Digital Evidence in Income Tax Search Assessments: Lessons from DCIT vs. Balar Marketing Pvt. Ltd. (ITAT Delhi)
Background and Context of the Case
The Income Tax Appellate Tribunal, Delhi, delivered a significant ruling in the matter of DCIT Vs Balar Marketing Pvt. Ltd., addressing one of the most consequential and underexplored questions in modern tax litigation — whether digital evidence gathered during search and seizure operations can be relied upon by the Revenue without satisfying the requirements of Section 65B of the Indian Evidence Act, 1872, and without maintaining a proper chain of custody.
The appeals before the Tribunal arose from orders passed under Section 153A read with Section 143(3) of the Income Tax Act, 1961, covering multiple assessment years from 2012-13 to 2021-22. A search and seizure operation under Section 132 of the Income Tax Act, 1961 was carried out on 23.03.2021 at the premises of Balar Marketing Pvt. Ltd. and its associated persons. The group, operating under the brand name "Fybros" and previously known in the market as Kundan Cables, was engaged in manufacturing copper wires, cables, and related electrical products.
The Revenue's entire case rested substantially on electronic data extracted from two mobile phones — an iPhone 7 and a Panasonic Eluga device — belonging to one Mr. Vimal Jain, the Administrative Head of the assessee-company. The alleged incriminating material included WhatsApp conversations and images from a software called "Sambhav software," which the Revenue claimed reflected unaccounted cash transactions executed through a hawala network.
Nature of Allegations and the Revenue's Case
During the search at the residential premises of Mr. Vimal Jain at D-99, Block-D, Jhilmil Colony, Delhi, various electronic devices including hard disks, mobile phones, and pen drives were seized and annotated as Annexures A1 to A3. Upon examination, the Revenue alleged that these devices contained evidence of:
- Exchange of cash tokens through the hawala network of the assessee-company
- Out-of-books sales and purchases with multiple parties
- Maintenance of parallel accounts within the Sambhav software
- Unaccounted cash transactions identified through WhatsApp and SMS conversations
Mr. Vimal Jain allegedly admitted in his statement recorded under Section 132(4) and Section 132(1A) that he had facilitated cash transactions for the assessee through the hawala route. He also reportedly explained that entries in the Sambhav software were coded — with years shifted back by ten years and amounts adjusted by two digits — to conceal the true nature of transactions. Out-of-books cash sales were allegedly recorded under the code name "Bhaga."
Mr. Parasmal Jain, recorded under Section 131(1A), also purportedly confirmed the existence of parallel books of account and the conduct of unaccounted cash dealings. Based on this material, the Assessing Officer prepared a date-wise Excel sheet of token exchanges and made various additions across the assessment years under consideration. The Commissioner of Income Tax (Appeals) granted partial relief, after which both the assessee and the Revenue filed cross-appeals before the Tribunal.
The Central Legal Questions Before the Tribunal
The Tribunal identified two critical preliminary issues arising from the grounds of appeal:
Whether digital evidence collected during search proceedings must comply with the Digital Evidence Investigation Manual, 2014 issued by the CBDT, and whether
Section 65Bof the Indian Evidence Act, 1872 applies to income tax assessment proceedings.Whether the approval granted under
Section 153Dof the Income Tax Act, 1961 by the Additional CIT was legally valid or whether it was mechanical and therefore unsustainable.
The assessee's counsel argued that the entire foundation of the Revenue's case — specifically the images extracted from Sambhav software and the WhatsApp chat screenshots — constituted secondary electronic evidence that was legally inadmissible without a valid certificate under Section 65B of the Indian Evidence Act. The Revenue's representative, on the other hand, contended that the provisions of the Evidence Act do not apply to income tax proceedings, which are civil rather than criminal in nature, and that adequate compliances had been undertaken through the issuance of an E-Certificate.