The
purpose of this article is to provide a focus on various decisions and
judgments of Tribunals and Courts on the issue of Theory of the Test of Human
Probabilities and sorrounding circumstances and its applicability to the
provisions of Income Tax Act 1961.
Human Probability test is one of the
important test laid down the highest court of India in order to check
genuineness of the transactions entered into the books of account of the
assesses. The Human Probability Test were laid down for the first time in the
case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) and followed in the
case of Sumati Dayal v. CIT (1995)
214 ITR 801 : 80 Taxman 89 (SC). Further it was also applied thereafter
in numerous cases by the various courts.
Theory
of Human Probability as laid down in CIT v. Durga Prasad (1971) 82 ITR 540 (SC)
The
issue of shifting of onus in the cases of cash credit is a complex one and each
case has to be examined in it’s own facts and circumstances. Hence, in the
cases of ‘fake loan’ from ‘paper companies’ the theory of preponderance of
human probability as pronounced by the Hon. Apex Court in the cases of CIT v.
Durga Prasad More (1971) 82 ITR 540 and Sumati Dayal v. CIT (1995) 214 ITR 801
: 80 Taxman 89 (SC) is of utmost importance. In the cases where it has been
established that the source company is a mere ‘paper company’ solely engaged in
the activity of providing accommodation entries, the presumption on the basis
of human probability may be referred to by the assessing officers to fortify
their findings.
The
Hon’ble Supreme Court in CIT v. Durga Prasad More (1971) 82 ITR 540 , at pages
545-547 made a reference to the test of human probabilities in the following
fact situation : –
“...Now
we shall proceed to examine the validity of those grounds that appealed to the
learned judges. It is true that an apparent must be considered real until it is
shown that there are reasons to believe that the apparent is not the real. In a
case of the present kind a party who relies on a recital in a deed has to
establish the truth of those recitals, otherwise it will be very easy to make
self-serving statements in documents either executed or taken by a party and
rely on those recitals. If all that an assessee who wants to evade tax is to
have some recitals made in a document either executed by him or executed in his
favour then the door will be left wide-open to evade tax. A little probing was
sufficient in the present case to show that the apparent was not the real. The
taxing authorities were not required to put on blinkers while looking at the
documents produced before them. They were entitled to look into the surrounding
circumstances to find out the reality of the recitals made in those documents.
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. Herein the assessee was receiving some income. He says that it
is not his income but his wife’s income. His wife is supposed to have had two
lakhs of rupees neither deposited in banks nor advanced to others but safely
kept in her father’s safe. Assessee is unable to say from what source she
built-up that amount. Two lakhs before the year 1940 was undoubtedly a big sum.
It was said that the said amount was just left in the hands of the
father-in-law of the assessee. The Tribunal disbelieved the story, which is,
prima facie, a fantastic story. It is a story that does not accord with human
probabilities. It is strange that the High Court found fault with the Tribunal
for not swallowing that story. If that story is found to be unbelievable as the
Tribunal has found, and in our opinion rightly, then the position remains that
the consideration for the sale proceeded from the assessee and, therefore, it
must be assumed to be his money.
It
is surprising that the High Court has found fault with the Income-tax Officer
for not examining the wife and the father-in-law of the assessee for proving
the department’s case. All that we can say is that the High Court has ignored
the facts of life. It is unfortunate that the High Court has taken a
superficial view of the onus that lay on the department.
‘...Science
has not yet invented any instrument to test the reliability of the evidence
placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to
judge the evidence before them by applying the test of human probabilities.
Human minds may differ as to the reliability of a piece of evidence. But, in
that sphere, the decision of the final fact-finding authority is made
conclusive by law.” (p. 545)
In
the case of Sumati Dayal v. CIT, the Hon'ble Supreme Court has dealt with the
relevance of human conduct, preponderance of probabilities and surrounding
circumstance, burden of proof and its shifting on the Department in cases of
suspicious circumstances, by following observations:
“…..
It is, no doubt, true that in all cases in which a receipt is sought to be
taxed as income, the burden lies on the department to prove that it is within
the taxing provision and if a receipt is in the nature of income, the burden of
proving that it is not taxable because it falls within exemption provided by
the Act lies upon the assessee. But in view of section 68, where any sum is
found credited in the books of the assessee for any previous year, the same may
be charged to income-tax as the income of the assessee of that previous year if
the explanation offered by the assessee about the nature and source thereof is,
in the opinion of the Assessing Officer, not satisfactory. In such case there
is prima facie evidence against the assessee, viz., the receipt of money, and
if he fails to rebut the same, the said evidence being unrebutted, can be used
against him by holding that it is a receipt of an income nature. While
considering the explanation of the assessee, the department cannot, however,
act unreasonably.
