Delhi ITAT Quashes Penalty as WhatsApp Chats & Hawala Tokens Failed Section 65B Evidence Test

Gaurav Rakhecha Vs JCIT (ITAT Delhi)

Delhi ITAT Tears Into “WhatsApp & Hawala Token” Assessments – Electronic Evidence Without Proper 65B Compliance Held Unreliable; ₹40 Lakh Penalty u/s 271DA Quashed

In a significant ruling on the evidentiary value of digital records in income-tax proceedings, the Delhi ITAT quashed penalty proceedings under section 271DA after holding that the alleged electronic evidence relied upon by the department lacked legal admissibility and proper procedural safeguards.

The case involved allegations that the assessee had received ₹40 lakh in cash through “hawala cash tokens” in violation of section 269ST. The penalty was triggered based on electronic material allegedly extracted during search proceedings conducted in the Balar Marketing group cases.

The Tribunal relied heavily on an earlier coordinate bench decision in the Balar Marketing group itself, where the entire assessment was found to be founded on inadmissible electronic evidence extracted from phones, laptops and digital devices without maintaining proper chain of custody and statutory safeguards.

The ITAT made extensive observations on the importance of the CBDT Digital Evidence Investigation Manual, 2014, emphasizing that while income-tax proceedings are not strictly governed by the Evidence Act, the fundamental principles of evidence law, fairness, authenticity and reliability of electronic records cannot be ignored.

The Bench observed that merely producing screenshots, WhatsApp chats or extracted images from software without proper certification, extraction reports and uninterrupted chain of custody could not justify additions or penalties. The Tribunal noted glaring deficiencies in the department’s handling of digital evidence, including incomplete custody records and absence of proper linkage between seized devices and extracted material relied upon in assessment.

In a strong remark, the Tribunal held that the department had only made a “half-hearted attempt” at compliance with the CBDT Manual and failed to ensure that the electronic material retained its evidentiary sanctity throughout the proceedings.

The ITAT further clarified that even otherwise, the alleged transaction was in the nature of a loan transaction, which, if at all, would fall under section 269SS and not section 269ST. Since the proviso to section 269ST excludes transactions covered under section 269SS, the very foundation of penalty under section 271DA collapsed.

Accordingly, the Tribunal quashed the entire penalty for AYs 2017-18, 2018-19 and 2020-21, holding that inadmissible electronic evidence and unverified “hawala token” entries cannot become the sole basis for penal consequences under the Act.

FULL TEXT OF THE ORDER OF ITAT DELHI

The instant appeals filed by the assessee are directed against the orders all dated 27.10.2025 passed by the Ld. Commissioner of Income-tax (Appeals), Delhi-26 [hereinafter referred to as the Ld. CIT(A)] under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) arising out of the Assessment Orders dated 28.08.2024 passed by the Addl. CIT, Central Range-4, New Delhi (hereinafter referred to as ‘the Ld. AO’) under Section 271DA of the Act for Assessment Years 2017-18, 2018-19 & 2020-21, respectively.

2. In all the matters, the assessee has challenged the orders imposing penalty by the ITO, Central Range-4, Delhi under Section 271DA of the Act. Considering the identical facts involved in the matters these are heard analogously and are disposed by a common order.

ITA No.8754/Del/2025 (Assessment Year 2020-21)

3. The brief facts of the case are that a search and seizure under Section 132 of the Act was conducted on 23.03.2021 at different business and residential premises of Shri Parasmal Jain and Balar Marketing group wherefrom various incriminating papers/documents were found and seized relating to the assessee before us. The assessment in the case of the assesseee was completed under Section 153C of the Act r.w.s. 143(3) of the Act on 30.12.2013 upon assessing income at Rs.12,92,030/-. The assesseee has received cash amounting to Rs.40 lakhs through hawala cash token, i.e., accepting in cash exceeding Rs.2 lakh from a person in a day, as it is clear violation of 269ST of the Act as per Revenue and on the alleged fact, show cause dated 08.02.2024 under Section 271DA r.w.s. 274 of the Act was issued. The assessee filed adjournment application. However, the proceeding was finalized upon levying penalty of Rs.40 lakhs, the sum equal to the amount of cash received by the assesseee as alleged.

4. The assesseee company gave accommodation entry to M/s Balar Marketing and its group companies through M/s Arham Finance and Investment Services Ltd. as alleged by the Revenue. The loan given to Balar Marketing and its group companies M/s Fybros Modular Private Limited amounting to Rs.68 lakhs and Rs.40 lakhs respectively, which were received back by the assesseee in cash along with its commission income. The Ld. AO in the penalty proceedings initiated against the assessee observed that from the assessment order and the seized materials, it is found that the assesseee accepted cash of Rs.40 lakhs from Shri Vimal Jain being the head of Administration of Balar Marketing Pvt. Ltd. through hawala tokens during the year under consideration. As provisions of Section 269ST of the Act explicitly prohibits the receipt of amount equal or exceeding Rs.2 lakhs, in aggregate, from a person in a day or in respect of a single transaction or in relation to transaction associated with one even or occasion from a person other than the specified modes, the receipt of Rs.2 lakhs by the assesseee is in violation of the said provisions of law, therefore, penalty under Section 271DA of the Act has been levied in respect of the contravention to the provisions under Section 269ST of the Act. In appeal, the same was confirmed by the First Appellate Authority.

