6,90,589.29 is reflected in the ‘cash in hand’ account. In this regard, it is submitted that from the analysis of the cash in hand account in the JSK Server, the same appears to have multiple notional or adjustment entries and does not probably reflect cash receipts and payments; the cash in hand ledger is also a notional account with multiple adjustment entires. The said fact is glaringly evident from the fact that cash in hand shown as per the said account was not even close to what was found during the course of search; no allegation of any unaccounted cash arising from JSK Server or any addition in that regard has been made. Had the entries in the said account been real or belonged to the appellant, the corresponding cash should have been found during the course of search on the premises of the appellant. This further proves that entry in the Neel Ratan Sarkar accounts is notional or adjustment entries having no impact of income even as per JSK Server.

(iv) It is not alleged that the impugned entry is linked to any identifiable person such as any customer, vendor or lender etc. Thus, in absence of credit from identifiable person, the entry is clearly notional and cannot result in any income.

• CIT V. Tyaryamal Balchand: 165ITR 453 (Raj.):

“It is clear from the law discussed above, that the Income-tax Officer was within his right to tax the amount of Rs. 16,950 as income from undisclosed source, even though he had added the amount of Rs. 18,117 in addition to the profit shown by the respondent-firm in its account books. However, in the present case, the respondent was well within his rights to plead that this amount of Rs. 16,950 is covered by the intangible income assessed at Rs. 18,117 and added to the income of the firm and apart from this, since for the last preceding three years, substantial additions amounting to Rs. 32,797 have been made, the amount of Rs. 16,950 could be taken as having come out of such intangible additions. In the case reported in [1980] 123 ITR 457, their Lordships of the Supreme Court have held that the additions made to the book profits in earlier years are the real income and can be treated as available for use in subsequent years or even in the same year..” (emphasis supplied)

• CIT v. K. S. M. Guruswamy Nadar and Sons [1984]: 149 ITR 127 (Mad.) @ 130

“But in this case in addition to the bogus cash credit there is an addition towards suppression of profit. In such a case as this, when there are two additions, it is always open to the assessee to explain that the suppressed profits during the year has been brought in as cash credits and, therefore, one has to be telescoped into the other and there can be only one addition. ”

• CIT V. K. Sreedharan: 201 ITR 1010 @ 1019 (Ker)

“What the assessee is expected to prove is a negative fact, that he has not spent the amounts. The income being undisclosed and secret, from its very nature, positive evidence will not be available to prove its existence in 1980-81. On the other hand, the fact that the assessee offered a large amount for settlement with readiness to make payment of a large amount by way of tax any time the Settelment Commission passed its order, is itself indicative that the assessee did have sufficient amounts with him. The Tribunal has found as a fact that the assessee could in any event have an amount of Rs. 3,87,544 with him available for investment in January/March, 1980. The period of four years between 1976-77 and 1980-81 is not so long a period as to rebut the presumption regarding the continued availability of the amount. We are, therefore, of the view that, on the facts of the case, the assessee has discharged the burden that lay on him to prove the source of the amounts of the cash credit entries made in January/March, 1980.

• CIT V. Dr.S.Bharti: 254 ITR 261 (Del.)

“When the amount of Rs.21 lakhs was found in the locker in the Bank of Maharashtra and further sum of Rs.1.89 lakhs was found in Locker No. 362 in the Allahabad Bank, these amounts could be easily said to have come from professional receipts only. No other activities are being done by the assessee. Thus, the natural conclusion is that the cash amount found in these two lockers as well as the cash amount found during the course of search at the premises No. 18/49, East Patel Nagar, have come out of professional receipts only. As these amounts have already been considered and taken by the assessee while filing the return in response to notice under section 158BC of the Act, no separate addition on account of suppressed professional receipts was called for. ”

• Kantilal & Bros V. ACIT: 52 ITD 412 @ 419 (Pune)

“16. ..It is a cardinal principle of law that no one should be twice harassed for the same cause. This principle is canonized in a well known legal dictum:

“NEMO DEBET BIS VEXARI PRO EADEM CAUSA”

The general conspectus of the main plank of Shri Sathe ‘s argument was that the piece of paper impounded ~ from the premises of Kant Electronics, reflected only the borrowings of the assessee. These borrowings were 80tilized by the assessee for acquiring the assets found during the search. …It would be contrary to

the canons of law to tax twice the same amount, i.e., borrowings and cost of assets. Borrowings were 80tilized to acquire assets.

