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Facts
A search and seizure operation led to the discovery of seized material, including a pen drive. Based on this data, the Assessing Officer (AO) alleged that the assessee made unaccounted cash payments of Rs. 1,10,00,000/- and added this amount to the assessee's income as unexplained expenditure under Section 69C.
Held
The Tribunal held that the addition was solely based on the contents of a pen drive seized from a third party. Citing a previous ITAT ruling on the same pen drive, which found its contents inadmissible due to non-compliance with Section 65B of the Indian Evidence Act, the Tribunal concluded there was no legal basis to rely on this material for the addition.
Key Issues
Whether digital evidence from a seized pen drive, lacking a valid certificate under Section 65B of the Indian Evidence Act, can be used to make an addition to the assessee's income.
Sections Cited
69C, 132, 143(3), 153C, 65B, 65B(2), 65B(4)
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Income Tax Appellate Tribunal, Hyderabad A Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
ORDER Per Madhusudan Sawdia, A.M.: The captioned appeal is filed by the Revenue feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-11, Hyderabad (“Ld. CIT(A)”), dated 11/10/2024 for the Assessment Year (“A.Y.”) 2017-18. The assessee has also raised the Cross Objection for the A.Y.2017- C.O. No.3/Hyd/2025 Ramesh Babu Segu 18. Since the issues raised in the Revenue’s appeal and the assessee’s Cross Objection are interwoven, they have heard together and disposed of vide the consolidated order for the sake of convenience and brevity.
2. The Revenue has raised the following Grounds of appeal:
1. 1. 1. 1. 1. 1. “1. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in not considering the pen drive seized during the course of search u/s 132 of the Act as an 1 independent primary source of evidence u/s 65B of the Indian Evidence act, when the extracts of digital evidence collected from the pen drive was confronted to and accepted by Sri Polisetty Shyam Sunder? 2. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in not considering the fact that the contents of seized pen drive were confirmed by the AR of Sri Polisetty Shyam Sunder during the course of scrutiny assessment proceedings u/s 143(3) rws 153C of the Act? 3. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in not considering the fact that corroborative evidence in the form of physical copy of receipts issued to the assessee were found and seized which matched with the contents of the seized pen drive regarding payments made by the assessee? 4. Any other ground that may be urged at the time of hearing”
The brief facts of the case are that the assessee is an individual engaged in the business of real estate services. The assessee filed his return of income for the Assessment Year (“A.Y.”) 2017–18 on 30.03.2018, declaring total income of Rs.5,55,050/-. Subsequently, a search and seizure operation under section 132 of the Income Tax Act, 1961 (“the Act”) was conducted on 28.01.2020 in the Page 2 of C.O. No.3/Hyd/2025 Ramesh Babu Segu case of Polisetty Somasundaram Group. During the course of search, certain unaccounted cash book and receipt vouchers were found and seized from the business premises of Polisetty Somasundaram. On the basis of the said seized material and the statement of the Managing Partner of Polisetty Somasundaram, Shri Polisetty Shyam Sundar, recorded on 08.06.2020, the Learned Assessing Officer (“Ld. AO”) observed that the assessee was allegedly involved in unaccounted cash transactions with Polisetty Somasundaram aggregating to Rs.2,21,18,000/- pertaining to A.Ys. 2014–15 to 2018–19. Accordingly, notice under section 153C of the Act was issued by the Ld. AO to the assessee on 29.08.2022. In response thereto, the assessee filed return of income for A.Y. 2017–18 on 08.03.2023, declaring total income of Rs.6,05,200/- . The Ld. AO thereafter issued notice under section 143(2) of the Act on 10.03.2023. On the basis of the material seized from the premises of Polisetty Somasundaram, particularly the data contained in a pen drive, the Ld. AO alleged that during the year under consideration, the assessee had made cash payments of Rs.1,10,00,000/- to Polisetty Somasundaram. When called upon to explain the source of such payment, the assessee categorically denied having made any such payment. Not being satisfied with the explanation, the Ld. AO treated the alleged payment of Rs.1,10,00,000/- as unexplained expenditure under section 69C of the Act and added the same to the income of the assessee. Accordingly, the assessment was completed by the Ld. AO under section 153C on 27.03.2023, determining the total income of the assessee at Rs.1,16,05,200/-.
