ITAT Hyderabad on Section 69C: Why Pen Drive Data Without Section 65B Certificate Failed

Background of the Dispute

The case ACIT Vs Ramesh Babu Segu before the ITAT Hyderabad concerns an addition made under Section 69C of the Income Tax Act 1961 based entirely on digital data retrieved from a pen drive and certain receipt copies seized from a third party, namely the Polisetty Somasundaram group.

A search under Section 132 was conducted on 28.01.2020 in the case of Polisetty Somasundaram Group. During this search, the Investigation Wing seized:

  • A pen drive said to contain cash book/digital records, and
  • Certain unaccounted cash book printouts and receipt vouchers allegedly evidencing cash dealings

The Revenue’s allegation was that the assessee, an individual engaged in real estate services, had made unaccounted cash payments aggregating to Rs.2,21,18,000/- to Polisetty Somasundaram over multiple years, including Rs.1,10,00,000/- during A.Y. 2017–18.

Based on these materials, proceedings under Section 153C were initiated against the assessee, culminating in an addition under Section 69C treating the alleged cash payment of Rs.1,10,00,000/- as unexplained expenditure.

The assessee contested this before the CIT(A), who deleted the entire addition. The Revenue carried the matter to the ITAT Hyderabad, while the assessee filed a Cross Objection supporting the order of the CIT(A).

The Tribunal ultimately sided with the assessee, dismissing the Revenue’s appeal and rendering the Cross Objection infructuous.

Procedural History

Return filing and search action

  1. The assessee, an individual in real estate services, filed a regular return for A.Y. 2017–18 on 30.03.2018 showing total income of Rs.5,55,050/-.
  2. A search under Section 132 was later carried out on 28.01.2020 in the case of Polisetty Somasundaram Group.
  3. During this search, officers seized:
    • A pen drive containing digital data (including a so-called cash book), and
    • Certain unaccounted receipt vouchers/cash records from the group’s premises.

Initiation of Section 153C proceedings

Relying on the seized material and the statement of Shri Polisetty Shyam Sundar, Managing Partner of Polisetty Somasundaram, recorded on 08.06.2020, the Assessing Officer formed a view that unaccounted cash transactions had taken place between the assessee and the searched group.

The Assessing Officer alleged that, for the block of years from A.Y. 2014–15 to A.Y. 2018–19, cash transactions involving the assessee totalled Rs.2,21,18,000/-.

Accordingly:

  • Notice under Section 153C was issued to the assessee on 29.08.2022.
  • In response, the assessee filed a return for A.Y. 2017–18 on 08.03.2023 declaring income of Rs.6,05,200/-.
  • Notice under Section 143(2) was subsequently issued on 10.03.2023.

Basis for addition under Section 69C

During the assessment proceedings:

  • The Assessing Officer relied primarily on the digital data extracted from the seized pen drive, asserting that the cash book generated from this data showed advances/cash payments made by the assessee to Polisetty Somasundaram.
  • Specific to A.Y. 2017–18, the Assessing Officer concluded that the assessee had made cash payments of Rs.1,10,00,000/- to the said group.

When called upon to explain the source and nature of this alleged payment:

  • The assessee categorically denied having made any such payment and contested both the authenticity and admissibility of the digital evidence.

Despite the denial, the Assessing Officer:

  • Treated Rs.1,10,00,000/- as unexplained expenditure under Section 69C,
  • Completed the assessment under Section 153C on 27.03.2023,
  • Determined total income at Rs.1,16,05,200/-, thereby making an addition of Rs.1,10,00,000/-.

Findings of the CIT(A)

On appeal, the CIT(A) examined the entire basis of the addition, including the pen drive contents and the receipts referred to in the assessment order.

1. Relevance of seized receipts to the assessment year

The CIT(A) scrutinised the two receipts reproduced at pages 2 and 3 of the assessment order, which were alleged to reflect cash dealings relating to the assessee. The appellate authority observed: