Seized Data Alone Is Not Enough for Tax Addition-A Game Changer for Tax Litigation

ITAT Delhi Ruling: M/s Sanmati Jewellers vs. DCIT, Central Circle-7, Delhi

(ITA No. 3031/Del/2022, dated 28.02.2025)

Background of the Case

M/s Sanmati Jewellers, a partnership firm engaged in trading bullion, jewelry, and silverware, originally declared an income of ₹45,17,630/- in its income tax return.

• A search operation under Section 132 was conducted on 05.01.2017 at the premises of Jindal Bullion Ltd. (JBL).
• During the search, digital data from Hazir Johri Software was seized from Mr. Kushagra Jindal, the promoter of JBL. This data allegedly recorded both accounted (pakka) and unaccounted (kaccha) transactions.
• A ledger titled “Sanmati 1586”, purportedly related to the assessee, contained both banking and cash transactions.
• The Assessing Officer (AO) recorded satisfaction on 04.02.2021 and issued a notice under Section 153C on 05.02.2021.

Additions Made by AO and CIT(A)

The AO made the following additions, which were later upheld by the CIT(A):

1. ₹67,16,600/- added as the peak balance of alleged unaccounted cash payments made by the assessee to JBL.
2. ₹19,37,985/- added on account of an assumed 2% gross profit margin on alleged cash purchases of bullion from JBL.

The CIT(A) justified these additions on the following grounds:

• Since the banking transactions in the ledger were accepted as genuine, the cash transactions recorded therein should also be considered valid.
• The seized digital data enjoys a presumption of truth under Section 292C.
• The request for cross-examination of Ms. Parul Ahluwalia (JBL employee) was denied on the ground that her statement did not constitute primary evidence.

Key Legal Issues and ITAT Findings

A. Limited Applicability of Presumption Under Section 292C

ITAT Observations:

• The Hazir Johri software was seized from JBL’s premises, not from the assessee.
• The presumption of truth under Section 292C applies only to the person from whom the documents are seized (JBL), and not to a third party like Sanmati Jewellers.
• Without independent corroborative evidence, the data from JBL’s software cannot be solely relied upon to make additions in the hands of the assessee.

Supporting Case Laws:

1. Rajeshwar Singh Yadav vs. DCIT (ITA Nos. 1909 & 1910/Del/2022, ITAT Delhi)
   • The presumption under Section 292C is limited to the person from whom the material is seized.
2. CIT vs. Babu Mohan Arya Smarak Educational Trust (42 taxmann.com 255, Allahabad HC)
   • Documents seized from a third party do not automatically implicate another person unless corroborative evidence exists.

B. Absence of Corroborative Evidence for Alleged Cash Transactions

ITAT Observations:

• The assessee categorically denied engaging in cash transactions and explained that entries in JBL’s ledger were erroneously recorded under its name due to its introduction of a broker (Subodh Kumar Jain) to JBL.
• No bills, vouchers, stock registers, or invoices were found linking the alleged cash purchases to the assessee.
• The Revenue failed to establish that the transactions recorded in JBL’s ledger exclusively belonged to the assessee.

Supporting Case Laws:

1. CIT v. D.K. Gupta (308 ITR 230, Delhi HC)
   • Seized material that constitutes “dumb documents” without independent corroboration cannot be the basis for additions.
2. CIT vs. Girish Chaudhary (296 ITR 619, Delhi HC)
   • Unverified notings in seized documents cannot be the sole basis for making additions.
3. Ashwani Kumar vs. ITO (39 ITD 183, ITAT Delhi)
   • In the absence of independent verification, additions based on loose papers cannot be sustained.

C. Unjustified Delay in Recording Satisfaction Note – Invalid 153C Proceedings

ITAT Observations:

• The search at JBL’s premises took place on 05.01.2017, yet the satisfaction note was recorded only on 04.02.2021—a delay of more than four years.
• Judicial precedents establish that a delay beyond 9-10 months in recording satisfaction renders 153C proceedings invalid.

Supporting Case Laws:

1. CIT vs. Bharat Bhushan Jain (370 ITR 695, Delhi HC)
   • A delay exceeding 10 months in recording satisfaction was held invalid.
2. PCIT vs. Jitendra H Modi HUF (403 ITR 110, Gujarat HC)
   • 153C proceedings were annulled due to a 9-month delay in recording satisfaction.
3. Radhey Shyam Bansal (337 ITR 217, Delhi HC)
   • Courts have consistently ruled that excessive delays in recording satisfaction invalidate 153C proceedings.

ITAT Ruling and Final Decision

• The ITAT deleted the additions of ₹67,16,600/- and ₹19,37,985/- due to a lack of corroborative evidence.
• The entire assessment under Section 153C was annulled on the ground of unjustified delay in recording the satisfaction note.

Key Takeaways from the Ruling:

✅ Presumption under Section 292C does not extend to third parties unless corroborated by independent evidence.
✅ Mere existence of entries in a seized ledger does not justify additions without proper verification.
✅ Significant delay in recording satisfaction for 153C proceedings renders the assessment invalid.

This ruling reinforces the principle that unverified third-party records cannot be the sole basis for additions in the absence of independent corroboration.