………..
Having regard to the conduct of the appellant as disclosed in her sworn
statement as well as other material on the record, an inference could
reasonably be drawn that the winning tickets were purchased by the appellant
after the event. The majority opinion after considering surrounding
circumstances and applying the test of human probabilities had rightly
concluded that the appellant's claim about the amount being her winning from
races, was not genuine. It could not be said that the explanation offered by
the appellant in respect of the said amounts had been rejected unreasonably and
that the finding that the said amounts were income of the appellant from other
sources was not based on evidence.”
Revenue can look into the
surrounding facts and circumstances to determine genuineness of a transaction
The Supreme Court ruled in favour of
the Revenue and held that the Department has the powers to look into the
surrounding facts and circumstances to determine the correct narrative.
The matter should be looked considering the test of human probabilities.
In
this case, the Court deemed that holding a winning ticket from horse races is
not a satisfactory explanation given the fact that the assessee could not show
any expenditure related to buying of tickets or travel expenses to different
cities. Furthermore, the Supreme Court observed that one would not stop taking
up activities yielding high returns merely because the income from it has
become taxable which is what happened in the case of the assessee.
“There is no dispute that the amounts were received
by the appellant from various race clubs on the basis of winning tickets
presented by her. What is disputed is that they were really the winnings of the
appellant from the races. This raises the question whether the apparent can be
considered as real. As laid down by this Court, apparent must be considered
real until it is shown that there are reasons to believe that the apparent is
not the real and that the taxing authorities are entitled to look into the
surrounding circumstances to find out the reality and the matter has to be
considered by applying the test of human probabilities.” – [Sumati
Dayal v. CIT (1995) 214 ITR 801 : 125 CTR 124 : 80 Taxman 89 (SC)]
Surrounding
circumstances and test of applying human probabilities
“Though an apparent
must be considered real until it was shown that there were reasons to believe
that the apparent was not real in the case where a party relied on self serving
recitals in document, it was for that party to establish the truth of those
recitals. Taxing authorities were entitled to look into the surrounding
circumstances to find out the reality of the recitals. It is a well settled
principle of law as declared by the Hon'ble Supreme Court in the case of Sumati
Dayal v. CIT that the true nature of
transaction have to be ascertained in the light of surrounding circumstances.
It needs to be emphasized that standard of proof beyond reasonable doubt has no
applicability in determination of matters under taxing statutes.
Share premium – Bogus share capital
in form of accommodation entries – Directors were working as peons,
receptionists etc., who have admitted that they have signed the documents as
per direction of Mr. Tarun Goyal – Details were filed, however they have been
not produced before the Assessing Officer for examination – Deletion of
addition by the Tribunal is held to be not justified
Allowing the appeal of the revenue
the Court held that evidence was collected in the course of search proceedings
by the Investigation Wing it was found that companies were not carrying on any
genuine business activities. Directors of these companies were employees of Mr.
Tarun Goyal, who were working as peons, receptionists etc. Entries in the books
were bogus. Modus operandi in such cases is well known, money
is circulated by first depositing cash in the bank account of one such company,
and thereupon it is transferred/circulated within the group companies before
cheque is issued to the beneficiary. Directors in the course of search
proceedings have admitted that they have signed the documents as per direction
of Mr. Tarun Goyal. In response to notice under section 133(6) details were filed however the
respondent- assessee had failed to produce directors of the companies, though
they had filed confirmations, and therefore, were in touch with the respondent-
assessee. The respondent-assessee had also failed to produce the details and
particulars with regard to issue of shares, notices etc., to the shareholders
of AGM/EGM etc. Accordingly Court held that the transactions are clearly sham
and make- believe with excellent paper work to camouflage their bogus nature.
The reasoning is contrary to human probabilities. In the normal course of
conduct, no one will make investment of such huge amounts without being
concerned about the return and safety of such investment. The Tribunal’s order
is clearly superficial and adopts a perfunctory approach and ignores evidence
and material referred to in the assessment order. Appeal of the revenue was
allowed. (Related Assessment year : 2008-09) – [PCIT v. NDR Promoters (P) Ltd
(2019) 410 ITR 379 : 307 CTR 281 : 261 Taxman 270 : 175 DTR 30 (Del)]
KEY NOTE :
SLP of assessee is dismissed, NDR Promoters (P) Ltd. v. PCIT (2019) 418 ITR 10 :
266 Taxman 93 (St) (SC)
Long term capital gains from
equities – Penny stocks – Burden is on the revenue to show with evidence the
chain of events and live link of the assessee’s involvement in the scam
including that he paid cash and in return received exempt Long term capital gains
– Denial of exemption under section 10(38) is held to be not justified –
Addition cannot be made as unexplained income – Addition cannot be made on
estimated commission for alleged accommodation entries
The Assessing Officer treated the
transactions of sale of shares of listed companies as bogus and added the sale
proceeds as unexplained income under section 68 of the Act and also added
commission under section 69C for alleged accommodation entries. CIT (A)
confirmed the order of the Assessing Officer. On appeal allowing the appeal of
the assessee the Tribunal held that the fact that a scam has taken place in
some penny stocks does not mean that all transactions in penny stocks can be
regarded as bogus. In deciding whether the claim is genuine or not, the authorities
have to be guided by the legal evidence and not on general observations based
on statements, probabilities, human behaviour, modus operandi etc. The Assessing
Officer has to show with evidence the chain of events and live link of the
assessee’s involvement in the scam including that he paid cash and in return
received exempt Long term capital gains. Addition cannot be made as unexplained
income. Addition cannot be made on estimated commission for alleged
accommodation entries. (Key Note: Sanjay Bimalchand Jain v. PCIT (2018)
89 Taxman.com 196 (Bom) is distinguished) (Related Assessment year : 2012-13)
– [Vijayattan Balkrishan Mittal v. DCIT – Date of Judgement : 01.10.2019 (ITAT
Mumbai)
Share capital premium – The test of
human probabilities cannot be applied to business transactions – The Assessing Officer
cannot reach this conclusion without further investigation and bringing
material on record
It was held
that the Assessing Officer cannot treat the share premium as unexplained cash
credit only because the same is not commensurate with the income and financial
strength of the assessee. The Assessing Officer cannot reach this conclusion
without further investigation and bringing material on record. (Related Assessment
years : 2007-08 & 2008-09) – [Janani Infrastructure (P) Ltd. v. ACIT – Date
of Judgement ; 02.08.2019 (ITAT Bangalore)]
Bogus Capital Gains from Penny Stocks (282x
gain in 12 months): The meticulous paper work of routing the transaction
through banking channel is futile because the results are altogether beyond
human probabilities. Neither in the past nor in the subsequent years, assessee
has indulged into any such investment having huge windfall. Had the assessee
been so intelligent qua the intricacies of the share market, he would have
definitely undertaken such risk taking activities in the past or future by
making such investment in unknown stock. It is a sham transaction to convert
undisclosed income into disclosed by evading tax under the garb of LTCG in
connivance with entry providers. (Pooja
Ajmani & Udit Kalra 176 DTR 249 (Del) followed. (Related
Assessment year : 2014-15) –
[Sanat
Kumar v. ACIT – Date of Judgement : 14.06.2019
(ITAT Delhi)
Effect
of a transaction which is supported by documentary evidence cannot be brushed
aside on suspicion or probabilities without pointing out any defect therein.
(Related Assessment Year : 2014-15 – [Puja Gupta v. ITO – Date of Judgement : 02.04.2019]
Bogus Capital gains – Penny Stocks –
Though the Assessing Officer did not find any mistake in the documentation
furnished by the assessee, there is need for finding of fact on (i) the nature
of the shares transactions; (ii) make- believe nature of paper work; (iii)
Camouflage the bogus nature; and, (iv) the relevance of human probabilities
etc. – Addition is confirmed as cash credits
The assessee purchased 300 shares of
Pyramid Trading Finance Ltd. now known as Misha Finance & Trading Ltd. The
said shares were transferred to Tohee Trading Agencies (P) Ltd. As per SEBI’s
website the said company i.e. Misha Finance & Trading Ltd was one of the
delisted Companies. Purchase price was ₹ 0.37 and the sale price
was ₹ 45 per share increase of 120 times within 24 months. The
assessee claimed exemption under section 10 (38) of the Act which was
disallowed by the Assessing Officer and assessed as cash credits. On appeal,
CIT(A) also confirmed the addition. On appeal to the Tribunal dismissing the
appeal of the assessee the Tribunal held that though the Assessing Officer did
not find any mistake in the documentation furnished by the assessee, there is
need for finding of fact on (i) the nature of the shares transactions; (ii)
make-believe nature of paper work; (iii) Camouflage the bogus nature and, (iv)
the relevance of human probabilities etc. – Addition is confirmed as cash
credits. Followed PCIT v. NDR Promoters (P) Ltd. (2019) 410 ITR 379
(Delhi) (Related Assessment year : 2015-16) - [Shamim Imtiaz
Hingora v. ITO – Date of Judgement :
01.03.2019 (ITAT Pune)
Bogus Capital Gains From Penny Stocks: The
assessee completed paper-trail by producing contract notes for purchase and
sale of shares of PIL. Mere furnishing of contract notes etc does not inspire
any confidence in the light of facts. Test of human probability should be
applied and apparent should be ignored to unearth the harsh reality
The assessee
completed paper-trail by producing contract notes for purchase and sale of
shares of PIL. Mere furnishing of contract notes etc does not inspire any
confidence in the light of facts. Test of human probability should be applied
and apparent should be ignored to unearth the harsh reality. It was held at
para 15 to 17 :
15. It is further pertinent to note
that it was not only the assessee who booked short term capital gain on the
sale of shares of PIL to the above extent, but his family members were also not
left behind. They also indulged in the similar paper transactions by allegedly
purchasing and selling shares of PIL from the same brokers and showing huge
amounts of short term. capital gains, for which addition of Rs.18,71,906/ - has
been made in the hands of his son Sh. Bharat Rajkumar Aqaruial and
Rs.20,21,OOl/ - in the hands of his wife Ameeta Rajkumar Agarwal for the same
assessment year, the appeals of which are being disposed off through this batch
of cases.
16. In view of the factual and legal
position discussed above, it is crystal clear that PIL is a penny stock company
and the assessee obtained only accommodation entries in the garb of short term
gain from transfer of shares of PIL, for which an appropriate addition has
rightly been made and upheld by the authorities below. We, therefore,
countenance the impugned order on this score.
17. Before parting with this issue,
we want to record that the ld. AR has relied on certain decisions in which the
additions made on account of accommodation entries got deleted. In the
oppugnation, Id. DR has also relied on certain decisions, including those
referred to in the impugned order, in which the addition on account of
accommodation entries got confirmed. We are not separately referring to those
decisions as the factual position prevailing in such case varies with the facts
of the instant case as recorded above. Even a single slightest variation in the
factual matrix of two apparently similar cases changes the entire complexion of
the decision. As the factual panorama obtaining in the extant case is different
from those relied on by the rival parties, we are, therefore, desisting from
distinguishing such cases separately. These grounds are therefore dismissed. – (Sumati Dayal (1995) 214 ITR 801
(SC) & Durga Prasad More (1971) 82 ITR 540 (SC) applied). (Related
Assessment years : 2005-06 & 2006-07)
– [Rajkumar B. Agarwal v. DCIT – Date of
Judgement : 04.02.2019 (ITAT Pune)
Bogus long-term capital gains –
Penny stocks – Filed evidences for (a) purchase of shares, (b) payment by
account payee cheque, (c) balance sheet disclosing investments, (d) demat
statement (e) evidence of sale of shares through stock exchange, (e) bank
statement reflecting sale receipts, (f) brokers ledger, (g) Contract notes
etc., the gains cannot be treated as bogus on human probabilities, suspicion,
conjectures and surmises – Addition as cash credits is deleted
Allowing the appeal of the assessee
the Tribunal held that the assessee has filed all necessary evidences in
support of the transactions. Some of these evidences are (a) evidence of
purchase of shares, (b) evidence of payment for purchase of shares made by way
of account payee cheque, copy of bank statements, (c) copy of balance sheet
disclosing investments, (d) copy of demat statement reflecting purchase, (e)
copy of merger order passed by the High Court, (f) copy of allotment of shares
on merger, (g) evidence of sale of shares through the stock exchange, (h) copy
of demat statement showing the sale of shares, (i) copy of bank statement
reflecting sale receipts, (j) copy of brokers ledger, (k) copy of contract
notes etc. Accordingly the addition as cash credit is held to be not justified.