5. At the time of hearing of the matter, the Ld. Counsel appearing for the assesseee submitted before us that in the case of Balar Marketing Pvt. Ltd., the Coordinate Bench in ITA Nos.3094/Del/2023, 3143 to 3148/Del/2023, and 3422 to 3426/Del2023, categorically held that the assessment has been framed on the basis of material allegedly retrieved from digital devices, but, those are not admissible under law so as to be relied for drawing conclusions that fact in dispute being proved on scales of probability even. The corresponding ground by which the assessee challenges the assessment order being framed on inadmissible electronic evidences, thus, deserves to be sustained. A copy of the order passed by the Coordinate Bench has duly been submitted before us.

6. Under these facts and circumstances of the matter, we have gone through the order passed by the Coordinate Bench held in the case of M/s Balar Marketing Pvt. Ltd. (supra) wherein the fact of alleged incriminating evidences extracted from iPhone and a Panasonic Eluga phones, laptop, pen drives, HDD recovered from Shri Vimal Jain and none of the devices found from Shri Vimal Jain, or Shri Parasmal Jain or his family members connected with the assesseee firm were found relevant. Not even Whatsapp chats with Parasmal Jain or any other employees of that assessee were found which should show Shri Vimal Jain was dealing with anyone on behalf of the assessee therein. It has further dealt with the issue of admissibility of electronic evidences in the following manner:

“8. Now, as with regard to the issue of admissibility of electronic evidences, the ld. AR has heavily relied upon the Digital Evidence Investigation Manual,2014 (hereinafter called ‘the Manual’) of the Central Board of Direct Taxes to submit that a detailed procedure has been provided by the Board with regard to collection of digital evidences and the manner in which the same has to be relied during the assessment proceedings.

9. Here,at outset, we find it necessary to observe that this Manual is in the instructions though may not have been issued u/s 119 of the Act,but certainly form of atleast good practices, which Board has found fundamental and necessary to add credibility to electronic evidences. The Manual is self contained code where Board has consciously and very articulately examined various facet of collection, examining and reproducing the digital evidences in assessment orders, on the basis of judicial decisions and provisions of law as enshrined in Evidence Act or Information Technology Act, 2000, and then laid down instruction to be followed by the officers of the department.

10. To bolster this conclusion of ours, we would like to observe that the CBDT in its Manual while feeling the relevance of the question with regard to admissibility of electronic evidences and taking note of sea change in the information and technology used in the business transactionshas observed as to how inrelevant statutes, provisions have been made with regard to recognizing electronic record as admissible evidence and as for convenience we reproduce the aforesaid from para 1.1 of the Manual:-

“The law of the country has also taken cognizance of this reality.The InformationTechnology Act, 2000 has been enacted recognizing electronic records as evidence, governing access to and acquisition of digital and electronic evidence from individuals, corporate bodies and/or from the public domain. By way of this enactment, amendments were also brought in other laws like Indian Penal Code, Indian Evidence Act and Criminal Procedure Code, (Cr.PC). The Income-tax Act, 1961 has also been amended thrice by way of Finance Act 2001, Finance Act 2002 and Finance Act 2009 thereby according recognition to electronic evidence, facilitating access to them and giving when need be, powers to impound and seize them. By Finance Act, 2001, Clause (22AA) was inserted in Section 2 to provide that the term “document” in Income Tax Act, 1961, includes an electronic record as defined in clause (t) of sub­section (1) of section 2 of the Information Technology Act, 2000. By Finance Act, 2002, Clause (iib) was inserted in Sub-Section (1) of Section 132 requiring any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000), to afford the authorised officer the necessary facility to inspect such books of account or other documents; and by Finance Act, 2009, clause (c) was inserted in sub-section (1) of Section 282 providing that service of notice in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000 (21 of 2000) will constitute valid service.”

11. In this context, it can be further observed that in para 1.5 the objectives of the Manual are mentioned which states that the aim of this Manual is to apprise the user of “basic legal provisions relating to digital evidence in Income-tax Act and other laws including Information Technology Act and Indian Evidence Act.”

12. Then, to counter the assertion of ld. CIT(A) and ld. DR too, that provisions of Section 65B of Indian Evidence Act are not applicable to income tax assessment proceedings, we would like to reproduce from this Manual as to how the Board perceived the relevance of various provisions of the different statutes and how specifically referred to the provisions of section 65A and 65B of the Indian Evidence Act, 1872 and directed that “accordingly while handling any digital evidence, the procedure has to be in consonance of these provisions.”. The relevant part in para 2.7.3 is as follows:-

“2.7.1 The Information Technology Act-2000 has been enacted to provide legal recognition to transactions carried out by means of electronic data interchange and other means of electronic communication, which involve the use of alternatives to paper-based methods of communication and storage of information. The same enactment has also brought amendments in the Indian Penal Code, 1861, the Indian Evidence Act, 1872, the Bankers’ Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934.

2.7.2 As far as Income-tax Act, 1961 is concerned, it has been amended thrice by way of Finance Act, 2001, Finance Act, 2002 and Finance Act, 2009 respectively.

