Digital Evidence Investigation Manual of CBDT is mandatory to be followed by ITD while conducting search and seizure and it is not optional – High Court
In a recent judgment, the Hon’ble High Court has held that it is mandatory for the ITD to follow the Digital Evidence Investigation Manual issued by CBDT while conducting search and seizure and it is not optional
ABCAUS Case Law Citation:
ABCAUS 3902 (2024) (03) HC
Important Case Laws relied upon by parties:
Dhakeswari Cotton Mills Limited vs. Commissioner of Income Tax (1954) 26 ITR 775 (SC)
Commissioner of Income Tax vs. Chhabil Dass Agarwal (2013) 36 Taxmann.com 36 (SC)
State of Kerala and others vs. M/s. Kurian Abraham Private Limited and another (2004) 12 KTR 235
Commissioner of Customs vs. Indian Oil Corporation Limited (2004) 3 SCC 488
Pooran Mal vs. Director of Inspection (1974) 93 ITR 505 (SC)
In the instant case, two assessees had filed a Writ Petition under Article 226 of the Constitution of India praying to issue a Writ of Declaration, to declare that the seizure of the .txt files by the Income Tax Department from an undisclosed location is not in accordance with law and therefore is inadmissible in evidence. The petitioner assessees had also challenged the order passed u/s 147 of the Income Tax Act, 1961 (the Act) and consequential demand notice.
The ITD had conducted a sudden search under Section 132 of the Act. In the said searches, the Assessing Officer (AO) had seized the electronic data and pursuant to the same, the Show Cause Notices were issued to the petitioner and the reply was filed by the petitioner. Subsequently, the impugned assessment orders were passed.
The main grievance of the petitioner was that the digital data evidences in the form of text files were collected by the AO from unknown locations without any valid search warrant and without following the guidelines issued by the CBDT in terms of Section 119 of the Act vide Digital Evidence Investigation Manual. Further, without providing any opportunity of personal hearing to the petitioner and without any corroborative evidence to corroborate the digital data evidences as mandated in the Digital Evidence Investigation Manual, four non-speaking assessment orders were passed.
On the contrary, the ITD claimed that the Digital Evidence Investigation Manual is only optional and Department can either follow the same or not, depends upon their convenience, since it is not mandatory.
However, the Petitioners contended that it is not correct and the said manual was optional since it was issued only by the CBDT. Therefore, having issued the said Manual, the Department cannot take a plea that they cannot comply the same, since the Department has framed the said guidelines based on the past experiences and the law laid down in the various cases by the High Courts and the Hon’ble Apex Court in order to avoid the invalidation of evidences collected by the Department once again before the Court of law. On the other hand, the Assessee can challenge the said guidelines if it is not in accordance with law. Therefore, the guidelines issued by CBDT is mandatory, however, the same has not been followed by the Department.
It was also argued that no opportunities for cross-examination had been provided to the petitioner. Therefore, it amounts to violation of principles of natural justice.
Search conducted with one witness that too GST Official was against the Rule and Manual
and The Hon’ble High Court observed that in terms of the provisions of Rule 112(7) of the Income Tax Rules, at the time of search, two independent witnesses are supposed to be present throughout the period of search. It is also provided that that the witnesses must be inhabitants of the same locality, which means those who are all residing in and around the premises, where the search was conducted and beyond that no other meaning can be provided for the word “inhabitant of the same locality”.
However, the Hon’ble High Court noted that the independent witness deployed by the Department was not an inhabitant of the same locality but an officer of the GST Department which was defended by the ITD stating that it is a practice of the Department to make one of the officials of other Department as witnesses, since the same would be convenient for the Department to call the witness at the time of trial.
However, the Hon’ble High Court opined that by providing independent witnesses must be inhabitants of the same locality, the intention of the legislation was different. The Hon’ble High Court stated that when the ITD made the officials of other departments as witnesses since it is convenient for them to call them at the time of trial, the said witness would loss the character of independent witness and that is not the witness, which was referred under Rule 112(6) of the IT Rules. Therefore, the search was conducted without one of the independent witnesses, out of two. Further, with regard to the aspect of mandatory requirement of the independent witnesses, the Digital Evidence Investigation Manual also deal with the same at chapter 6.2 at par with the Rule 112(6) and (7) of the IT Rules.