..Once the contention of assessee that the amount as reflected in the ‘seized paper ‘ represents borrowings of the assessee is accepted, it would be proper to presume that such amount was 80tilized for the acquisition of assets found at the time of search. ”

• Principle of telescoping has been also applied in the following cases:

– CIT v. Singhal Industrial Corporation: 303 ITR 225/ 199 CTR 690 (All.): The Court held that set off of unexplained deposits against addition on account of sales outside books was justified.

– Dhandia Jewellers V. CIT: 214 ITR 712, 715 (Raj.): Secret profits or

undisclosed income earned in earlier year constitutes a fund from which the assessee may withdraw subsequently.

– Rameshwar Lal Soni V. ACIT: 91 ITD 301, 354-357 (Jodhpur) TM: In this case, the assessee claimed the benefit of telescoping and also benefit ofpeak credit in respect of various addition made on the basis of documents found during the course of search. The benefit of telescoping and also benefit of peak credit was allowed by the Judicial Member but was denied by the Accountant Member on the ground that the assessee was unable to adduce proof to claim such benefit. The Third Member disagreed with the view of the Accountant Member and held that benefit of telescoping and also peak credit is to be allowed.

– Jagdamba Construction Co.: 82 TTJ 13 (Jd.)

– DCIT V. Sunil Umashankar Rungta: 94 TTJ 329 (Mum.): Principle of Telescoping applied to delete certain additions of undisclosed income in block assessment

– Eagle Seeds & Biotech Ltd V. ACIT: 100 ITD 301 (Ind.)

• From the JSK Server, it is found that Z Account ‘ has been credited with Rs. 150 crores on 01.05.2019.

• The assessee has changed his stance on explanation regarding ‘Z Account’ inasmuch as it was first explained that the same relates to disclosure made by the family of the assessee under Income Disclosure Scheme, 2016 (IDS), while later the explanation was changed to that the ‘Z Account’ represents ‘liability’. Accordingly, the assessee is trying to mislead the Department about true nature of the account.

• Since Z Account is grouped under the set of accounts having account code starting with letter ‘CL’, the nature ofZ account is also loan account.

• Contention of the assessee that entries posted on 1^st May represent only opening balances carried forward from prior year was incorrect as numerous regular entries are posted in JSK server on 1^st May (snipped at page 49 of impugned order).

• Assessee has failed to identify the party to whom ‘Z Account’ represents; assessee has failed to explain why it is not a loan account; assessee has failed to establish the creditworthiness of party which represents ‘Z’ account in reference to credit of Rs. 150 crores; assessee has failed to specify the FY to which the opening balance of Rs.150 crores, if any, relates; assessee has failed to bring on record the relevant documents such as ledger of ‘Z’ account for FY 2018-19, balance sheet/ trial balance for FY 2018-19 or confirmation from third party to which ‘Z’ account relates to establish that credit entry represented opening balance.

• As the assessee failed to explain the nature and source of introduction of funds of Rs.150 crores found credited in Z Account in the parallel books of the assessee, an amount of Rs. 150 crores is added as unexplained credits under section 68 r.w.s 115BBE of the Act.

(i) The ‘Details’/ narration in the entry ‘Karni Fabrics (CL), Accumulated From Beginning of This Year’ shows that the same is adjustment relating to opening balance; further, Karni Fabric is undisputedly some notional/ adjustment account in the so-called JSK Server.

(ii) It is not alleged that the impugned entry is linked to any identifiable person such as any customer, vendor or lender etc. Thus, in absence of credit from identifiable person, the entry is clearly notional and cannot result in any income.

(iii) The ‘Type’ mention against the impugned entry in the ‘Z Account’ is mentioned as ‘JE’ which is stated to reflect Journal Entry, i.e., some adjustment/ notional/ balancing/ inter-se set-off entries; there is thus no corresponding credit of money.