(Related Assessment year : 2014-15) – [Mahavir Jhanwar v. ITO – Date of Judgement :
01.02.2019 (ITAT Kolkata)]
Share premium – The fact that the
premium is abnormally high as per test of human probabilities is not sufficient
– The Assessing Officer has to lift the corporate veil & determine
whether any benefit is passed on to the shareholders/ directors. Directions
issued to Assessing Officer to establish whether assessee company was used as a
vehicle to pass on the benefit to shareholders/directors – Tribunal directed
the Assessing Officer to verify all the funds and cash flow management of the
company for both Assessment years 2009-10 & 2010-11. Assessing Officer
should not resort to rely on circumstantial evidence or on test of human
probabilities but on factual evidence of passing on benefit to the
shareholders/directors- Addition was deleted subject to verification
The appellant contended before the
Tribunal that, the representatives from investor companies were examined on
oath and have confirmed making the investment at premium. Complete details and
confirmation of transaction available and are not contradicted in any way that
shares were acquired at a premium as continued to be reflected in books of
accounts of Appellant Company. Quantity of share premium on shares of private
company are not regulated by law and is based on commercial negotiations. Share
premium money received is fully accounted and continues to remain in the
company to date fully compliant with section 78 of companies Act. Allegations
that the same could be towards services by promoters are totally baseless and
not supported by any material. Amount of share premium is permitted to be
negotiated between investor and company and there are no restrictions on the
quantum. Bharati Cement Corporation Limited as legal entity is distinct and
separate from promoters or shareholders, presumptions made in impugned order
are contrary to settled principles of law, unlawful, factually baseless and
invalid. As no amount of share premium is alleged or even shown to have been
allowed as pass through by the company there is no basis for suspicions and
wild allegations. Without prejudice, even if lifting of corporate veil is
permissible, the consequence would not lead to taxation of share premium in the
hands of Appellant Company. The Tribunal held that the fact that the premium is
abnormally high as per test of human probabilities is not sufficient to the Assessing
Officer to lift the corporate veil. Presumptions of some service/benefits being
allowed by Government of State of Andhra Pradesh to investor companies, even if
presumed to be true for argument sake cannot justify taxation of any amount in
the hands of Appellant company, as being a legal entity Appellant Company was
neither in business of providing such services or was actually involved in any
way. Details provided also establish that the entire sum and even subsequent
share premium amount received from PARFICM remains invested in Appellant’s
business as on date of this hearing. Assessing Officer brought impugned share
premium to tax under Section 28 (iv) and Section 68 but the learned CIT(A) has
confirmed that the same is taxable under Section 56. Department is not in
appeal against learned CIT(A) order. The subsequent amendment by way of Section
56 (2)(viib) effective 01.04.2013 i.e., Assessment year 2013-14 cannot be
applied for impugned transactions completed during Assessment years 2009-10 and
2010-11. On record confirm that Section 68 and Section 28 (iv) have no
application at all. Tribunal directed the Assessing Officer to verify all the
funds and cash flow management of the company for both Assessment years 2009-10
& 2010-11. Assessing Officer should not resort to rely on circumstantial
evidence or on test of human probabilities but on factual evidence of passing
on benefit to the shareholders/directors. Hence, grounds of appeal raised by
the assessee are allowed for statistical purposes. (Related Assessment years : 2009-10,
2010-11) – [Bharathi Cement Corporation (P) Ltd. v. ACIT – Date of Judgement :
10.08.2018 (ITAT Hyderabad)]
ITAT
had disallowed the claim of exempt LTCG and had confirmed the addition made on
the ground that the assessee could not prove the purchase of shares made in
cash. Neither there was any further investment through that broker and found
the whole transaction is beyond human probability and business logic
(i)
The
assesse purchase 800 shares of STL at a premium and total price paid was Rs
2,72,000. The company was then merged with a new company and assesse got 34000
shares which were sold for Rs 83,57,578/-.
(ii)
The
purchases were made in cash through four separate cash payments to broker from
Kolkata by assesse from Chandigarh. The purchases were off market transactions.
(iii)
The
assesse was not in India during the period when shares were purchasesd. He had
no knowledge of shares. The source of cash was claimed as tution money which
was not proved.
(iv)
The
broker did give confirmation to notice under section 133(6). The purchases were
however were found to be bogus and the fact that the broker form kolkata would
send someone to collect cash in chandigarh was found to be unbelievable.
(v) The court based on the human
probability and the fact that the company had no actual financial substance
confirmed the addition. – [Abhimanyu Soin
v. ACIT – Date of Judgement : 18.04.2018 - 2018-TIOL-733-ITAT Chandigarh)]
Despite
documentary evidence and broker’s confirmation, genuineness of penny stock
transactions has to be determined on the basis of ‘preponderance of human
probabilities’. If assessee is unable to explain ‘intriguing’ facts and
circumstances, genuineness of transaction cannot be accepted . Addition was
confirmed as cash credits
(i)
The issue before us is whether the documents furnished by the assessee,
including averments made by him, or even his broker, satisfy the test of
preponderance of human probabilities. In our view if the assessee has
reasonably explained the ‘intriguing’ facts and circumstances as pointed by the
Assessing Officer, and on the strength of which the genuineness is assailed by
him, and which further agree with that observed in the case of a penny stock
company, no case for treating the transaction as not genuine shall arise. The
onus under section 68 though is on the assessee, so that his explanation would,
however, require being substantiated or proved.
