Admissibility of Circumstantial Evidence in Income Tax proceedings

“Men may tell  lies, but Circumstances do not”.

Meaning of evidence

The word ‘Evidence’ has been derived from the Latin word ‘evidere’ which implies to show distinctly, to make clear to view or sight, to discover clearly, to make plainly certain, to certain, to ascertain, to prove.

According to Sir Blackstone, ‘Evidence’ signifies that which demonstrates, makes clear or ascertain the truth of the facts or points in issue either on one side or the other.

According to Sir Taylor, Law of Evidence means through argument to prove or disprove any matter of fact. The truth of which is submitted to judicial investigation.

Evidence means and includes-

(1)  All the statements which the court permits or requires to be made before it by witnesses, in   relation to matters of fact under enquiry; such statements are called Oral evidence;

(2)  All the documents including electronic records produced for the inspection of the court; such documents are called documentary evidence;

The definition of Evidence given in Act is very narrow because evidence comes before the court by two means only-

(1)   The statement of witnesses.

(2)   Documents including electronic records.

Evidence - Direct Evidence

Direct evidence is evidence of a fact based on a witness's personal knowledge or observation of that fact. A person's guilt of a charged crime may be proven by direct evidence if, standing alone, that evidence satisfies a judge beyond a reasonable doubt of the person's guilt of that crime.

Circumstantial evidence

Circumstantial evidence is defined as evidence based on inference and not on personal knowledge or observation (also termed indirect evidence; oblique evidence). "Some circumstantial evidence is very strong as when you find a trout in the milk". (Henry David Thoreau-Journal, 11th November 1850). "Evidence of some Collateral fact, from which the existence or non-existence of some fact in question maybe inferred as a probable consequence, is termed Circumstantial evidence" William P. Richardson. The Law of Evidence, 3rd edition at page 68.

Circumstantial evidence is evidence of the circumstances, as opposed to direct evidence. It may consist of evidence afforded by the bearing on the fact to be proved, of other and subsidiary facts, which are relied on as inconsistent with any result other than the truth of the principal fact. It is evidence of various facts, other than the fact in issue which are so associated with the fact in issue, that taken together, they form a chain of circumstances leading to an inference or presumption of the existence of the principal fact.

Circumstantial Evidence means the evidence which is not drawn from direct observation of a fact in issue but it is inferred from the relevant facts. In other words, it can be said that when there is no direct evidence in respect of principle fact but certain circumstances are there which though not a fact in issue, but relevant to the fact in issue i.e., the principle fact and from the establishment of all such circumstantial evidence a safe inference of principle fact can be inferred or presumed., that is why it is termed as an ‘Inferential Evidence’. Circumstantial evidence is indirect information or secondary facts that allow a reasonable inference of the principal fact, without actually proving the Principal Fact.

Circumstantial evidence how to be used

In the appreciation of circumstantial evidence, the relevant aspects, as laid down from time to time are —

(1)  the circumstances alleged must be established by such evidence, as in the case of other evidence ;

(2)  the circumstances proved must be of a conclusive nature and not totally inconsistent with the circumstances or contradictory to other evidence.

(3)  although there should be no missing links in the case, yet it is not essential that every one of the links must appear on the surface of the evidence adduced ; some of these links may have to be inferred from the proved facts ;

(4)  in drawing those inferences or presumptions, the Authorities must have regard to the common course of natural events, to human conduct and their relation to the facts of the particular case.

(5)  The circumstantial evidence can, with equal facility, be resorted to in proof of a fact in issue which arises in proceedings for the assessment of taxes both direct and indirect, circumstantial evidence can be made use of in order to prove or disprove a fact alleged or in issue. In fact, in whatever proceedings or context inferences are required to be drawn from the evidence or materials available or lacking, circumstantial evidence has its place to assist the process of arriving at the truth.”

It will also be worthwhile to consider the nature of burden of proof on the Assessing Officer for proving a fact or circumstance in the income tax proceedings. The questions raised about the tax liability by the Assessing Officer are to be answered by the assessee by furnishing reasonable and plausible explanations. If assessee is not forthcoming with proper or complete facts or his statement or explanation is contradictory, drawing of suitable inferences and estimation of facts is inevitable. Courts generally will not interfere with such estimate of facts, unless the inferences or estimates are perverse or capricious.