(iv) No corroboration of any corresponding flow of cash/ money is substantiated by the Revenue. In fact, there is no corresponding entry in cash in hand account forming part of JSK Server.

(v) No corresponding cash is found during the course of search at the premises of the appellant.

(vi) Even as per Special Auditor, the Z Account reflects some difference between credit and debit balances of certain selected accounts as on 01.05.2019. The relevant extracts of the special audit reporare transcribed as under:

“Cash credits.

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited maybe charged to income-tax as the income of the assessee of that previous year :

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in

the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has

been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”

(Emphasis supplied)

“The question is what is the true nature and scope of section 68 of the Act? When and in what circumstances would section 68 of the Act come into play? A bare reading of section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessees of that previous year.” (emphasis supplied)

“2. The brief facts necessary for the disposal of this tax case reference are as follows: the assessee is a firm of two partners, viz., one P. Thiagarajan and another K.L. Sri Hari. The firm was constituted by a partnership deed dated July 30, 1981, and its business was deemed to have commenced from July 16, 1981.

The firm was a registered firm. Even before the commencement of the firm, on May 16, 1981, one of the partners of the firm, viz., P. Thiagarajan, had paid a sum of Rs. 30,000 as licence fee for warehouse and depots under the State Excise Rules to the State Government and had deposited another sum of Rs. 30,000 as a wholesale security deposit with the State Government. The question arose whether the sum of Rs. 60,000 credited to the account of Thiagarajan and treated as his capital contribution should be treated as undisclosed income of the firm. The Tribunal found that even before the commencement of the business of the firm on July 16, 1981, Thiagarajan had paid Rs. 60,000 as security deposit and licence fees with the Government which was given credit in his capital account. The Tribunal further held that it was not a case of cash credit at all and the provisions of section 68 are not attracted. The Tribunal, therefore, held that the amount of Rs. 60,000 cannot be referred to as the undisclosed income of the firm as Thiagarajan had given a statement that the said amount was given by him even before the commencement of the business of the firm for the purpose of carrying on the business.

We find that the Appellate Tribunal has arrived at the conclusion that the sum of Rs. 60,000 was not the undisclosed income of the firm on the basis of the materials available on record and on the basis of the statement of Thiagarajan, which was believed and accepted by the Tribunal, we are therefore, of the view that the finding recorded by the Tribunal on the basis of the material is a pure finding of fact and does not call for any interference by this court.” (emphasis supplied)

“3. On appeal, the ld. CIT(A) deleted the addition, holding as under: –

“4.4 I have considered the submissions of the ld. Counsel, the AO’s remand report and other facts on record. In this case there is no dispute that the loan of Rs. 20 lcas shown from Sh. Pritam Goel is only by way of book entry in the books of M/s Lyra Industrials. Neither the giver of loan nor the receiver of loan is claiming to have exchanged the sum of Rs. 20 lacs through banking channels or in cash. The amount was already available in the books of account of M/s Lyra Industrials but it has been transferred from the account of Sh. Pritam Goel to the account of Sh. Suren Goel with necessary entries in their capital accounts. As no money has been received from outside, there is no entry in the cash book of the firm. On these given facts there can be no case for treating the sum of Rs. 20 lacs as an unexplained cash credit in the books of the appellant. The AO’s view that the genuineness of a transaction cannot be certified till the mode of payment is established cannot be held to be a thumb rule. In the case of book entries/adjustments there is no question of mode of payment or actual receipt of money from one party to another. Book entry transfer means transfer only through the respective accounts in the books of the concerns. After the transfer the firm has shown reduced balance in the case of Pritam Goel and an increased balance in the case of Suren Goel even though these has been no physical withdrawal of Rs. 20 lacs from Sh. Pritam Goel’s account. The AO’s observation that the transaction is sham is thus, misconstrued. The liability of Rs. 20 lacs has been established to be genuine as the amount has been taken as a loan from Sh. Pritam Goel.

In view of the observations made above, it is held that the addition of Rs. 20 lacs made u/s 68 is totally unjustified. Accordingly the addition is deleted.”