(ii)
Firstly, documentary evidences, in the face of unusual events, as prevailing in
the instant case, and without any corroborative or circumstantial evidence/s,
cannot be regarded as conclusive. Two, the preponderance of probabilities only
denotes the simultaneous existence of several ‘facts’, each probable in itself,
albeit low, so as to cast a serious doubt on the truth of the reported ‘facts’,
which together make up for a bizarre statement, leading to the inference of
collusiveness or a device set up to conceal the truth, i.e., in the absence of
credible and independent evidences. For a scrip to trade at nearly 50 times
its’ face value, only a few months after its issue, only implies, if not price
manipulation, trail blazing performance and/or great business prospects (with
of course proven management record, so as to be able to translate that into
reality), while even as much as the company’s business or industry or future
program (all of which would be in public domain), is conspicuous by its
absence, i.e., even years after the transaction/s. The company is, by all
counts, a paper company, and its share transactions, managed. We, accordingly,
reversing the findings of the first appellate authority, confirm the assessment
of the impugned sum u/s.68 of the Act. (Related Assessment year : 2006-07) –
[ITO v. Shamim M. Bharwani (2015) 170 TTJ 238 : 118 DTR 268 (ITAT Mumbai)]
Assessing Officer is to apply the test of human probabilities
for deciding genuineness or otherwise of a particular transaction. Merely
leading of evidence that transaction was genuine, cannot be conclusive. Genuineness of transaction can be rejected,
if the evidence given by the assessee is not trustworthy
The test of human
probability often comes to the help of the revenue to track unaccounted income.
This could be a great help in exposing the ‘fake loans’ from ‘paper companies’
as well. In one of its special kinds, the test of human probability made an
assessee pay huge amount of tax in Som Nath Maini v. CIT [2008] 306 ITR 414
(P&H). In this case, the assessee in his return declared loss from sale of
gold jewellery and also declared a short-term capital gain from sale of shares
so that the two almost match each other. This simple tax planning became ineffective
after the Assessing Officer disbelieved the astronomical share price increase
applying the test of human probability. The Assessing Officer observed that
short-term capital gains were not genuine in as much as the assessee had
purchased 45000 shares of Ankur International Ltd. at varying rates from Rs.
2.06 to Rs. 3.1 per share and sold them within a short span of six-seven months
at the rate varying from Rs. 47.75 paisa to Rs. 55. Even though the two respective
transactions for purchase and sale of shares were routed through two different
brokers, yet the Assessing Officer did not believe the astronomical rise in
share price of a company from Rs. 3 to Rs. 55 in a short-term. The assessee
lost its case before the Tribunal. Confirming the order of the Tribunal, the
Punjab and Haryana High Court held that the burden of proving that income is
subject to tax is on the revenue but, on the facts, to show that the
transaction is genuine, burden is primarily on the assessee. As per the Court,
the Assessing Officer is to apply the test of human probabilities for deciding
genuineness or otherwise of a particular transaction. Mere leading of the
evidence that the transaction was genuine, cannot be conclusive. Any such
evidence is required to be assessed by the Assessing Officer in a reasonable
way. Genuineness of the transaction can be rejected in case the assessee leads
evidence which is not trustworthy, and the department does not lead any
evidence on such an issue. (Related Assessment year : 1998-99) - [Som Nath Maini v CIT (2008) 306 ITR 414
(P&H)]
Section 10(38) - Bogus Capital Gains from
Penny Stocks: Though the Assessing Officer did not find any mistake in the
documentation furnished by the assessee, there is need for finding of fact on
(i) the nature of the shares transactions; (ii) make-believe nature of paper
work; (iii) Camouflage the bogus nature; and, (iv) the relevance of human
probabilities etc (NDR Promoters 410 ITR 379 (Del) referred). (Related Assessment year : 2015-16) – [Shamim Imtiaz Hingora v. ITO
- Date of Judgement : 01.03.2019 (ITAT Pune)]
Sale
of shares – Despite documentary evidence and broker’s confirmation, genuineness
of penny stock transactions has to be determined on the basis of ‘preponderance
of human probabilities’. If assessee is unable to explain ‘intriguing’ facts
and circumstances, genuineness of transaction cannot be accepted – Addition was
confirmed as cash credits
Assessing
Officer has made the addition as cash credits in resect of sale of shares
treating the same as non-genuine. On appeal considering the various documents
produced by the assessee deleted the addition. On appeal by revenue, allowing
the appeal the Tribunal held that:
(i)
The issue before us is whether the documents furnished by the assessee,
including averments made by him, or even his broker, satisfy the test of
preponderance of human probabilities. In our view if the assessee has
reasonably explained the ‘intriguing’ facts and circumstances as pointed by the
Assessing Officer, and on the strength of which the genuineness is assailed by
him, and which further agree with that observed in the case of a penny stock
company, no case for treating the transaction as not genuine shall arise. The
onus u/s. 68 though is on the assessee, so that his explanation would, however,
require being substantiated or proved.