• • • By way of first amendment, provisions of sub-section (12A) of section 2 was inserted to give legal recognition to the books of account maintained on computer and sub-section (22A) to section 2 was inserted to provide definition of ‘document’ which included “electronic record” as defined under Information Technology Act 2000.

Under Information Technology Act 2000 an electronic record has been defined to include data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro file. This definition of electronic record is wide enough to cover person in possession of computer, storage device, server, mobile phone, i-Pod or any such device.

The above amendment has thus specifically given recognition to electronic record as admissible evidence at par with a ‘document’. Further, the powers to impound/copy a document during a survey action u/s 133A and power to seize a document during a search and seizure operation has also been automatically extended to electronic records as a result of the amendment.

• • • By way of second amendment, provisions of section 132 (l)(iib) were inserted facilitating access to the electronic devices including computer, containing document or books of accounts in the form of electronic records by making it obligatory for the person under control of such device to afford the necessary facility to inspect such records. By Finance Act, 2009, clause (c) was inserted in sub-section (1) of Section 282 providing that service of notice in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000 (21 of 2000) will constitute valid service.

2.7.3 Under Indian Evidence Act there are several references to documents and records and entries in books of account and their recognition as evidence. By way of the THE SECOND SCHEDULE to the Information Technology Act Amendments to the Indian Evidence Act have been brought in so as to, incorporate reference to Electronic Records along with the document giving recognition to the electronic records as evidence.

Further, special provisions as to evidence relating to electronic record have been inserted in the Indian Evidence Act, 1872 in the form of section 65A & 65B, after section 65. These provisions are very important. They govern the integrity of the electronic record as evidence, as well as, the process for creating electronic record. Importantly, they impart faithful output of computer the same evidentiary value as original without further proof or production of original. Accordingly, while handling any digital evidence, the procedure has to be in consonance of these provisions.

2.7.4 Under Indian Penal Code several acts of omission and commission relating to various documents and records are treated as offences. By way of the THE FIRST SCHEDULE to the Information Technology Act, Amendments to the Indian Penal Code have been brought in, so as to incorporate reference to Electronic Records along with the document.”

13. To deal with the issue further as to how far the Evidence Act is applicable or not to the assessment proceedings under the Act, in more comprehensive manner, we take note of certain provisions of the Income Tax Act 1961, which indicate as to how, though not strictly applicable, the jurisprudential concepts of law of evidence, as enshrined under the Evidence Act, find their place, in proceedings under the Income Tax Act 1961.Thereby establishing that in assessment proceedings also these jurisprudential concepts of law of evidence are relevant and need to be followed.

13.1 In this regard, the foremost thing to consider is that section 3 of the Evidence Act describes ‘evidence’ with inclusive definition by bringing in scope all statements as oral evidences and all documents including electronic records as documentary evidences. The Income Tax Act 1961, however, independently does not define ‘evidence’, relevant and admissible for assessment proceedings. So the concept of evidence as provided and interpreted under law of evidence is relevant in assessment proceedings as well.

13.2 Further Section 17 of the Evidence Act, defines, ‘Admission’ as a“statement, oral or documentary or contained in electronic form which suggests any reference as to any fact in issue or relevant fact.” However, it to keep in mind thatin the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [(1973) 91 I.T.R. 18] and CIT Vs. S. Khader Khan Son [(2012) 352 ITR 480 (SC)], the Hon’ble Supreme Court, in reference to proceeding under the Act itself has held that “an admission is an extremely important piece of evidence but it cannot be said that it is conclusive.

13.3 Then Section 3 of Evidence Act, further explains the concept of ‘proved’ wherein it is said that a fact is said to be proved when after considering ‘the matters before it’, the court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists. This definition of ‘proved’ uses the words, ‘after considering the matters before it’ and does not refer to merely evidences. Thus, it is not only the evidences, but, matter as a whole on record gives the court opportunity to draw an inference about the existence or non-existence of fact.

13.4 The ld. tax authorities likeanyotherquasi judicial authorities when entering into any inquiry to reach a conclusion on the basis of evidences, also rely the statements in the form of oral evidences or documents including electronic records called documentary evidences which form substantive material for believing a fact to exist or otherwise existing either by way of a conclusive opinion on the basis of a prudent man approach.

13.5 In this context, the provisions in section 143(2) and 143(3) of the Income Tax Act 1961 become relevant and which are reproduced below:-

“143(2) Where a return has been furnished under section 139, or in response to a notice under sub-section (1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attendthe office of the Assessing Officer or to produce, or cause to be produced before the Assessing Officer any evidence on which the assessee may rely in support of the return:

Provided that no notice under this sub-section shall be served on the assessee after the expiry of three months from the end of the financial year in which the return is furnished.

(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment:

13.6 The aforesaid two sub-sections of section 143 of the Act, make it apparent that the AO, while taking cognizance of the return of the assessee,if finds it necessary to examine the reported income or loss, can call the assessee to produce ‘evidence’. At the cost of repetition, we observe that the word ‘evidence’ is not independently defined in the Act and, certainly, cannot mean anything more than what is defined in section 3 of the Evidence Act, which we have considered above.