4. The Revenue is now in appeal before us against the aforesaid findings of ld. CIT(A). The ld. DR supported the findings of AO while the ld. AR on behalf of the assessee relied upon the order of the ld. CIT(A).

5. We have heard both the parties and gone through the facts of the case. Indisputably, the loan of ’20 lacs shown from Sh. Pritam Goel father of the assessee was only a journal entry in the books of M/s Lyra Industrials. Since there was no physical transfer of money from the account of Sh. Pritam Goel and only a journal entry was passed, the findings of the AO that transaction was sham ,is baseless, the ld. CIT(A) concluded. In the light of these findings of ld. CIT(A) especially when the Revenue have not placed before us any material so as to enable us to take a different view in the matter, we are not inclined to interfere. Therefore, ground no. 1 in the appeal is dismissed.” (emphasis supplied)

• The “Details” column in the aforesaid Z Account ‘ mentions as under:

The narration “Accumulated From Beginning of This Year” invariably means opening balance of ‘Z Account’ as at the beginning of the year and no other interpretation whatsoever of the said phrase is comprehensible.

• As per the findings of the special auditor, the accounting in JSK Server is not made as per normal accounting practice; the carried forward of balance is not done on standard date 01.04.2019 but as on 01.05.2019; closing balance are posted as opening balance of respective accounts as on 01.05.2019. The relevant extract of the Special Audit Report (refer page 40 of report) is snipped hereunder for ready reference:

The aforesaid unusual practice in JSK Server is also recognized by the assessing officer. In the order dated 14.03.2024 passed under section 142(2A), the assessing officer observed that “The accounts in JSK server maintained in JSK server were not based on sound and established accounting principles.To arrive at the fair and correct figure of income, adjustment of opening balances and entries nullifying the impact of opening balances need reduction. Claim of revenue expenses, after adjustment of opening balances and nullifying entries, is to be allowed.” (refer page 16 of the order/ notice dated 14.03.2024).

Considering the aforesaid consistent practice, it is evident that closing balance as on 31.03.2019 is posted as opening balance of Z Account as on 01.05.2019; thus, the impugned entry does not reflect any fresh credit during the year under consideration but merely transfer of closing balance of earlier year to be posted as opening balance of relevant year.

It is relevant to note that while posting of opening balance entries as on 01.05.2019 is accepted for all other ledger accounts, in respect of Z Account, the special auditor and the assessing officer has alleged that the impugned entry is not carried forward of balance but is a regular entry, without any reason being assigned for the same. The said conduct in fact shows that the special auditor and the assessing officer are somehow desperate to make addition of the impugned entry in the books of account for the year under consideration. As regards reference made to certain regular entries made on 01.05.2019 in the JSK Server at page 41 of the impugned order, it is submitted that from the details made available it is noticed that the same is not comparable to the entry in the Z account as the said referred entries are of “RC” series while Z Account represent “JE” Series entry (which is same for all posting of opening balances).

• It is not even alleged that there was any corresponding entry is reflected as on 01.05.2019 in the cash in hand ledger account.

• It is admitted by the assessing officer in para 15.8 that “there is no movement of sale/ purchase in these accounts during the year.” The same reflects no fresh credit during the year.

• CIT v. Usha Stud Agricultural Farms Ltd.: 301 ITR 384 (Del.)- In the instant case, the assessing officer made addition under section 68 of the Act of Rs.15 lakhs shown as ‘advance received’ on the ground that the assessee failed to furnish the copy of confirmation from the creditor. On appeal, the CIT(A) allowed the appeal of the assessee on the ground that credit balance of Rs.15 lacs was being reflected in the books of accounts of the assessee over past four-five years and was not a fresh credit entry of the previous year under consideration. The Tribunal affirmed the order of the CIT(A). On further appeal by the Revenue, the High Court dismissing the appeal held as under:

“.Here, the CIT(A) has deleted the addition of Rs. 15 lacs mainly on the ground that this credit balance of Rs. 15 lacs is being reflected in the accounts of the Assessee over the past four to five years or so and hence this was not a fresh credit entry of the previous year under consideration and these credit entries were already made and accounted for in the assessment years 1995-96 and 1997-98 which were introduced in the form of advance against breeding stallions owned by the Assessee and thus these credit entries did not relate to the year under consideration for being considered under Section 68 of the Act.