(ii)
Firstly, documentary evidences, in the face of unusual events, as prevailing in
the instant case, and without any corroborative or circumstantial evidence/s,
cannot be regarded as conclusive. Two, the preponderance of probabilities only
denotes the simultaneous existence of several ‘facts’, each probable in itself,
albeit low, so as to cast a serious doubt on the truth of the reported ‘facts’,
which together make up for a bizarre statement, leading to the inference of
collusiveness or a device set up to conceal the truth, i.e., in the absence of
credible and independent evidences. For a scrip to trade at nearly 50 times its
face value, only a few months after its issue, only implies, if not price
manipulation, trail blazing performance and/or great business prospects (with
of course proven management record, so as to be able to translate that into
reality), while even as much as the company’s business or industry or future
programme (all of which would be in public domain), is conspicuous by its
absence, i.e., even years after the transaction/s. The company is, by all
counts, a paper company, and its share transactions, managed. We, accordingly,
reversing the findings of the First Appellate Authority, confirm the assessment
of the impugned sum under section 68 of the Act. We decide accordingly. (Related
Assessment year : 2006-07) – [ITO v. Shamim M. Bharwani – Date of
Judgement (2016) 69 taxmann.com 65 (ITAT Mumbai)]
Assessing
Officer can assess on consideration of material available on record,
surrounding circumstances, human conduct, preponderance of probabilities and
nature of incriminating information / evidence available on record
The
ITAT observed that “We have already seen that the tax
authorities have applied the test of human probabilities explained by the
Hon’ble Supreme Court in the cases of Sumati Dayal and Durga Prasad More to
disbelieve the claim of Long term Capital gains put forth by the assessee. We
notice that the test of human probabilities was not applied by the co-ordinate
benches of Tribunal in the case of Pune
bench of Tribunal in the case of Shri Avinash Kantilal Jain in ITA No.980/PN/10
and ITA No.1049/PN/10 dated 31.10.2012, wherein the long term capital gains
earned by the assessee therein from purchase and sale of Prime Capital Markets
Ltd was held to be genuine. and decision dated 04.05.2012 rendered by ITAT Mumbai.
in the case of Mr. Shyam R Pawar in ITA No.5585/Mum/2011, 5620, 5621 &
5622/Mum/2011 wherein the Long term Capital gains realized by the assessee
therein on sale of shares of Prime Capital Markets Ltd was accepted by the
Tribunal. Hence, in our view, the assessee cannot take support from
the above said decisions. We further notice that the ld CIT(A) has placed
reliance on the decision dated 04.01.2011 rendered by ITAT Delhi in the case of
Haresh Win Chaddha v. DDIT, wherein the Tribunal has expressed the view that
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.
Further it was held that the Assessing Officer can assess on consideration of
material available on record, surrounding circumstances, human conduct,
preponderance of probabilities and nature of incriminating information /
evidence available on record.
In the case of CIT v. Smt. Jamnadevi Agrawal
(2010) 328 ITR 656, where the Hon’ble Bombay High Court has
upheld the order of Tribunal on the reasoning that no fault can be found with
the findings recorded by the Tribunal. A perusal of the above said order would
show that the revenue in the above said case had contended that the assessees
in the group have purchased and sold shares of similar companies through the
same broker. Further the purchase prices and sale prices were supported by
producing the evidences to show that the said transactions were undertaken at
the rates prevailing on the respective dates. Under these set of facts, the
High Court held that the findings given by the Tribunal cannot be found fault
with and further held that the decision rendered by Hon’ble Supreme Court in
the case of Sumati
Dayal (1995) 214 ITR 801 was not applicable. In the case of CIT v. Shri Mukesh Ratilal
Marolia in Income Tax Appeal No.456 of 2007 dated 07.09.2011,
the Hon’ble Bombay high Court has observed that the assessee has furnished
copies of Share certificates to show that the shares were in fact transferred
to the name of the assessee before it. Further there was no allegation that the
prices of shares purchased by the assessee in the case before High Court were
manipulated.
However, in the instant case, the
assessee could not produce the copies of share certificates and copies of share
transfer forms. The transaction of purchase of shares could not be cross
verified. The shares of M/s Prime Capital Markets Ltd was declared as “Penny
Stock” by SEBI and the broker Sanju Kabra, through whom the shares were sold by
the assessee was indicted for manipulating the prices of penny stock shares.