Page 3 of C.O. No.3/Hyd/2025 Ramesh Babu Segu
4. Aggrieved with the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). During the appellate proceedings, the Ld. CIT(A) observed that the receipt vouchers seized during the search did not pertain to the assessment year under consideration and, therefore, had no relevance for making the impugned addition. The Ld. CIT(A) further observed that the cash book on which the Ld. AO relied was generated from data contained in a pen drive seized from the premises of Polisetty Somasundaram. The Ld. CIT(A) noted that the Visakhapatnam Bench of the Tribunal, in the case of Polisetty Somasundaram Vs. DCIT, in to 180/Viz/2024, dated 18/08/2023 had held that the contents of the very same seized pen drive were not admissible evidence in the absence of a valid certificate under section 65B of the Indian Evidence Act, 1872, and on that basis, had quashed the assessment made under section 153A in the case of Polisetty Somasundaram. The Ld. CIT(A) held that once the contents of the seized pen drive were held to be inadmissible in the hands of Polisetty Somasundaram, from whose premises the pen drive was seized, the same material could not be relied upon to make an addition in the hands of the assessee, who is a third party. Accordingly, the Ld. CIT(A) deleted the addition of Rs.1,10,00,000/- and allowed the appeal.
5. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before this Tribunal. At the outset, the Learned Departmental Representative (“Ld. DR”) submitted that the solitary issue involved out of the grounds of appeal of the Revenue is the deletion of addition of Rs.1,10,00,000/- by the Ld. CIT(A). Page 4 of C.O. No.3/Hyd/2025 Ramesh Babu Segu She contended that the Ld. CIT(A) erred in disregarding the pen drive seized during the search under section 132, which, according to her, constituted independent and primary electronic evidence under section 65B of the Indian Evidence Act. She submitted that the extracts of the digital data were confronted to and accepted by the Managing Partner of Polisetty Somasundaram, Shri Polisetty Shyam Sundar. She further submitted that during assessment proceedings under section 143(3) read with section 153C, the authorised representative of Polisetty Somasundaram had also confirmed the contents of the seized pen drive in their respective assessment proceedings. It was contended that the cash book printouts extracted from the pen drive clearly mentioned the date and amount of advances allegedly given by the assessee to Polisetty Somasundaram. She further submitted that certain cash vouchers were also found from the premises of Polisetty Somasundaram corroborating the entries in the pen drive. Accordingly, she prayed that the order of the Ld. CIT(A) be set aside and the addition made by the Ld. AO be restored.
6. Per contra, the Learned Authorised Representative (“Ld. AR”) strongly supported the order of the Ld. CIT(A). He invited our attention to page nos. 2 and 3 of the assessment order, wherein the Ld. AO has reproduced two receipts allegedly seized from the premises of Polisetty Somasundaram. He submitted that both the receipts were neither seized from the premises of the assessee nor contained any acknowledgment or signature of the assessee. It was further submitted that the said receipts did not pertain to the assessment year under consideration and, therefore, had no relevance for making the impugned Page 5 of C.O. No.3/Hyd/2025 Ramesh Babu Segu addition. The Ld. AR also drew our attention to the order of the Visakhapatnam Bench of the Tribunal in the case of Polisetty Somasundaram Vs. DCIT (supra), the relevant part of which has been reproduced at page nos. 27 to 37 of the order of the Ld. CIT(A), wherein the Tribunal categorically rejected the contents of the seized pen drive as inadmissible evidence in the absence of a valid certificate under section 65B of the Indian Evidence Act and consequently quashed the assessment order made under section 153A of the Act. It was submitted that when the contents of the seized pen drive were held to be inadmissible in the case of Polisetty Somasundaram, from whose premises the pen drive was seized, the same material could not be relied upon to make an addition in the hands of the assessee, who is a third party.
7. In the alternative, the Ld. AR submitted that documents seized from the premises of a third party and statements of third parties, in the absence of any independent corroborative evidence, cannot be used against the assessee. Accordingly, he prayed for dismissal of the Revenue’s appeal.