Since it is a finding of fact recorded by the CIT(A) that this credit balance appearing in the accounts of the Assessee, does not pertain to the year under consideration, under these circumstances, the Assessing Officer was not justified in making the impugned addition under Section 68 of the Act and as such no fault can be found with the order of the Tribunal which has endorsed the decision of the CIT(A).

The above being the position, no fault can be found with the view taken by the Tribunal.

Thus, the order of the Tribunal does not give rise to a question of law, must less a substantial question of law, to fall within the limited purview of Section 260-A of the Act, which is confined to entertaining only such appeals against the order which involves a substantial question of law. Accordingly, the present appeal filed by the Revenue is, hereby, dismissed” (emphasis supplied)

• CIT v. Prameshwar Bohra: 301 ITR 404 (Raj.): The assessee credited an amount of investment/cash credit of Rs.1,55,316 on 01.04.1992 in his books of accounts. The assessing officer added this amount as unexplained investment in the assessment year 1993-94. The Tribunal held that this was not a case of cash credit entered in the books of account of the assessee during the year, but it was a case in which the assessee had invested the capital in the business and the amount was shown as closing capital on 31.03.1992 and as opening capital on 01.04.1992. Therefore, the Tribunal held that what was already credited in the books of account ending on 31.03.1992 for financial year 1991-92 could not be an explained cash credit or investment in the books of account maintained for the financial year 1992-93).

• In the case of DCIT v. Nipun Builders & Developers Ltd.: ITA No. 558/Del./2010, the Delhi Bench of the Tribunal held as under:

“….12…. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that the Ld. Commissioner of Income Tax (Appeals) has given a categorical finding that the amount from the seven parties in this case have been received during the previous year relevant to assessment year 2004- 05, hence, no addition on account of any cash credit u/s 68 can be made for assessment year 2005-06. ” (emphasis supplied)

(i) The ‘Details’/ narration in the entry ‘Karni Fabrics (CL), Accumulated From Beginning of This Year’ shows that the same is adjustment relating to opening balance; further, Karni Fabric is undisputedly some notional/ adjustment account in the so-called JSK Server.

(ii) The ‘Type’ mention against each of the impugned entries in all the accounts is mentioned as ‘JE’ which is stated to reflect Journal Entry, i.e., some adjustment/ notional/ balancing/ inter-se set-off entries; there is thus no corresponding credit of money.

(iii) No corroboration of any corresponding flow of cash/ money is substantiated by the Revenue. In fact, there is no corresponding entry in cash in hand account forming part of JSK Server.

(iv) No corresponding cash is found during the course of search at the premises of the appellant.

• The “Details” column in each of the ledger account mentions as under in respect of the entry in question:

The narration “Accumulated From Beginning of This Year” invariably means opening balance of respective ledger account as at the beginning of the year and no other interpretation whatsoever of the said phrase is comprehensible.

• As per the findings of the special auditor, the accounting in JSK Server is not made as per normal accounting practice; the carried forward of balance is not done on standard date 01.04.2019 but as on 01.05.2019; closing balance are posted as opening balance of respective accounts as on 01.05.2019 (explained supra).

• No corresponding entry is reflected as on 01.05.2019 in the cash in hand ledger account.

– It is firstly submitted that in absence of valid 65B Certificate for the device from which chat is extracted, the digital data does not have any evidentiary value and cannot thus be relied upon (legal position cited above).

– That apart, it is submitted that whatsapp chats forming part of personal chats are merely hearsay details and cannot be considered as evidence per se. Being so, any data/ chat/ contents retrieved from whatsapp cannot be used to make any inference against the assessee. Be that as it may, the same cannot be relied upon at all in absence of any corroborative evidence being brought on record.