There is no presumption in law that the Assessing Officer is supposed to discharge an impossible burden to assess the tax liability by direct evidence only and to establish the evasion beyond doubt as in criminal proceedings. This is why Hon’ble courts by way of a catena of binding judicial pronouncements, have held that tax liabilities can be assessed by Revenue Authorities on consideration of material available on record, surrounding circumstances, human conduct, preponderance of probabilities and nature of incriminating information/ evidence available on record.

Every person against whom penal action is sought to be proceeded with has as in criminal and civil law an inherent right to explain the facts and circumstances of the case "to prove his innocence" and consequencly the tax authorities are bound to consider the evidences in the circumstances which are placed before the tax authorities which are required to be exercised judiciously.

If a procedure is prescribed under the Income-tax Act, the same is required to be followed. It is only in the absence of a particular procedure which is required to be followed that the Income Tax Authorities have to fall back upon and rely upon other allied laws.

Evidence of some collateral fact from which the existence or non-existence of some fact in question may be inferred as a probable consequence is termed circumstantial evidence.

Conditions - Circumstantial Evidence

For conviction on circumstantial evidence, the following conditions must be fulfilled:

(1)  The circumstances from which the conclusion of the guilt is to be drawn should be fully established.

(2)  The facts so established should be considered not only with the hypothesis of the guilt of the accused,

       that is to say, they should not be explainable on any other hypothesis except that the accused is guilty.

(3)  The circumstances should be of conclusive nature and tendency.

(4)  They should exclude every possible hypothesis except the one to be proved.

(5)  There must be chain of evidence so complete as not to leave any reasonable ground for the conclusion consistent with the innocence of the accused and must show that in all human probability the act must have been done by the accused.

It will therefore include any circumstantial material also, which directly or indirectly, proves that the earlier evidence submitted was only a make belief and such new material has a bearing on the assessment of total income of any assessee, even if such income was earlier admitted as correct in absence of any such adverse facts available at the time of earlier assessment.

Assessing Officer should have ‘reason to believe’ that income chargeable to tax has escaped assessment

The words “reason to believe” suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the assessing officer may act on direct or circumstantial evidence but not on mere suspicion or rumor.

To be convincing (and admissible in court), circumstantial evidence must:

(i)          Be relevant, of course, that is, tend to prove or disprove a fact in issue;

(ii)        Be cumulative, that is, not limited to one, isolated piece of evidence, but of several inter-connected parts; for example, a husband not only comes home late, without an excuse, but has lipstick on his collar, liquor on his breath and a matchbox in his pocket from the Stagger Inn Lounge;

(iii)       Be tightly organized and clearly presented: many circumstantial cases fail not because the evidence is weak, but because it is presented in a disorganized and confusing manner which the fact finder cannot understand;

(iv)      And finally, to be persuasive (and admissible in court) circumstantial evidence must exclude all plausible innocent explanations.

Relevant Fact

One fact is said to be relevant to another when the one is connected with the other in any of the ways referred to in the provisions of this Act relating to the relevancy of facts. (Section 3) Where in a case direct evidence is not available to prove a fact in issue then it may be proved by any circumstantial evidence and in such a case every piece of circumstantial evidence would be an instance of a "relevant fact"

A circumstantial evidence whenever used has to be conclusive in nature

Perhaps, however, one of the most important legal provisions of fraud and evasion investigators is the authority to use circumstantial evidence to determine the proper tax due when books and records are absent. Circumstantial evidence enables the fraud investigator to develop presumptive assessments and includes the type and nature of the business activities of the taxpayer, analysis of businesses similarly situated, the movement of funds through the taxpayer’s accounts with a bank or other financial institution, the comparison of the taxpayer’s expenditures with the taxpayer’s income, and other information.

