[Opinion] New Trend | Digital Evidence Vs Corroborative Evidence

Dr B Ramaswamy – [2024] 159 taxmann.com 762 (Article)

Introduction

The case in question, filed in 2023, involves a series of writ petitions challenging the seizure of .txt files by the 2nd respondent. The petitioner contends that the seizure and subsequent actions by the respondents, including the passing of assessment orders, were not conducted in accordance with the law and violated principles of natural justice. The core issues revolve around the collection of digital data evidence without a valid search warrant, non-compliance with the Digital Evidence Investigation Manual, and allegations of improper conduct during the search and seizure process.

The petitioner argues that the assessment orders, based on digital data, were passed without providing adequate opportunities for a personal hearing and without presenting corroborative evidence. In response, the respondents question the maintainability of the writ petitions, asserting that statutory appeals have been filed. They argue that the evidentiary value should be appreciated by the Appellate Authority and not through writ petitions. Additionally, the respondents contend that the procedures followed during the search and seizure were in accordance with the law and dispute the mandatory nature of the Digital Evidence Investigation Manual.

The court, after considering both parties’ arguments, rejects the respondents’ contentions on maintainability and upholds the petitioner’s right to pursue the writ petitions. The court emphasizes the significance of the Digital Evidence Investigation Manual and concludes that the assessment orders were passed in violation of principles of natural justice. Consequently, the court sets aside the assessment orders, remits the matter back for reconsideration, and provides specific directions to follow proper procedures. This introduction encapsulates the key elements and conflicts in the case, setting the stage for a detailed examination of the proceedings and the court’s findings.

This case is about the Income Tax Act and the steps that should be followed, along with the rules set by the Central Board of Direct Taxes (CBDT). The main question here is whether the evidence collected by the tax officials from undisclosed can be accepted in court or not. Another important question is whether the rules in the CBDT’s Digital Evidence Investigating manual are mandatory or just optional. There’s also a concern about how independent witnesses were positioned and their statements recorded during the investigation. Both sides in the case presented their arguments and referred to previous court judgments to support their points. In a nutshell, this case is all about understanding and applying the rules of the Income Tax Act, the CBDT, and deciding if the evidence collected digitally is valid in court.

The Hon’ble High Court of Judicature at Madras, vide an Order and Judgment dated 23.02.2024, decided the writ petitions filed by the petitioners against the Department of Income Tax “hereinafter referred to as the “Department”. The Order discusses the various aspects of the proceedings initiated by the Department while passing the assessment orders which are imperative for the society to understand as the IT Act percolates to the roots of the society and has an impact on all individual taxpayers.

The judgement imparts some understanding and awareness on the basic principles that are necessary for the individual taxpayers of the society to know. Issues decided and their impact on the Society at large Alternate remedy in Tax matters It is a well settled principle that a writ petition would not be entertained if an effective alternate remedy is available to the aggrieved person or if the statute itself provides for a grievance redressal mechanism.

However, relying upon the decision of the Hon’ble Apex Court in the case of CIT v. Chhabil Dass Agarwal [2013] 36 taxmann.com 36/217 Taxman 143/357 ITR 357 it was observed that the circumstances wherein the statutory authority has not acted in accordance with the provisions of the enactment in question or in defiance of the fundamental principles of judicial procedure or when an order has been passed in total violation of the principles of natural justice, would be exceptions to the rule of alternate remedy and thus, the writ petitions in such cases would be maintainable.

Thus, where an Assessee feels that the proceedings are inherently against the basic principles as pointed out in the judgement, it shall be open to the Assessee to directly approach the High Court under Article 226 of the Indian Constitution. Conduct of search proceedings a. Independent witnesses It is a requirement under Rule 112 of the IT Rules that during search and seizure that two independent witnesses who must be respectable inhabitants of the same locality must be present during the entire duration of the search proceedings. The Department had argued that for the purpose of convenience and to ensure the presence of the witness during the entire trial, one of the witnesses was from the GST Department.

The Court observed that no other meaning can be provided for the word “inhabitant of the same locality”. Therefore, it is clearly a violation of the rules if the independent witnesses are not the residents of the locality and it is against the very intent of the legislation. b. Digital Evidence Investigation Manual The Digital Evidence Investigation Manual was issued by the Department in the year 2015 under Section 119 of the Act.

It was further observed that in the age of a Digital India, the Department cannot claim the excuse of non-availability of the hardware and the said manual had to be followed in letter and spirit since the same was issued under Section 119 of the Act. Also, it was held by the Hon’ble Court that the Department cannot take the plea that it is only optional for them to follow the manual. Further, if the manual has not been followed while collecting and preserving the evidences, without there being any corroborative evidence, the digital data collected as well as the search and seizure would be against the law and ab initio bad.

The Hon’ble Court while applying the ratio in the case of Commissioner of Customs v. Indian Oil Corporation Limited, held that if the manual is not followed, the entire search proceedings would be against the law. c. Principles of Natural Justice and basic principles of jurisprudence The Assessee in the proceedings must be provided with the copies of the documents relied upon by the Department while passing an Assessment Order Further, the right to cross-examine the witnesses whose statements were recorded is fundamental to the jurisprudence governing the law of evidence and there cannot be exceptions to the same. It was observed that the search was conducted and the show cause notices were issued in a hasty manner and immediately thereafter, the assessment order was passed without providing any opportunities of a personal hearing to the petitioner or the right of cross-examination of the witnesses.

Therefore, clearly the assessment orders were passed in violation of principles of natural justice. Power of the Court If the relief sought by the petitioner is limited and in the facts and circumstances of the case, if it is found that the petitioner is not entitled for a particular writ, instead of dismissing the petition, the Court is empowered to mould the relief and issue an appropriate writ. Impact on the Revenue The aforementioned observations of the Hon’ble High Court of Madras highlight the importance of the law and the procedure established through the various rules, manuals etc. in order to ensure that the assessment orders are valid and may not be set aside after following a thorough process.

The Order serves as a guiding light to the authorities so that the entire process is not rendered bad ab initio. A few pointers from the judgement are highlighted here in below: 1. The authority must follow the search in accordance with the details mentioned in the search warrant. 2. There should be a backup of all the documents relied upon and the entire set of documents sought to be relied upon must be made available to the Assessee. 3. The proceedings should not be conducted in a hasty manner and a reasonable time and opportunity should be provided to the Assessee. It must be ensured that the Assessee is afforded an opportunity of a personal hearing in view of the principle of Audi Alteram Partem. 4. Further, if the statements of witnesses during the proceedings are relied upon, an opportunity to cross-examine the witnesses must be provided to the Assessee. 5. Further, the manuals such as the Digital Evidence Investigation Manual which are issued by the authorities itself must be followed in letter and spirit. Any exception to use such manuals as options would only tarnish the impartiality and the reputation of the Authority. 6. The Assessment order must be a detailed one taking into consideration all the evidences relied upon the Authority.

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