Reliance in this regard is placed on the decision of the Chennai Bench of the Tribunal in the case of Mr. A. Johnkumar v. DCIT: ITA No. 3028/Chny/2019, wherein it was held that WhatsApp messages cannot be considered as a conclusive evidence to draw an adverse inference against the assessee. The relevant findings of the Tribunal are reproduced as under:

“……

9.4 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The sole basis for the AO to make addition u/s.69C of the Act, was election held for Nellithope Constituency of Pondicherry Union Territory.. The AO had also taken support from a WhatsApp message sent from the assessee’s mobile phone to Mr.Somu and analyzed those SMS messages on his own understanding and inferred that the assessee had used some code words to distribute cash to voters. Except photo identity cards issued by M/s.Johnkumar Trust, found in the premises of the assessee and WhatsApp message sent from assessee’s mobile phone, no other evidence was with the AO to draw a conclusion that the assessee had distributed cash to voters amounting to rs. 17 Crs. First of all, WhatsApp messages cannot be considered as a conclusive evidence to draw an adverse inference against the assessee, unless those WhatsApp messages are supported by corroborative evidences to indicate that those messages and contents represents undisclosed income of the assessee. Further, what is written in WhatsApp message is not readable in terms of any income or expenditure. We have gone through those WhatsApp messages, which is available in the assessment order and we find that nothing could be made out from those messages. In some messages, it was written inward on various dates and some tonnes. In some messages, it was written in outward in tonnes. From those messages, the AO given his own meaning and inferred with tonne means lakhs, inward means cash received for distribution and outward means cash distributed. The AO had also in his own meaning for some other contents recorded in WhatsApp messages and inferred cash distribution timings, shift change timings, etc., and concluded that the assessee has received so much cash and distributed so much of cash to various persons in the process. The AO neither bring on record from which person, the assessee has received cash and to whom the assessee has distributed cash. The AO neither made out a case of source for cash and destiny of cash distributed by the assessee.. We find that neither the AO has found any physical cash distribution to voters nor examined any of the photo identity card holding to ascertain the fact that cash was distributed to them. Further, the AO had relied upon the WhatsApp messages sent from assessee’s mobile phone to Mr.Somu and had given his own meaning to those messages. In the process, the AO neither tested the admissibility of WhatsApp messages as evidence u/s.69B of Evidence Act, nor examined Mr.Somu the recipient of messages sent by the assessee. The AO without carrying out necessary enquiries and also examining those persons, simply concluded that those messages are meant for distribution of cash and the assessee has spent such a huge amount for election expenses. In our considered view, the findings recorded by the AO is purely on suspicion and surmises manner without any evidences to justify his findings..

..In our considered view, the AO is grossly erred in denying the explanation offered by the assessee, because whether or not any explanation offered by the assessee on the messages, but the fact remains that the AO could bring some positive evidence to link the WhatsApp messages to allege that the contents of WhatsApp messages depicts the undisclosed income or expenses of the assessee. In this case, on perusal of those WhatsApp messages what we could understand is that those messages are a dumb document without any corroborative evidence on record and therefore, no addition can be made on the basis of said documents. ” (emphasis supplied)

The Mumbai Bench of the Tribunal in the case of Mrs. Monica Kumarpal Banda v. ACIT: ITA No. 170/Mum/2023 dated 7.08.2023 held that WhatsApp chat recovered during the course of search and seizure operation without any corroborative evidence, has no evidentiary value and are simply dumb documents which cannot be relied on to make addition(s)/ draw adverse inferences.

To the similar effect are the following decisions:

? Designers Point (India) P. Ltd v. ACIT: ITA No.2517/Del/2022 (Del Trib.)

? LSL Tools (P.) Ltd. v. ACIT:  (Delhi –Trib.)

? Atul Tantia v. DCIT: ITA No. 492/Kol/2021 (Kol Trib.)

? Dy. CIT v. Saarrthi Realty and Infra LLP [2025] 214 ITD (Mum.) 27

? DCIT v. Niru Dhiren Shah: 2025]  (Mum – Trib.)

? Rucha Consultancy LLP v. DCIT:  (Mum-Trib.)

? ACIT v. Shanker Nebhumal Uttamchandani:   (Surat-Trib.)

