2025 (2) TMI 490 - AT - Income Tax

Addition of undisclosed income based on unaccounted cash receipts found in seized documents - addition on account of absence of certificate u/sec.65B(4) of the Indian Evidence Act and the digital evidence - addition was based on the basis of data retrieved from the pen drive in the form of print out of excel sheets and subsequent statement of Shri S S Dalwi - as argued that the contents of the pen drive being electronic evidence have to be certified in terms of section 65B of the Indian Evidence Act but which was not done - HELD THAT - In the instant case there was a certificate drawn u/sec.65B(4) of the Indian Evidence Act for the pen-drive seized from the cabin of Shri Shrikant S. Dalvi which was relied upon by the Assessing Officer while making the impugned addition and since such a copy of the certificate was provided to the assessee for its comments and the assessee could not make any counter-comments to the certificate so issued by the Assessing Officer u/sec.65B(4) of the Indian Evidence Act therefore in absence of any contrary material brought to our notice in our opinion the Ld. CIT(A) is justified in rejecting the above grounds. Assessing Officer in the instant case has obtained a certificate u/sec.65B(4) of the Indian Evidence Act and copy of which was also forwarded to the assessee and the assessee had no answer to the same - Decided against assessee. Undisclosed cash receipts - CIT(A) in treating 85% of the total cash receipts as income of the assessee - CIT(A) restricted the addition to 85% of unrecorded cash receipts on account of sale of scrap on the ground that the seized documents also contain certain expenditure - HELD THAT - It is an admitted fact that during the course of search excel sheets which were retrieved from the pen drive seized from the cabin of head cashier Shri S S Dalvi contain both unaccounted cash receipts as well as unaccounted cash expenditure. While the AO taxed the entire unaccounted cash receipts as income of the assessee however he ignored such unaccounted cash expenditure on the ground that the assessee could not correlate such expenditure as relatable to such unaccounted cash receipts and the said expenditure also contains certain expenditure not allowable as per provisions of Explanation to section 37. It is the settled position of law that the seized documents are to be considered as a whole and the department cannot consider a part of the seized documents which suits it and ignore the other part that does not suit it. So far as the allegation of the Assessing Officer as well as the Ld. CIT(A) that such unaccounted expenditure contains certain illegal payments is concerned there is no dispute to the fact that it contains certain payments to government officers. However the same has not been quantified either by the assessee or by the Assessing Officer or by the Ld. CIT(A). We find the Ld. CIT(A) while analyzing the seized documents for assessment year 2018-19 has given the details of several cash expenses on test check basis which according to him are allowable expenses Considering the totality of the facts of the case only the net profit embedded in such receipts should be taxed when both unaccounted receipts and unaccounted expenses are found during the course of search we are of the considered opinion that the profit on account of such unaccounted cash receipts should be determined at the same rate or nearby rate of net profit that has been declared by the assessee and accepted by the Revenue for the respective assessment years. The order of the Ld. CIT(A) is accordingly modified and the Assessing Officer is directed to re-compute the income from unaccounted cash receipts in the above percentage and make necessary additions. Denial of deduction u/sec.35(2AB) - capital and revenue expenditure incurred for in house R D activities - HELD THAT - Only the existence of approval and incurring of the expenditure were relevant considerations in the pre-amended period and not the amount quantified by the prescribed authority. The new stipulations came to be introduced w.e.f. 01-07-2016. As the assessment year under consideration is 2018-19 the amended sub-clause (b) of Rule 6 (7A) is applicable. We therefore hold that the ld. CIT(A) was justified in restricting the amount of weighted deduction to the quantification done by the prescribed authority. Assessee is not eligible for deduction of the entire revenue expenditure claimed by it u/s 35(2AB) for the assessment years 2017-18 2018-19 and 2019-20 but only to the extent quantified by the DSIR. However as held above since the stipulation came to be introduced w.e.f. 01.07.2016 the section of quantification by the DSIR is not applicable for assessment year 2016-17 and therefore the Ld. CIT(A) is not justified in restricting the deduction to the extent determined by the DSIR for assessment year 2016-17. We therefore set aside the order of the Ld. CIT(A) on this issue for assessment year 2016-17 and direct the Assessing Officer to allow the claim of deduction u/s 35(2AB) of the entire revenue expenditure. Cash expenditure during the year exceeds the unaccounted cash receipts - HELD THAT - After considering the opening cash balances as on 01.04.2012 as per the seized documents there is no cash deficit for the impugned assessment year. The Revenue is not in appeal for assessment year 2015-16 for the availability of opening cash balance determined by CIT(A) as per the seized document. Therefore no infirmity in the order of the Ld. CIT(A) deleting the addition made by the Assessing Officer on account of unexplained expenditure u/s 69C.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• The admissibility and evidentiary value of digital evidence obtained from a pen drive in the absence of a certificate under Section 65B(4) of the Indian Evidence Act.
• The determination of undisclosed income based on unaccounted cash receipts found in seized documents and whether the entire receipts should be taxed or only the profit element.
• The eligibility for deduction under Section 35(2AB) of the Income Tax Act for research and development expenses, particularly when the prescribed authority's report quantifying the eligible expenditure was not initially available.