13.7 It can be further seen that sub-section (3) to Section 143 of the Act, gives the scope of assessment wherein the AO has been given liberty to examine the evidences produced by the assessee and to even collect evidences by own efforts and, then, after taking into account ‘all relevant material’ which he has received from assessee or gathered in enquiry, make an assessment. Very apparently, like the use of the word ‘matter before it’ in section 3 of the Evidence Act, sub-section (3) of section 143 of the Act also uses the phrase ‘relevant material.’

13.8 Thus, to our mind, when it is said the provisions of Evidence Act are not applicable on the quasi judicial authority, what is meant is that the strict rules of proof of a fact in a particular manner only is not applicable. As for instance a Will, as per section 68 of the Evidence Act being a document required to be attested can be used in evidence only when one of the attesting witnesses at least has been examined for the purpose of proving its execution. However, in quasi judicial proceedings, like assessment, such strict mode of proof of Will is not necessary. That does not dispense with applicability of rules of fairness, prudence and natural justice which are foundation of evidence law.

13.9 As for our discussion with regard to this aspect we may mention here that under the Assessment proceedings the admission may be in the form of statements recorded at time of search and seizure under Section 132(4) of the Act and the statement have evidentiary value and can be used as evidence in any proceeding under the Act. Statement recorded during survey under Section 133A(3)(iii) unlike a statement under Section 132(4) of the Act, is not on oath and therefore has no evidentiary value, though it can still be used in proceedings being. Then during assessment proceedings u/s Section 131 of the Act, statement on oath are recorded by AO.However, statements recorded even on oath though binds the assessee cannot be independently used for making addition unless corroborated by evidences. Reliance can be placed on decision of Hon’ble Delhi High Court in PavitraRealcon (P) Ltd 2024) 340 CTR 225 / 240 DTR 465 (Delhi)(HC).Thus relevant statements, including admissions or documents which are not inchoate and unimpeachable and whose veracities cannot be doubted at all should only be considered to be ‘relevant material’, permitted to be relied, u/s 143(3) of the Act for concluding the assessment.

14. This view of ours is further supported by the fact that many basic principles and rules of evidences as enshrined under evidence law, are made part of assessment proceedings. To refer to some of such instances we can see that right to cross-examination of witness examined by assessing officer stands duly recognized in case of income-tax proceedings and reliance can be placed on the decision CIT vs. SMC Share Brokers Ltd., 288 ITR 345 (Del). Hon’ble Supreme Court in the case of Vasantlal and Company v. CIT [1962] 45 ITR 206 (SC) held as under:-

“The Income-tax Office is not bound by any technical rules of the law of evidence. It is open to him to collect materials to facilitate assessment even by private enquiry. But if he desires to use the material so collected, the assessee must be informed of the material and must be given an adequate opportunity of explaining it.”

15. Principles of non-relevance and non-admissibility of hearsay evidence, as part of Section 60 of Evidence Act, is duly recognized in tax proceedings and thus suspicion how so ever strong cannot take place of proof, even in assessment proceedings. Reliance is being placed on the case of Dhakeshwari Cotton Mills Ltd. 26 ITR 775 wherein Hon’ble Supreme Court held that a suspicion remains a suspicion unless the same is established and can never take place of reality. Similarly the Hon’ble Supreme Court in the case of Umacharan Shaw & Bros v. CIT (1959) [1959] 37 ITR 271 (SC) held that suspicion however strong, cannot take the place of evidence.Assessment cannot be made on guesswork without any reference to any material on record. The Hon’ble Supreme Court in the case of Omar Salay Mohamed Sait v CIT [1959] 37 ITR 151 (SC) had held that no addition can be made on the basis of surmises, suspicion and conjectures. In the case of CIT v. Daulat Ram Rawatmull[1973] 87 ITR 349 (SC) the Hon’ble Supreme Court held that the onus to prove that the apparent is not real is on the party who claims it to be so.

15.1We also find that as enshrined under Evidence Act, secondary evidences, like photocopies of a documents, are also not held be reliable for completing assessment. Reliance can be placed on decision of Hon’ble Delhi High Court in Principal Commissioner Of Income Tax, vs Smt. Rashmi Rajiv Mehtadecidedon 4 March, 2024 vide ITA 984/2019(2024) 299 Taxman 82 (Delhi)(HC), wherein Hon’ble High Court has consider photo copy of an agreement of sale and held as follows;

“No doubt the income tax proceedings are not bound by the technical rule of evidence, but where the addition is solely based on a photocopy of alleged document and the authenticity of such photocopy which is being made basis for making addition is being challenged by the assessee, then ostensibly onus will shift upon the Revenue to first establish the authenticity of such photocopy, thereafter, the onus may shift to the assessee to establish what is stated is correct. Here is the case where Revenue has failed to establish the authenticity of the photocopy of the alleged agreement to sell and thus, we are of the view that the addition on the basis of such photocopy the authenticity of which has not been established, the same cannot be sustained.”

