Introduction
In a recent case, titled Chandrasekaran Shenbagamoorthy v. Assistant Commissioner of Income-tax[i], involving questions raised regarding the handling of digital evidence collected during an income-tax search, the Madras High Court (‘High Court’) examined whether its writ jurisdiction would be maintainable and what should be an outcome of an assessment arising from digital evidence not collected in accordance with the laid down procedure as per the Income-tax Act, 1961 (‘Act’).
Brief Facts
A search and seizure operation was conducted in relation to M/s Integrated Services Private Limited (‘ISPL’), during which incriminating materials allegedly related to the petitioner were found. Consequently, a notice under s. 148 of the Act was issued to the petitioner on 23.03.2023. This was followed by notices under s. 142(1) of the Act. The Petitioner replied to the notices.
Eventually, proceedings culminated in the impugned assessment order dated 30.03.2024 (‘Impugned Order’), which was challenged by the Petitioner on the grounds of non-adherence to the Evidence Manual (‘Manual’) and s. 65B of the Indian Evidence Act, 1872 (‘Evidence Act’).
Held
The High Court disposed of the writ petition and deemed it inappropriate to exercise its discretionary jurisdiction under a. 226 of the Constitution of India (‘Constitution’). The Petitioner was directed to pursue a statutory appeal.
The High Court observed that the petitioner failed to point out specific instances where the Manual or s. 65B of the Evidence Act was breached by the revenue authorities. Further, it was noted that such objections were not raised during the course of the assessment proceedings.
The High Court, however, observed that to test the Petitioner’s contentions, a reappraisal of evidence may be necessary, and the appropriate forum for such reappraisal is the appellate authority.
Our Analysis
This judgment clearly emphasised the importance of procedural compliance in income tax reassessment proceedings and the handling of digital evidence. The decision reiterates the absence of specific breaches of the Manual or s. 65B of the Evidence Act, coupled with the failure to raise objections during the assessment, weakens the case for judicial intervention under a. 226 of the Constitution.
The High Court concluded that the Petitioner should pursue a statutory appeal to address the alleged procedural lapses, highlighting the necessity of raising specific objections and the proper forum for reappraisal of evidence. The Petition was disposed of with instructions for the appellate authority to consider the appeal on merits if filed within the specified time frame, emphasising the importance of raising timely objections during the assessment proceedings and directing such disputes to be resolved through appropriate statutory appellate mechanisms.
The case and its surrounding circumstances concern digital evidence collected in abundance during income-tax searches or any other searches conducted by other government agencies. The income tax department has issued a digital Manual containing detailed procedures for collecting and handling such evidence. For instance, when such evidence is collected, the hash codes of the seized files and records will be noted, recorded, and affirmed by the assessee. Interestingly, the following aspects deserve notice of the reader in this background:
Whether such manual amounts to an instruction issued by the Central Board of Direct Taxes (CBDT) under s. 119 of the Act (and hence mandatory to be followed by the subordinate officers), or merely serves as a guideline, is yet to be decided by the Supreme Court. The High Court has, in Sarvana Selvarathnam Retails v. CIT[ii], held that the manual, indeed, is an instruction that ought to be followed.
The interplay between electronic or digital evidence and documentary evidence is unclear under tax proceedings. For instance, if the income tax authorities seize the electronic files of the financial statements of an assessee (with or without following the laid down procedure as per the manual) and take printouts of the same and seize such printouts, whether the digital evidence loses relevance, is a curious question yet to be answered with clarity.
The direction in the present case has been given to the lower authority to reappraise the evidence. However, the assessee's contention was raised concerning the collection of the digital evidence, which the High Court itself could have very well decided.
In all, the seizure of digital evidence by the income tax department is prevalent in almost all searches. The manual issued by the tax department carries the force of law under s. 119 of the Act, and hence, should be followed by the tax authorities who seize digital or handle such evidence. However, the fate of the evidence, in case the procedure is not scrupulously followed, is unclear in tax assessment and appellate proceedings.
End Notes
[i] 2024 164 taxmann.com 24 (Madras) [14.06.2024].
[ii] 463 ITR 523 (Madras).
Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.