8. We have carefully considered the rival submissions and perused the material available on record. The addition of Rs.1,10,00,000/- in the hands of the assessee has been made solely on the basis of the contents of a pen drive seized from the premises of Polisetty Somasundaram. In this regard, we have gone through the order of the Visakhapatnam Bench of the Tribunal in the case of Polisetty Somasundaram Vs. DCIT (supra), the relevant part of which has been reproduced at page nos. 27 to 37 of the order of the Ld. CIT(A), which is to the following effect: Page 6 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 7 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 8 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 9 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 10 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 11 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 12 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 13 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 14 of C.O. No.3/Hyd/2025 Ramesh Babu Segu Page 15 of C.O. No.3/Hyd/2025 Ramesh Babu Segu
9. On a perusal of above, it is an undisputed fact that the very same seized pen drive and the data contained therein were examined by the Visakhapatnam Bench of the Tribunal and it has been held that the contents of the pen drive were not admissible as evidence in the absence of a certificate under section 65B of the Indian Evidence Act and, on that basis, quashed the assessment order of the Ld. AO made under section 153A of the Act. Once the contents of the seized pen drive have been declined to be accepted as valid evidence in the case of Polisetty Somasundaram, from whose premises the pen drive was seized, we find no justification in law to rely upon the same material for making an addition in the hands of the assessee, who is a third party. The Revenue has Page 16 of C.O. No.3/Hyd/2025 Ramesh Babu Segu not brought on record any independent or corroborative evidence to establish that the assessee actually incurred unexplained expenditure of Rs.1,10,00,000/- during the year under consideration. We have also gone through the page nos. 2 and 3 of the assessment order, wherein the Ld. AO has reproduced the two receipts allegedly seized from the premises of Polisetty Somasundaram, which is to the following effect:
Page 17 of C.O. No.3/Hyd/2025 Ramesh Babu Segu 10. On a perusal of the above, we find that the alleged receipts relied upon by the Revenue were neither seized from the premises of the assessee nor pertain to the relevant assessment year. Accordingly, the said receipt cannot be relied on for making any addition for the year under consideration. Further, we find merits in the submission of the Ld. AR that the documents seized from the premises of a third party and statements of third parties, in the absence of any independent corroborative evidence, cannot be used against the assessee. In view of the present facts and respectfully following the decision of the Visakhapatnam Bench of the Tribunal in the case of Polisetty Somasundaram (supra), we hold that there is no infirmity in the order passed by the Ld. CIT(A) in deleting the addition made under section 69C of the Act. Accordingly, the appeal filed by the Revenue is dismissed.
C.O. No.3/Hyd/2025:
The assessee has raised the following grounds in his Cross Objection:
“1. The deletion of the INR 1,10,00,000/- addition under Section 69 of Income tax act, 1961 by the Learned CIT(A)-11, Hyderabad, is legally justified. The Learned Assessing Officer's addition was unjustified, and the Hon'ble ITAT should uphold the deletion.
The addition is based solely on Annexure A/PSS/CORP/18, which lacks legal validity. The Hon'ble ITAT, Visakhapatnam, in to 180/Viz/22-23 (M/s. Polisetty Somasundaram, dated 15- 08-2023), has held that additions cannot be made without a valid Section 65B certificate, making the impugned addition unsustainable.
Page 18 of C.O. No.3/Hyd/2025 Ramesh Babu Segu 3. The department's claim of corroborative evidence from receipts is factually incorrect. The alleged receipts do not conclusively establish undisclosed income or unexplained expenditure, and adverse inferences cannot be drawn based on assumptions.
The reliance on unverified digital evidence, including the seized pen drive, is legally untenable. In the absence of supporting bank transactions or books of accounts, the addition lacks legal sanctity under the Income Tax Act and the Indian Evidence Act.
That the Assessing Officer erred in making the disallowance of INR 1,10,00,000/- under Section 69 of the Income Tax Act, 1961, without appreciating the correct facts and legal position. That without prejudice to the above, the addition/disallowance made by the Assessing Officer is excessive, arbitrary, and based on mere conjecture and surmises. The same has been rightly deleted by the CIT(A), and no interference is warranted by the Hon'ble ITAT.
That the cross-objector craves leave to add, alter, amend, or withdraw any of the above grounds at the time of hearing of the appeal.”
Since we have dismissed the appeal filed by the Revenue and upheld the order of the Ld. CIT(A), the cross-objection filed by the assessee becomes infructuous and is accordingly dismissed.
In the result, the Cross Objection of the assessee in C.O. No.3/Hyd/2025 is dismissed.
Order pronounced in the Open Court on 13th February, 2026.