15.2 Then, it is also settled provision of law that illegality of search does not vitiate the evidence collected during alleged illegal search, but, at the same time, courts or the appellate authority have to be circumspect before admitting such evidences. Reliance can be placed on the decision of the Hon’ble Supreme Court in Dr. Pratap Singh vs. Director of Enforcement 155 ITR 166 (SC). It can also be observed that circumstantial evidences are heavily relied by the tax authorities by drawing inferences from the facts, circumstances and material relied for making the additions. The Hon’ble Supreme Court in CIT vs. Durga Prasad More, 88 ITR 54, has held that courts and Tribunals have to judge the evidence before them applying the test of human probabilities. In Chuharmal vs. CIT, 172 ITR 250, has held that “the rigor of rules of evidence contained in Evidence Act was not applicable, but that did not mean that the taxing authorities were not desirous??of invoking the principles of the Act in the proceedings before them, they were prevented from doing so.” In SumatiDayal vs. CIT, 214 ITR 811 (SC), the Hon’ble Supreme Court has recognized that taxing authorities were entitled to look into surrounding circumstances to find out the reality of recitals.

16. We can further see that there are various provision under the Income Tax Act 1961 akin to provision under the Evidence Act like section 131 of the Act giving powers regarding discovery, production of evidence, section 132(4A) presumption as to books of account and documents, section 132A of the Act giving power to requisition books of account, section 136 of the Act specifically mentioning that proceedings before income-tax authorities to be judicial proceedings, provision of section 250(4) of the Act and Rule 46A of admitting additional evidences, Section 278E of the Act giving rise to presumption as to culpable mental state, section 292C of the Act giving rise to presumption as to assets, books of account definitely recognize some of the basic principles of Evidence Act by specific adoptions in the Income-tax Act, 1961. The presumption attached to statements recorded u/s 143(4) of the Act. Then, though affidavits are not included in the definition of ‘evidence’ in section 3 of the Evidence Acthowever, the same are frequently called for and relied in the assessment proceedings.

17. Thus we are of considered view that certain Rules of natural justice, prudence and common sense as enshrined in the Evidence Act certainly become applicable in all quasi judicial proceedings also even if there is no strict application of Evidence Act. Based on aforesaid discussion we can certainly hold that the strict principles and Rules of ‘mode of proof’ under the Evidence Act may not be applicable to assessment proceedings but the aforesaid discussion leaves us to a conclusion that even if the Evidence Act is not made strictly applicable to the tax proceedings by the Income Tax Act 1961, the fundamental principles of law of evidence defining what constitutes evidence, the relevancy of evidence for the issues under consideration, the principles of their admissibility in terms of valid mode of proof and probative value of the evidences, cannot be ignored even by quasi judicial authorities. Thus where the initial burden of proof is on the Revenue authorities to show that the receipts constitutes income, and only real income is liable to tax and more particularly in case of search assessments that addition is on the basis of incriminating material found during the search, the burden on the Revenue is of proving that the assessee has attempted to evade tax and this burden is to be discharged by establishing facts and circumstances from ‘relevant material’ driving conclusive inference that in fact assessee evade tax lawfully payable by it. Reliance can be placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Sati Oil Udyog Ltd., 373 ITR 746 (SC). Hon’ble Supreme Court in Commissioner of Income-Tax, West Bengal vs Durga Prasad More AIR 1971 SC 2439 has observed that “Now coming to the question of onus, the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas in others, it may be nominal. There is nothing rigid about it.”

18. Now where the revenue wants to exclusively rely electronically retrieved evidences, certainly the burden on revenue is stricter as to also establish the genuineness of the electronic evidence and that too is of wholesome nature. As quasi-judicial authorities, tax authorities too are also supposed to give reasoned findings based on relevant and admissible electronic evidences coming from credible source with probative worthiness.

19. The incorporation of provision about necessity of having certificate u/s 65B of the Evidence Act is thus one of the elementary jurisprudential aspects which call for admission of only the best evidence and to ensure the electronic or digital evidence hold veracity to draw conclusive conclusions and to fasten a liability. This is fortified by the Hon’ble Supreme Court decision in Addl. Director General Adjudication vs. Suresh Kumar and Co. Impex Pvt. Ltd. &Ors. In Civil Appeal Nos.11339-11342 of 2018 dated 20^th August, 2025 where recently, the Hon’ble Supreme Court has dealt with the case of relevancy and admissibility of electronic evidences in the proceedings under the Customs Act, 1962 wherein the provisions of section 138C of the Customs Act, 1962 regarding admissibility of electronic evidences has been accepted subject to availability of certificate to be obtained in accordance with the sub-section (4) of section 138C of this Act of 1962. The Hon’ble Supreme Court observed that section 65B(4) of Indian Evidence Act is parimateria to section 138C(4) of the Act of 1962 and, further relied the decision of the Hon’ble Supreme Court in Arjun Panditrao Khotkar v. Kailash Kushanrao Gorantyal and Others (2020) 7 SSC 1,and observed that in the said decision the Hon’ble Supreme Court, while explaining the mandatory nature of section 65B(4) of the Indian Evidence Act applied following two Latin maxims :-

(i)  impotentiaexcusatlegem;

(ii) lex non cogitadimpossibilia, and thereafter held that these two maxims are the foundation with regard to admissibility of electronic evidences and though section 65B(4) of the Evidence Act is mandatory, yet, it would all depend on the facts of each case, how the same could be said to have been duly complied with.