Bona fide human error should be demonstrated with circumstantial evidence

While dismissing appeal, it was held that in order to avoid penalty under section 271(1)(c) of the Income Tax Act, the assessee should prove the defense of bonade mistake/ errors with circumstantial evidence. Only arguments raised by the ld. counsel for the assessee is that, it was an inadvertent and bona fide mistake while filing the return. Question before us is, how such mistake was committed and how it could be termed as an inadvertent or bona fide mistake. In the case of Price Waterhouse Coopers (P) Ltd v. CIT, a provision for gratuity etc. was made for the regular and adhoc employees. In the audit report, it was pointed by the auditor that provision for adhoc employees was required to be written back. But somehow, while filing the return, accountant failed to add back that amount. An affidavit of the concerned person was filed and it was pointed out that more than thousands of employees were working in that concern. In that background, it was construed as bona fide human error i.e. failure to add back a particular provision. In the present case, no such circumstances have been pointed out by the assessee either before the Assessing Officer or before the ld. CIT(A). The only statement made is that it was a bona fide human error. This is a very general and sweeping statement. It should be demonstrated with circumstantial evidence as to how this error has happened; what is operating force in the mind of person who has prepared the return, and how he failed to comprehend a particular item. Even the affidavit of that person has not been filed. Therefore, we are of the view that this statement is just being made for giving an explanation. Revenue authorities have appreciated this aspect and rejected the contentions of the assessee. We do not find any merit in the contentions of the assessee, accordingly, appeal of the assessee is dismissed.  (Related Assessment Year : 2006-07) – [Swift Knit (P) Ltd. v. ITO Date of Judgement  : 31.08.2018 (ITAT Ahmedabad)

Where the reason to believe recorded does not refer to any material that came to the knowledge of the Assessing Officer from which the Assessing Officer could have formed a reasonable belief that the expenditure referred to had not crystallized during the relevant year. The recorded reasons to believe that income had escaped assessment were not based on any direct or circumstantial evidence and were in the realm of mere suspicion. In absence of adequate reasons the reassessment was set aside. – [SMCC Construction India Ltd. v. ACIT (2014) 220 Taxman 354 (Delhi)]

The prosecution has to satisfy certain conditions before a conviction based on circumstantial evidence can be sustained The circumstances from which the conclusion of guilt is to be drawn should be fully established and should also be consistent with only one hypothesis, i.e. the guilt of the accused. The circumstances should be conclusive and proved by the prosecution. There must be a chain of events so complete so as not to leave any substantial doubt in the mind of the Court. Irresistibly the evidence should lead to the conclusion inconsistent with the innocence of the accused and the only possibility that the accused has committed the crime. Furthermore, the rule which needs to be observed by the Court while dealing with the cases of circumstantial evidence is that the best evidence must be adduced which the nature of the case admits. – [Brajendra Singh v. State of Madhya Pradesh; AIR 2012 SC 1552]

In the case of Sudama Pandey and others v. State of Bihar relating to a case in which the trial court had sentenced five people to death for the attempted rape and murder of a 12-year-old child, the High Court had commuted the sentences, but the Supreme Court noted that it was unfortunate that the High Court did not also properly review the evidence. Acquitting the accused, the Supreme Court noted that both the trial court and the High Court had committed a serious error by appreciating circumstantial evidence, resulting in a miscarriage of justice. In an indictment of the lower judiciary, the Supreme Court remarked: “The learned Sessions Judge found the appellants guilty on fanciful reasons based purely on conjectures and surmises. It is all the more painful to note that the learned Sessions Judge, on the basis of the scanty, discrepant and fragile evidence, found the appellants guilty and had chosen to impose capital punishment on the appellants. – [Sudama Pandey v. State; AIR 2002 SC 293 : (2002) 1 SCC 679: 2002 SCC (Cri) 239]

“We may also mention that the expression "reason to believe" refers to the belief which prompts the Assessing Officer, to apply section 147, to a particular case; that it will depend on the facts of each case ; that the belief must be of an honest and reasonable person, based on reasonable grounds; that the Assessing Officer is required to act, not on mere suspicion, but on direct or circumstantial evidence ; that the expression "reason to believe" does not mean a subjective satisfaction on the part of the Assessing Officer.” – [IPCA Laboratories Ltd. v. DCIT (2001) 251 ITR 420 (Bom)

As per Section 106 of the Evidence Act, the Department is deemed to have discharged its burden if it adduces only so much evidence, circumstantial and direct, as is sufficient to raise a presumption in its favour as regards the existence of particular articles and things found at the time of search. That elements of close relationship and occasion relate to "realm of human probability" are in the nature of circumstantial evidence. The question of proving friendship is a matter of evidence coupled with human nature, for a person may develop fancy for a friend or a neighbour. In this connection reliance is placed on the decision of R. K Syal v. ACIT (2000) 66 TT] 656 (Chad).