CBDT order u/s 119 are binding on Authorities
The Hon’ble High Court observed that as per the provisions of section 119 of the Act, the CBDT may issue such orders, instructions, directions from time to time to other income tax authorities for proper administration of this Act and such authority and other persons shall observe and follow such orders, instructions and directions of the Board. Therefore, if the CBDT issued any orders, instructions, directions etc., for the Authorities, the same must be observed or followed by the Authorities concerned.
Digital Evidence Investigation Manual is of binding nature
The Hon’ble High Court held that since the Digital Evidence Investigation Manual was issued by the CBDT under Section 119(1) of the Act, it is mandatory for the Department to follow it. The Hon’ble High Court clarified that in the Manual, some of the examples were given on various software and hardware that the same has to be used for illustration and in no way recommendatory or mandatory to the users. It only talks about the examples given in the software and hardware and it is not about the Rules prescribed in the Manual.
The Hon’ble High Court stated that the ITD has to follow the instructions as stated in the Manual, particularly, for today’s digital scenario, when the assessment is being made in faceless manner, the Manual has to be followed in letter and spirit throughout India since even a layman in the corner of the country is required to follow the terms of the Income Tax Act with regard to the efiling, etc . If these guidelines were not followed, the same would amount to nullifying of evidences and thereby, the Department has to incur the huge revenue losses
The Hon’ble High Court noted that the Hon’ble Supreme Court has culled out the following principles:
(1) Although a circular is not binding on a Court or an assessee, It is not open to the Revenue to raise the contention that is contrary to a binding circular by the Board. When a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid nor that it is contrary to the terms of the statute.
(2) Despite the decision of this Court, the Department cannot be permitted to take a stand contrary to the instructions issued by the Board.
(3) A show cause notice and demand contrary to existing circulars of the Board are ab initio bad
(4) It is not open to the revenue to advance an argument or filed an appeal contrary to the circulars.
AT the same time, the Hon’ble High Court opined that applying the judgment of the Hon’ble Supreme Court in another case, it clear that the evidences cannot be nullified based on the technical clutches because the Income Tax Officers is not entitled make assessment without reference to any evidence or materials at all. There must be something more than the suspicion to support the assessment under the Act.
Assessment order must be corroborated by any other evidences, to prove that it was not bound by any technical clutches.
The Hon’ble High Court noted that the ITD had not followed the procedure laid down in the Digital Evidence Investigation Manual and collected numerous digital files where all of them were not complete and readable. However, the ITD based on the sale value of one day, considered the same as if the entire sale of that day would be the sale of each and every days of the year, including the days on which the shop was closed mandatorily due to Covid pandemic, which means, as held by the Constitution Bench of the Hon’ble Apex Court, the assessment is not supposed to be made by virtue of pure guess and it should be made with evidences, which is beyond suspicions. Further, the data, which were relied upon by the ITD while passing the assessment order, had not been corroborated by any other evidences, which is mandatory to prove the case of the respondents when they are not bound by any technical clutches.
Further the Hon’ble High Court observed that the provision of the Digital Evidence Investigation Manual provide that merely gathering electronic evidence is not sufficient. Efforts have to be made to corroborate the contents therein vis-a-vis other evidence such as material and oral. Preliminary and detailed statements of the persons in control of computers/electronic devices are always very important. Therefore, if any electronic data is relied upon by the Department, the same has to be corroborated with the evidences.
In view of the above, the Hon’ble High Court opined that apparently, the assessment was made without corroboration of material evidence and hence, the same was not done in the manner held by the Constitution Bench of the Hon’ble Apex Court.
The Hon’ble High Court opined that since the ITD had not followed the Digital Evidence Investigation Manual while collecting and preserving the evidences, as per the law laid down by the Hon’ble Apex Court, if there is no corroborative evidence and proved in the manner known to law, the digital data collected by the Department in the course of search and seizure and thus, the said search and seizure is against the law and ab initio bad.
It was inter alia held by the Hon’ble High Court that It is mandatory for the ITD to follow the Digital Evidence Investigation Manual issued by CBDT while conducting search and seizure and it is not optional. The electronic data have been collected in .txt files in violation of the provisions of Digital Evidence Investigation Manual. Though the procedures have not been followed while collecting the electronic data in .txt files, the data collected by the respondents can be relied upon only if the said data are supported by the corroborative evidences
Accordingly, the Hon’ble High Court set aside the impugned assessment orders and remitted the matter back to the Authority concerned for re-consideration.
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