20. Accordingly, in the said case of Suresh Kumar (supra), the Hon’ble Supreme Court considered the ‘substantial compliance’ of section 138C(4) to be sufficient and, therefore, we can firmly conclude that if, in the case of the Income-tax Act, 1961, there are no specific provisions with regard to admissibility of electronic evidences, then, the Manual issued by the Board would substantially hold the ground and the tax authorities are suppose to ensure that there is at least substantial compliance of the Manual to make the electronic evidence relevant and admissible under the law and thus pass judicial scrutiny in appellate jurisdictions

21. Coming to the case in hand, it can be observed that as this question of relevance of electronic evidences was raised by the ld. AR at the time of hearing and the Bench by order dated 03.05.2025 had directed the Revenue to provide records, if any, of as to how the electronic and digital evidences were handled so as to ensure that same remained unimpeached and their veracity, as admissible and reliable peace of material to conclude search remained intact and if any compliance u/s 65B of the Indian Evidence Act were made in accordance with the law. Thereafter, on 19.03.2025, certain material were filed by the ld. DR in the form of certificates taken u/s 65B of the Indian Evidence Act, 1872 and the Bench had observed as follows:-

“Ld. DR has submitted certain certificates given u/s 65B of Indian Evidence Act, 1872 and we have gone through the same. The Certificates as filed before us seem to be incomplete and Ld. DR was unable to assure that apart from the material filed before the Bench there is any other relevant material in regards to these certificates. Thus Ld. DR is directed to ensure that complete record with regard to these certificates to be produced and further to assist the bench to examine this material, a competent expert be called from the department. In any case the arguments will be concluded on the next date of hearing. Adjourned to 3^rdApril, 2025. Both parties informed.”

22. Further on 24.07.2025 also court again gave ld. AO to clarify about availability of any other material with department, specially about the chain of custody documents, and the bench had observed as follow;

“Both the sides were heard. Ld. DR was apprised that at the time of previous hearing, on behalf of the department, certain documents were filed with regard to compliances of admitting electronic evidences. However, one of the vital documents on which Ld. AR has stressed pertains to the chain of custody, a report prepared immediately at the time of search and seizure.

The chain of custody document provided to the Bench merely reflects the seizure and handing over the seized devices to the investigation wing at the time of search and seizure. However, the link evidences showing connectivity of a chain of custody to reach the Assessing officer are not there in the documents provided by the department.

Ld. DR who is present virtually, has requested that the current incumbent DR of this Bench ‘A’ be directed to procure the relevant documents/ information. Accordingly, it is directed that department will ensure filing all the material establishing admissibility of the electronic evidences, specially the chain of custody document from the stage of handing over of the electronic devices to the Investigation Wing reaching the hands of the Assessing Officer.

Ld. DR is requested to forward a copy of this order for information to the present incumbent DR of ‘A’ Bench and also to the concerned Assessing Officer.

As, this Bench has considerably heard the matter at length, it is kept for further clarification on this aspect only for 14.08.2025. No further opportunity shall be granted to the department, and it will be presumed that there is no other piece of information/document available with the Assessing Officer than what has already been furnished in previous hearings.”

22.1 In response of same ld. Assessing Officer had also filed a response and for completeness the same is also reproduced below:-

“Office of The Asst. Commissioner of Income Tax Central Circle-13, New Delhi Room No-247,2nd Floor,E-2, Jhandewalan Extension, New Delhi- 110055 Email:delhi.dcit.cenl3@incometax.gov.in

F.No. ACIT/CC-13/ITAT/2025-26/270 Date: 21.08.2025

To,

The Income Tax Officer,
O/o CIT(DR)-1, A Bench,
ITAT, New Delhi.

Madam/Sir,

Sub: Appeals in the case of Balar Marketing Pvt. Ltd., (PAN: AAACB0361N),assessee’s appeals ITAs 3143-3148/DEL/2023 & Department appeals in 3422- 3426/Del/2023 for A.Ys. 2016-17 to 2021­22- respectively regarding.

Kindly refer to the above and email dated 08.08.2025 vide which your office sought documents/electronic devices from the stage of handing over by the Investigation Wing to the concerned Assessing Officer. In this regard, report is being submitted as below:

During an Income Tax search operation, technical forensics personnel is responsible for assisting the Income Tax Department in imaging and cloning digital devices found at the premises, which may contain crucial data related to the concerned party.

The procedure of seizure of electronic devices as well as imaging and cloning of digital devices is carried on in accordance with the Search and seizure manual (last updated in 2025) and Digital Evidence Investigation Manual 2014.

The forensics expert employs specialized tools while creating backups or images of the digital evidence to maintain its integrity, ensuring that no data from the original device is altered or tampered with during the cloning process. This ensures that the original evidence remains untouched throughout the acquisition process. Once the imaging/cloning is complete, the software used generates results that may vary depending on the tool; however, two consistent and critical outputs are provided by all: the forensic image of the original evidence and the hash value—a unique digital fingerprint representing all the information stored on the original device.

Hash values are generated using cryptographic algorithms through a process known as hashing. Hashing is a one-way function that transforms any amount of data into a fixed-length string of characters, known as the digest. This digest is non-reversible—meaning it cannot be decrypted or traced back to the original content—and is therefore used as a digital fingerprint for the data. Even a minor change in the original dataset would result in a completely different hash value, which makes it an effective mechanism for data integrity verification.