Since the proceedings under the Act are civil in nature, even the circumstantial evidences based on preponderance of probability will constitute incriminating material enough to make an assessment of income and fasten the tax liability as held by in Sumati Dayal v. CIT (1995) 214 ITR 801 : 125 CTR 124 : 80 TAXMAN 89 (SC).

The concept of mens rea is peculiar and applicable strictly in criminal law but the same cannot be strictly imported under the Income- tax Act more particularly with reference to levy of penalty. The theory of onus is both on the revenue as well as on the assessee. The onus is not on the revenue either to prove the guilty mind or the sufficient cause on the part of the assessee. The onus is entirely on the assessee to prove his bonafides on the basis of facts and circumstances of the case. If the assessee can discharge such onus, then there can be no levy of penalty. – [Gujarat Travancore Agency v. CIT (1989) 177 ITR 455 (SC]

It was held that the word ‘evidence’ as used in sec. 143(3) covered circumstantial evidence also. The word ‘evidence’ as used in section 143(3) obviously could not be confined to direct evidence. The word ’evidence’ was comprehensive enough to cover the circumstantial evidence also. Under the tax jurisprudence, the word ‘evidence’ had much wider connotations. While the word ‘evidence’ might recall the oral and documentary evidence as may be admissible under the India Evidence Act the use of word ‘material’ in Section 143(3) showed that the Assessing Officer, not being a court could rely upon material, which might not strictly be evidence admissible under the Indian Evidence Act for the purpose of making an order of assessment. Court often took judicial notice of certain facts which need not be proved before them. The plain reading of section 142 and 143 clearly suggest that the Assessing Officer may also act on the material gathered by him. The word ‘material’ clearly shows that the Assessing Officer is not fettered by the technical rules of evidence and the like, and that he may act on material which may not strictly speaking be accepted evidence in court of law. (Related Assessment year : 1983-84) – [M/s Mont Blane Properties and Industries (P) Ltd. (ITA No.614 / Bom/87) (ITAT Bombay)]

In the case of Chuharmal v. CIT, the Hon’ble Supreme Court while holding so referred to and approved the observations made by the Hon’ble Bombay High Court in the case of J. S. Parker v. V.B. Palekar (1974) 94 ITR 616 : TaxPub(DT) 0197 (Bom) holding that what was meant by saying that the Evidence Act did not apply to proceedings under the Income Tax Act was that the rigour of the rules of evidence contained in the Evidence Act, was not applicable but that does not mean that when the taxing authorities were desirous in invoking the principles of the Evidence Act in proceedings before them, they were prevented from doing so. The Hon’ble Supreme Court further observed that salutary principle of common law jurisprudence embedded in the Evidence Act could be applied to the taxation proceedings. – [Chuharmal v. CIT (1988) 172 ITR 250 : TaxPub(DT) 1170 (SC)]

In case of J S Parker v. V.B. Palekar, it was held that"the tax liability under the Income tax Act is of civil nature. To fasten a tax payer with such a liability it is not necessary that the evidence should be in the nature of "beyond doubt" as is required to fix a criminal liability. Tax liability can be fastened on the basis of preponderance of probabilities". – [J S Parker v. V.B. Palekar  (1974) 94 ITR 616 (Bom)]

Assessing Officer can go beyond the parameters laid down in Civil, Criminal and Evidence Act and look into the surrounding circumstances and even issue summons and examine witnesses and other people who he suspects would have given the loans or entered into agreements in order to find out the reality of the situation as was laid down in CIT v. Durga Prasad More (1971) 82 ITR 540 (SC).

Totality of circumstances must be considered in circumstantial evidence

Like in criminal law, the Assessing Officer is required to take into consideration "circumstantial evidence" and he is also required to take into consideration "totality of the circumstances" before coming to a determinative question as to whether a particular item of income or expenditure is proved or not. This rule of evidence in circumstantial probability was considered in CIT v. Rameshwar Prasad Bagla (1968) 68 ITR 653 (All).

In Barium Chemicals Ltd. v. Company Law Board (1966) 36 Company Cases 639, it was observed, "If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion, therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute. – [Barium Chemicals Ltd. v. Company Law Board 1967 AIR 295, 1966 SCR 311 : (1966) 36 Company Cases 639 (SC)]