2023 (6) TMI 226 - HC - Income Tax

Revenue's Appeals Dismissed Due to Improper Verification of Digital Evidence

The Revenue's appeals against the Income Tax Appellate Tribunal's decision for the assessment years 2012-2013 and 2016-2017 were dismissed. The court ... Assessment u/s 153A - Assessee claimed that the AO had not given copies of the seized materials extracted from the hard disk and the pen drive - violation of the principles of natural justice - ITAT has noted in the impugned order that the AO has simply reproduced the appraisal report and has not undertaken any analysis of the seized materials. Even the hard disk with the working copy was not seen by the AO. The seized material had neither been opened nor examined. The expert report also failed to point out that the software was “hardware specific”. HELD THAT:- In the impugned order the ITAT has concluded that the CIT(A) was right in holding that the additions made in the all three AYs was “in total violation of the principles of natural justice” and that the additions have been made clearly on estimate basis. With there being concurrent findings on fact by the both the CIT(A) and ITAT and there being clear violations of the legal requirements by the AO, this Court is unable to find any error committed by the CIT (A) or the ITAT in disagreeing with the AO and setting aside the assessment order. No substantial question of law arises. ISSUES PRESENTED AND CONSIDERED 1. Whether findings of the Deputy Director of Income Tax (DDIT) / intelligence officer can be used by the Assessing Officer (AO) in assessment proceedings when the DDIT is an Assessing Officer under clause 2A of Section 2 of the Act. 2. Whether the AO lawfully relied on an appraisal report and reproduced its contents in the assessment order without independently verifying digital evidence (hard disk extracts and pen-drive contents) that were relied upon to make additions, particularly where the seized digital material was not provided to the assessee before completion of assessment proceedings. 3. Whether the AO's reproduction of the appraisal report and reliance on non-verified materials (including digital exhibit BDJC-27 and loose sheets BDJC-21) violated principles of natural justice and rendered the additions liable to be set aside as estimate-based. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Use of DDIT Findings by AO Legal framework: Clause 2A of Section 2 of the Act identifies certain officers (including DDIT) as Assessing Officers. Principle: findings of one officer may be used in assessment only if legal requirements of confrontation, disclosure and verification are complied with. Precedent treatment: No earlier authority was invoked or overruled in the judgment; the Court examined the factual compliance with statutory and natural justice requirements rather than laying down a new precedent on admissibility of DDIT findings. Interpretation and reasoning: The Court focused on whether the department had the foundational materials (extracts) available and whether those materials were disclosed to the assessee for rebuttal. The mere status of DDIT as an AO does not validate reliance on material which was not available to the assessing authority for examination and was not furnished to the assessee; procedural fairness and the availability/verification of seized material are decisive. Ratio vs. Obiter: Ratio - an assessing authority cannot lawfully make additions based solely on another officer's appraisal if the seized/extracted material forming the foundation for such appraisal is not available, verified or supplied to the assessee for rebuttal. Conclusions: The Court sustained the ITAT's conclusion that the AO could not properly rely on the DDIT/appraisal report under the facts where extracts were unavailable to both the AO and the assessee, and procedural safeguards were not met. Issue 2 - Reliance on Appraisal Report without Independent Verification of Digital Evidence Legal framework: Assessments must be founded on evidence that has been verified and confronted to the assessee; principles of natural justice require disclosure of material relied upon to enable effective rebuttal before completion of assessment proceedings. Precedent treatment: No specific precedents were cited; the Tribunal's factual findings about non-verification and non-availability of working copies were accepted by the Court as establishing a breach of legal requirements. Interpretation and reasoning: The record showed that (a) inventory recorded BDJC-27 as a 'hard disk with working copy'; (b) the AO either did not access the working copy or was unable to open the hard disk on a standard computer; (c) the remand report produced a soft copy only to the appellate authority after change of AO; and (d) an expert report did not indicate that the software was hardware-specific. These lacunae created doubt as to whether the purported extracts ever existed before the AO or were provided to the assessee. Consequently, the AO's order was effectively a reproduction of the appraisal report without independent analysis or verification of the digital material. Ratio vs. Obiter: Ratio - an AO must independently verify digital evidence and ensure the assessee is given copies of the material relied upon; reproducing an appraisal report without such verification and disclosure is legally impermissible. Conclusions: The Court agreed with the ITAT that the AO had merely reproduced the appraisal report and had not undertaken requisite analysis or verification of the seized digital material, justifying setting aside the additions. Issue 3 - Violation of Principles of Natural Justice and Estimate-based Additions Legal framework: Principles of natural justice require that material relied upon by the revenue be disclosed to the assessee for rebuttal; assessments cannot be based on mere estimates when founded on unverified or undisclosed material. Precedent treatment: The Tribunal and the appellate authority applied conventional standards of natural justice and evidentiary foundation; the High Court accepted these concurrent factual findings rather than re-examining them de novo. Interpretation and reasoning: The absence of available extracts from BDJC-27 and the failure to provide seized materials to the assessee undermined the foundation of the additions. The Tribunal's observation that the department neither possessed the foundational extracts nor supplied them for rebuttal showed a breach of procedural fairness. Given these defects, the additions were effectively estimate-based and violative of principles of natural justice. Ratio vs. Obiter: Ratio - where the foundational seized material is not available to the assessing authority and is not furnished to the assessee for rebuttal, resulting additions are in violation of natural justice and liable to be set aside as estimate-based. Conclusions: The Court upheld the CIT(A) and ITAT findings that the assessments were in total violation of principles of natural justice and that the additions were made on an estimate basis; accordingly, the assessment orders were set aside. Disposition and Legal Consequence The Court, endorsing concurrent factual findings of the CIT(A) and ITAT about non-availability, non-verification and non-disclosure of seized digital material and about reliance on the appraisal report without independent analysis, found no error in the appellate orders and dismissed the revenue appeals; no substantial question of law arises for consideration.