Hash value can be generated of any data set and it’s a data unique value. Which mean, if two data sets having exactly the same data will be having the same Hash value. This function of hashing is used for ta integrity check in case of tampering of data after a hash value is produced. Majorly two types of hashing algorithm are used i.e., MD5 and SHAI.

MD5 (Message Digest Algorithm 5): Produces a 128-bit hash value. It is efficient and widely supported across forensic platforms, and primarily used as a checksum to detect unintentional data corruption.

SHA-1 (Secure Hash Algorithm 1): Produces a 160-bit hash value, typically rendered as a 40-character hexadecimal string. It provides a higher level of uniqueness and is often used for evidence validation in legal settings.

The above procedure was duly followed in the case of the assessee, and Hash value was also recorded which remained unchanged throughout the process.

After seizure of electronic devices, Once the imaging and hashing were completed, the examiner generated a certificate under Section 65B of the Indian Evidence Act on 24.03.2021 (A sample copy of the same is attached herewith) which has now been updated to Section 63 of the Bharatiya Sakshya Adhiniyam. Form 65B includes comprehensive details about the cloned electronic evidence, party information, hash value, references to the applicable legal provision, and the signatures of the involved

parties, including the examiner. A sample copy of the Form 65B recorded in case of the assessee is reproduced below-

A chain of custody document was also signed by the Authorized officer present at the department, which indicates that the authenticity of the digital evidence was maintained at the time of seizure. A sample copy of the same in case of assessee is attached below-

The cloned data was stored on two separate storage drives: one designated as the “working copy” and the other as the “master copy.” The master copy is permanently sealed and retained by the Income Tax Department, to be used only if the working copy becomes corrupted or damaged. The master copy was sealed and the Authorized officer present at the premise and the Assessee put their signature on it as well.

Therefore, in case of the assessee as well, the Certificate u/s 65B was recorded on 24.03.2021, at the time of the extraction of data from electronic devices and thereafter cloning of data was undertaken. The Cloned data as stored in the Master copy was then sealed by the Authorised officer present on the premise and his signature were also placed on the same. The hash value was also generated at the time which remains intact and unchanged. Therefore it is clear from above that the cloning of data is undertaken after the extraction of data is done and hash value generated.

The working copy was then forwarded to the Cyber Forensics Lab (CFL), where a cyber forensics expert converted the cloned image into a readable format stored on another drive known as the “extraction copy.” The extracted copy is then used to support the ongoing investigation and, where applicable, are presented as part of the proceedings. The Digital Evidence Investigation Manual 2014 defines ‘Chain of Custody’ as –

“Chain of custody” is the roadmap that shows how evidence was collected, analyzed and preserved in order to be presented as evidence. Establishing a clear chain of custody is critical because electronic evidence can be easily altered. A clear chain of custody would demonstrate that electronic evidence is trustworthy. Preserving a chain of custody for electronic evidence, at a minimum, requires that-

i. No data has been added, changed, deleted from the seized information evidence

ii. The seized/information evidence was duplicated exactly and completely.

iii. A reliable and validated duplication process was used.

iv. All media were secure and safe.

Based on above, the chain of custody of the seized electronic evidence was never compromised in the process described above and followed in the case of the assessee. The cloned data is stored in 2 devices, ‘a Working Copy’ and ‘a Master copy’. And the master copy is sealed permanently and     is never desealed. The hash value (i.e.—a unique digital fingerprint representing all the information stored on the original device) is generated which remains the same throughout the search proceedings and later on during the assessment proceedings. The unique hash value remains same for a particular electronic evidence/data set. Moreover, since the Master copy remains sealed, the question of compromise of the chain of custody does not arise.

Further, the entire seized material is handed over by the Investigation Wing to the Assessing Officer in Central Circle through a handing over note (A copy of the same in case of the assessee is attached herewith). The handing over note is the document which evidences that the entire seized material including the electronic devices and evidences is handed over to the assessing officer in the central circle. Even during this stage, the Master copy of the electronic evidence is not opened and remains sealed. Therefore, the chain of custody as well as the hash value remains intact and uncompromised.

Further, the data or evidences used from the electronic devices/evidences and which have been relied upon by the Assessing Officer for making the additions can be verified at any time by Appellate authorities through the Master copy maintained with the department.

Yours faithfully.

Sd/-

(Abhilasha Sharma)
Asst. Commissioner of Income Tax,
Central Circle -13,
New Delhi.

Encl.: as above”

…………………………………………………………………………………………

……………………………………………………………………………………….

37, Then report which assessing officer has filed and we have reproduced in para 18.1 above admits that the procedure of seizure of electronic devices as well as imaging and cloning of digital devices is carried on in accordance with the Search and seizure manual (last updated in 2025) and Digital Evidence Investigation Manual 2014 and that chain of custody was not maintained subsequent to time of search. It is certainly thus not the case of department that assessing officer had any opportunity of examining the credibility of electronic evidences and then to record of same in the assessment order. Therefore, the chain of custody form as left incomplete demolishes the case of the Department that there is no reason to doubt the electronic evidences relied by the AO.

