Unauthenticated Digital Data Cannot Sustain Addition: ITAT Quashes ₹9.40 Crore u/s 69C [Read Order]

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has held that an addition towards unexplained expenditure under Section 69C of the Income TaxAct, 1961, made solely based on unauthenticated digital data allegedly recovered during a post-2021 search, cannot survive when the assessment itself is framed in violation of the mandatory reassessment procedure prescribed under the Finance Act, 2021.

The appellant, Malbros International Pvt. Ltd., is engaged in the manufacture and trading of grain-based Extra Neutral Alcohol, ethanol and country liquor. A search under Section 132 of the Income Tax Act, 1961 was conducted on 18.05.2023 on the assessee group as well as on certain third parties, including former employees.

During the search on a former employee, digital data in the form of Tally records and a hard disk was allegedly recovered. Relying on these digital records, the Assessing Officer (AO) treated an amount of ₹9.40 crore as unexplained expenditure and made an addition under Section 69C of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) upheld this addition, leading the assessee to file an appeal before the Tribunal.

The appellant contended that addition of ₹9.40 crore under Section 69C of the Income Tax Act, 1961 was wholly unsustainable as it was based on unauthenticated and incomplete digital data recovered from the possession of a former employee, long after the manufacturing unit had been shut down. The appellant submitted that no nexus was established between the alleged expenditure and its regular books of account or business activities.

The Revenue supported the assessment order and contended that the digital data seized during the search clearly indicated unexplained expenditure incurred by the appellant. It was argued that the seized tally records constituted sufficient material to justify the addition under Section 69C of the Income Tax Act, 1961. The Department was represented by the Departmental Representative.

The Bench comprising Rajpal Yadav, Vice President and Manoj Kumar Aggrawal, Accountant Member, set aside the addition of ₹9.40 crore made under Section 69C of the Income Tax Act, 1961. The Bench held that the assessment year under consideration fell within the period immediately preceding the search conducted after 1.04.2021 and, therefore, the reassessment mechanism under Section 148 of the Income Tax Act, 1961 was mandatory.

The ITAT observed that the AO relied entirely on digital material seized from third-party premises without recording the mandatory satisfaction that such material pertained to the assessee and without obtaining prior approval under Section 148B of the Income Tax Act, 1961. Thereby rendering the entire assessment void in law.

Consequently, the addition made on account of unexplained expenditure based on unauthenticated digital data was set aside without examining the issue on merits.

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