? Balar Marketing (supra)

Specific reference is also made to the decision of the Supreme Court in the case of Common Cause (A registered Society) v. Union of India: 394 ITR 220 (SC) wherein various hard disks, pen drives etc. recovered running raids were held to be not admissible under the Evidence Act. The relevant extracts of the judgment are as under:

“22. In case of Sahara, in addition we have the adjudication by the Income Tax Settlement Commission. The order has been placed on record along with I.A.No.4. The Settlement Commission has observed that the scrutiny of entries on loose papers, computer prints, hard disk, pen drives etc. have revealed that the transactions noted on documents were not genuine and have no evidentiary value and that details in these loose papers, computer print outs, hard disk and pen drive etc. do not comply with the requirement of the Indian Evidence Act and are not admissible evidence. It further observed that the department has no evidence to prove that entries in these loose papers and electronic data were kept regularly during the course of business of the concerned business house and the fact that these entries were fabricated, non-genuine was proved. It held as well that the PCIT/DR have not been able to show and substantiate the nature and source of receipts as well as nature and reason of payments and have failed to prove evidentiary value of loose papers and electronic documents within the legal parameters. The Commission has also observed that Department has not been able to make out a clear case of taxing such income in the hands of the applicant firm on the basis of these documents.

23. It is apparent that the Commission has recorded a finding that transactions noted in the documents were not genuine and thus has not attached any evidentiary value to the pen drive, hard disk, computer loose papers, computer printouts.

……

27. Considering the aforesaid principles which have been laid down, we are of the opinion that the materials in question are not good enough to constitute offences to direct the registration of F.I.R. and investigation therein. The materials should qualify the test as per the aforesaid decision. The complaint should not be improbable and must show sufficient ground and commission of offence on the basis of which registration of a case can be ordered. The materials in question are not only irrelevant but are also legally inadmissible under Section 34 of the Evidence Act, more so with respect to third parties and considering the explanation which have been made by the Birla Group and Sahara Group, we are of the opinion that it would not be legally justified, safe, just and proper to direct investigation, keeping in view principles laid down in the cases of Bhajan Lal and V.C. Shukla (supra).”

Moreover, the screenshots of chats of employees are pages 2806 to 2809 of PB does not indicate muchless substantiate any cash transaction by the appellant. The contents of the chat are incomprehensible and does not anyhow substantiate any unaccounted cash received/ earned by the appellant.

– No corroboration of the aforesaid chat with any material has been established; the same is based solely on Whatsapp chats extracted from the mobile phones of some of the employees. In fact, the assessing officer has not even mentioned the nature of transaction in respect of which such alleged cash has been alleged to have been received.

(i) A search is initiated under section 132 or books of accounts, other documents or any assets are requisitioned on or after 1^st day of April 2021 in the case of the assessee or

(ii) a survey is conducted under section 133A, other than under sub-section (2A) [***] of that section, on or after the 1st day of April, 2021, in the case of the assessee; or

(iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee,

the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee where the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.

“11.4 In conclusion, it was submitted that since the year under appeal formed part of the three assessment years immediately preceding the year in which search was conducted, the assessment ought to have been framed under section 148 with approval u/s 148B. The framing of the assessment u/s 143(3) and approval taken only for the purposes of section 143(3) was thus asserted to be fundamentally defective, non-compliant with statutory mandate, and consequently void ab initio. On these grounds, following the ratio in Homelife Buildcon Pvt. Ltd., it was prayed that the impugned assessment be quashed.

12. The Ld. CIT-DR Shri Manav Bansal opposed the contention, stating that the return for A.Y. 2022-23 was filed prior to the date of search, and validly selected for scrutiny under CASS. The AO was competent to complete the assessment u/s 143(3).

12.1 He contended that section 148B applies only to “re- assessment” and not to “regular assessments.” The AO’s approval from Addl. CIT, being in line with the CBDT Instruction No. 7/2022 dated 15.07.2022, fulfils the supervisory requirement. The DR also submitted that Homelife Buildcon is distinguishable, as the AO therein relied on third-party search data, whereas the present case is based on assessee’s own seized material.

13. We have carefully considered the rival submissions and perused the record. It is undisputed that search u/s 132 was conducted on 24.11.2022, relevant to A.Y. 2023-24. Thus, A.Y. 2022- 23 is one of the three preceding years under Explanation 2(iv) to section 148. The Explanation reads that if a search is initiated, “the Assessing Officer shall be deemed to have information suggesting escapement of income for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated.”