2. ISSUE-WISE DETAILED ANALYSIS

Admissibility of Digital Evidence:

• Legal Framework and Precedents: The admissibility of digital evidence is governed by Section 65B of the Indian Evidence Act, which requires a certificate for electronic records to be admissible. The Supreme Court in Anvar P.V. vs. B K Basheer emphasized the necessity of such a certificate.
• Court's Interpretation and Reasoning: The Tribunal found that a certificate under Section 65B(4) was indeed obtained and provided to the assessee, who failed to contest its validity. Therefore, the digital evidence was deemed admissible.
• Conclusion: The Tribunal upheld the admissibility of the digital evidence, dismissing the assessee's appeal on this ground.

Determination of Undisclosed Income:

• Legal Framework and Precedents: The Income Tax Act allows for the taxation of undisclosed income. However, judicial precedents suggest only the profit element of unaccounted receipts should be taxed.
• Court's Interpretation and Reasoning: The Tribunal noted that both unaccounted receipts and expenditures were documented. It emphasized that the seized documents should be considered as a whole, and only the profit element, consistent with the net profit ratio of the respective years, should be taxed.
• Application of Law to Facts: The Tribunal directed the Assessing Officer to tax the net profit percentage of the unaccounted cash receipts, aligning with the declared net profit rates for each assessment year.
• Conclusion: The Tribunal modified the CIT(A)'s order, directing a re-computation of income based on net profit percentages.

Eligibility for Deduction under Section 35(2AB):

• Legal Framework and Precedents: Section 35(2AB) provides for weighted deductions on R&D expenses, contingent on certification by the prescribed authority.
• Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s decision to restrict deductions to the amounts certified by the DSIR, as per the amended rules effective from 01-07-2016.
• Conclusion: The Tribunal ruled that the deduction should be limited to the certified amount for the relevant assessment years, except for the year 2016-17 where the pre-amendment rules applied.

3. SIGNIFICANT HOLDINGS

Admissibility of Digital Evidence:

"Since in the instant case there was a certificate drawn u/sec.65B(4) of the Indian Evidence Act for the pen-drive seized... the Ld. CIT(A) is justified in rejecting the above grounds."

Determination of Undisclosed Income:

"We are of the considered opinion that the profit on account of such unaccounted cash receipts should be determined at the same rate or nearby rate of net profit that has been declared by the assessee and accepted by the Revenue for the respective assessment years."

Eligibility for Deduction under Section 35(2AB):

"We, therefore, hold that the ld. CIT(A) was justified in restricting the amount of weighted deduction to the quantification done by the prescribed authority."

Final Determinations:

• The Tribunal upheld the admissibility of digital evidence based on the presence of a Section 65B(4) certificate.
• The Tribunal directed the taxation of only the profit element from unaccounted cash receipts, modifying the CIT(A)'s order.
• The Tribunal upheld the restriction of R&D deductions to certified amounts for assessment years post-2016-17, while allowing full deductions for 2016-17 under pre-amendment rules.