38. More importantly, as we examined the assessment order, we find that none of the directions of the Manual have been followed by the AO except for making the extracts of digital images of Sambhav Software or statements annexed to the assessment order. The aforesaid directions of Board in para 9.1 and 9.6 of the Manual have been completely ignored by the AO. It appears that at time of initiation of search the process of collection of digital evidences was very much in accordance with the directions of Manual. The preparation of chain of custody document and taking E Certificate at time of making working copy, does show that authorities were conversant with the Manual or other instructions. They were aware that only evidence found in search is in the digital form so they with all caution initiated the process of collection of digital evidences form two phones in accordance with mandate of Manual and general principles of law, regulating collection of electronic evidence and to maintain its sanctity throughout, till it is ultimately relied in assessment and if needed at stage of judicial scrutiny. However, the attempt was either half hearted, if not to be presumed to be thwarted half way to prejudice of assessee. It is established that that tax authorities applied some provisions and instructions of the Manual, at time of search but, failed to maintain the records as per the instructions in Manual for Panchnama, mobile device collection form, certificate u/s 65B of the Evidence Act and most importantly the chain of custody form.

39. More particularly, and at the cost of repetition, with regard to the certificate u/s 65B, it can be observed that the same is merely a certificate of the expert about due process adopted while data was backed up from the impugned devices to the devices in which the data was cloned. However, subsequently, as to how the data was retrieved and relevant incriminating evidences were extracted from the devices by whom, have not been certified. In fact that required maintaining correct record of chain of custody, so as to show that when the data was retrieved or any extract taken during assessment proceedings the same were corroborated by hash values as recorded at time of making the working copy. The purpose of section 65B of Evidence Act is to provide a certificate to the computer output stating identity of the electronic record describing the manner in which the output electronic record was produced. The certificate should indicate particulars of the electronic device involved, like in the case in hand the two phones or the working copy involved for producing the output of images relied by assessing officer. The authenticity is added by the extraction reports which forms basis of issuing the certificate. There is no extraction report of these two mobiles or of working copies though of some other devices found insearch are placed in material before us. Then the certificate u/s 65B should have shown that the output to be relied as an evidence was produced from the working copy and that the same was in lawful control of the person signing the certificate and certainly the chain of custody document would have established same. However, the chain of custody document filed is completely silent about the same.

40. Then it is also pertinent to mention that the incriminating evidences relied by the AO is not the primary evidence existing in the laptop or computer wherein the alleged Sambhav software was installed, but, are merely images of Sambhav software which allegedly Mr. Vimal Jain was sharing with counterparts for acknowledging the transactions. Similarly, on going through the Whatsapp chats as part of the annexure to the assessment order, the same do not contain any message which will narrate any transaction on its own, but, only mention some figures which are allegedly to be codes. When original Sambhav software could not be retrieved from any of the electronic devices the images in the phones of Mr. Vimal Jain were, no doubt, secondary evidences only and that all the more required that if they were to be relied the instructions given by the Board to ensure the authenticity of evidence become material directions to be followed. The evidences extracted from the phone howsoever relevant would become admissible only once necessary compliances required as per due course of law are made. The due course here certainly is the instructions in Manual. Even if it is claimed by ld. DR to be not binding the aforesaid discussion has firmly established that the assessment though being a quasi judicial exercise had to be on the basis of evidences whose veracity can be tested in subsequent proceedings, like appeal or judicial review. This gives us an opportunity to hold that even if the case of revenue is accepted that strict principles or rules of Evidence Act are not applicable or there is no necessity of certificate u/s 65B, still in order to give and add credibility to the conclusions drawn on the digital evidences the AO should ensure that there is substantive compliances of the Manual and not just by way of eye wash.

41. Thus we have no hesitation to hold that assessment has been framed on the basis of material, allegedly retrieved from digital devices, but which are not admissible under law so as to be relied for drawing conclusions, of fact in dispute, being proved on scales of probability even. The corresponding grounds by which assesse challenges the assessment order being framed on inadmissible electronic evidences thus deserves to be sustained.”

7. Having regard to the search conducted in the case of Balar Marketing group of cases and the addition made in the case of the assessee before us clearly on the basis of the same material seized which has been held to be inadmissible electronic evidence in the case of Balar Marketing itself, the penalty imposed in the hands of the assessee before us on the selfsame evidence is not sustainable. Such contention made by the Ld. AR has not been controverted by the Ld. DR. Moreso, the provisions of Section 269ST in terms are not applicable to the case in hand for the reason that the nature of the aforesaid money transaction is a loan transaction and, therefore, shall attract the provisions of Section 269SS, if, at all. The proviso to Section 269ST of the Act specifically states that these provisions shall not apply to a transaction covered by the provisions of Section 269SS of the Act. In that view of the matter, the prayer made by the Ld. Counsel appearing for the assesseee that the penalty order be quashed is found to be acceptable.

8. As the quantum order in Balar marketing Pvt. Ltd. has been quashed by the Coordinate Bench holding the evidences sought to be claimed as incriminating in nature being electronic evidence are not admissible evidence in the eyes of law, the same hawala token cannot be the basis of levying penalty of Rs.40 lakhs in the case of the assessee before us. The penalty, therefore, is not sustainable and quashed.

9. The order is mutatis mutandis applied to appeals of the assessee for Assessment Years 2017-18 and 2018-19.

10. In the result, all the appeals filed by the Assesseee are allowed.

Order pronounced in the open court on 22.05.2016.