13.1 Therefore, the only permissible statutory course was to issue notice u/s 148 and obtain prior approval u/s 148B before passing assessment order.

13.2 As the Assessing Officer completed the assessment under section 143(3) of the Act without issuing the notice under section 148 of the Act. Therefore, the question before us is whether the assessment proceedings initiated under section 143(3) of the Act can be validly continued and completed after a search under section 132 has been conducted in the case of the same assessee, without following the procedure prescribed under section 148 (Explanation 2) of the Act.

13.3 In our considered opinion, the answer lies in the scheme of the Act itself. Section 143 provides the general framework for regular assessment, whereas sections 147-148 (post-2021 regime) deal with reassessment based on information suggesting escapement of income, including that unearthed during a search.

13.4 A plain reading of section 143(2) shows that such notice can be issued only when a return of income is furnished under section 139 or in response to a notice under section 142(1). It empowers the Assessing Officer to scrutinize that return if he considers that income has been understated or tax underpaid. However, when a search under section 132 takes place and materials are found indicating possible escapement of income, the statute envisages a different route for carrying out assessment or reassessment under section 147 read with section 148, which is the special mechanism for bringing to tax the income discovered in consequence of a search.

13.5 Although section 148 (inserted w.e.f. 01.04.2021) does not begin with a non-obstante clause similar to the erstwhile section 153A, its context and Explanation 2 make it clear that where a search is initiated, the jurisdiction thereafter must flow through this special channel, subject to prior satisfaction and approval of the Principal Commissioner or Commissioner. The legislative intent is to ensure that when a search is carried out, the assessment is framed under the specific provisions meant for such cases and not under the general provision of section 143(3). Further we may mention that no notice under section 143(2) could have been issued after 3 months from the end of the financial year in which the return is furnished. In the present case the original return of income was filled on 4/11/2022 for the assessment year 202223 and 143 (2) was issued on 21/6/2023 , therefore also the assessment was framed under 143(3) of the Act is not sustainable. In other words the time required for issuing the notice under 143(2) had already expired, and the revenue can not be allowed to issue issue 143(2) on 21.6.2023 after the search was carried out and notice had been issued on 21.6.2023 and assessment was framed under 143(3) of the Act. The relevant portion of section 143(3) reads as under:-

143(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the Assessing Officer or to produce any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be issued after the expiry of three months from the end of the financial year in which the return is furnished.

13.6 This position finds substantial support from the ratio of various decisions of Hon’ble High Court and Hon’ble Supreme Court.

The Courts unanimously held that once a search has been conducted and proceedings are triggered under section 153A, the Assessing Officer cannot continue parallel proceedings under section 143(3) or section 147 for the same assessment year, because the entire assessment for that year stands merged in the search assessment. The Courts emphasized that the existence of a special procedure for assessment consequent to a search is a complete code in itself; therefore, ordinary assessments abate and cannot coexist with the search-based assessment.

13.7 Drawing this analogy to the current regime, it is evident that when a search takes place and information is unearthed suggesting escapement of income, the Assessing Officer must act under section 148 (which now performs the role formerly assigned to section 153A) rather than continuing with a pending section 143(3) proceeding. The legislative intent remains the same — to prevent multiplicity of proceedings and ensure that only one comprehensive order is passed, factoring in both the pre-search and post search materials.

13.8 The rationale is further reinforced by the well-settled principle of generalia specialibus non derogant — the special provision overrides the general. Section 148 (as a special provision triggered by search information) must prevail over section 143 (the general provision for regular scrutiny). Allowing the Assessing Officer to continue and conclude proceedings under section 143(3) after a search would defeat this legislative scheme and render the safeguards, such as prior approval of the Principal Commissioner, redundant.

13.9 Accordingly, we hold that once a search is initiated under section 132 and material is found relating to the assessee, the pending assessment under section 143(3) cannot validly continue, as the time for issuing the 143(2) in response to original return of income had already expired, therefore the Assessing Officer must necessarily proceed in accordance with the special provisions contained in section 148 of the Act.”