Hence, in our view, the tax authorities have rightly applied the test of human
probabilities to examine the claim of purchase and sale of shares made by the assessee.” (Related Assessment year :
2006-07) - [Usha Chandresh Shah, v. ITO - Date of Judgement : 26.09.2014) (ITAT
Mumbai)]
Despite lack of direct evidence, tax evasion can be assessed
In the case of Hersh
Win Chadha v. DCIT, the ITAT Delhi has analysed the nature of income-tax
proceedings and powers of Assessing Officer and held that the dispute concerned
the determination of the income-tax liability of the assessee rather than
fixing any criminal liability or accountability of the assessee for any other
law or obligation. The admissibility of documents, evidence or material differs
greatly in income-tax proceedings and criminal proceedings respectively.
In
criminal proceedings, the charge is to be proved by the State against the
accused, establishing it beyond doubt, whereas as per the settled proposition
of law, the income-tax liability is ascertained on the basis of the material
available on record, the surrounding circumstances, human conduct and
preponderance of probabilities.
If
the Assessing Officer, during the course of proceedings comes across some
material indicating any accrual or receipt of income in the hands of the
assessee, he is empowered to investigate the matter and ask relevant questions.
The Assessing Officer’s burden is initial in nature, the assessee, thereafter,
has to give a proper explanation, which means, it must be true and disclosing
proper facts, more particularly when they are in the exclusive knowledge of the
assessee. The assessee has no option to remain selective, elusive, evasive or
restrained in disclosure. After such explanation, statement or other disclosure
of the assessee, the Assessing Officer will ascertain the correctness of the
assessee’s submissions on the basis of material available on record, the
surrounding circumstances, the conduct of the assessee, the preponderance of
probabilities and the nature of incriminating information/ evidence available
with him.
The assessee, an agent of Bofors,
was alleged to have received, through his alleged front company Svenska,
Panama, commission of Rs. 52.60 crores for securing a defense deal for Bofors
from the Government of India. The inference that the
commission was paid was drawn on the basis of a report of the Swedish National
Audit Bureau, certain correspondence and other documents that suggested that
the assessee, in his capacity as a long-standing representative of Bofors was
the beneficiary of the income. No direct evidence to link the
assessee with the alleged commission was found. The Assessing Officer
assessed the said sum of Rs. 52.60 crores. For the subsequent years, the Assessing Officer
assessed notional interest at 5% p.a. on the said amount. The CIT (A) confirmed
the addition. The assessee appealed to the Tribunal on the ground that there
was no evidence to show that he had earned the alleged commission and the
assessment was based on conjecture. HELD confirming the addition of Rs. 52.60
crores while deleting the addition of notional interest:
(i) Unlike criminal proceedings
where the charge has to be proved beyond doubt, income-tax proceedings are
quasi-judicial. Tax liability in cases of suspicious
transactions has to be assessed on the basis of the material available on
record, surrounding circumstances, human conduct and preponderance of
probabilities;
(ii) Rules of
evidence do not govern income tax proceedings and the Assessing Officer is not
fettered or bound by technical rules contained in the Indian
Evidence Act and is entitled to act on material which may not be accepted as
evidence in a court of law;
(iii) In clandestine transactions, it is impossible to have direct
evidence or demonstrative proof of every move and when the assessee is not
forthcoming with proper facts and chooses to be elusive and evasive, the Assessing
Officer has no choice but to take recourse to estimate. The only
caveat is that it should be reasonable and based on material available on
record. It should not be perverse or based merely on conjectures.
(iv) The Swedish Govt stated that
commission was paid to the Indian agent of Bofors (though the assessee was not
named). If the statement of a sovereign Govt is not acceptable as reliable
evidence in Indian tax proceedings, no case of cross-border tax evasion can
ever be detected or proved. No burden can be cast on the Assessing Officer
in impossible terms. Mere non-mentioning of names of recipients cannot be capitalized
by Bofors or assessee to derail the tax liability;
(v) Though SNAB did not disclose the
names of the beneficiaries due to some strategic consideration, the import of
disclosure cannot be ignored or underestimated. It is the
duty of the Revenue Authorities to be mindful of clues and coincidences and
bring them to logical conclusions, otherwise clandestine tax evasion through
shady economic deals, will go undetected, as appears to be the order of the
day. India is neither a tax haven, nor a banana republic;
(vi) The Income Tax Department was
carrying out investigations in difficult circumstances ascribable to the
sensitive nature of inquiries, their ramification on national politics and
public perception. It was very difficult to get
information and documents and to examine concerned links due to the
premeditated surreptitious cover up of transactions and smokescreen corporate
jugglery;
(vii) 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. He can assessee on consideration of material available
on record, surrounding circumstances, human conduct, preponderance of
probabilities and nature of incriminating information/ evidence available on
record;
(viii) Though the original documents were not given to the assessee
(despite demand), no inference can be raised that the contents are fabricated
or incorrect because the evidence was obtained by lawful means. Questioning
their contents or veracity in income tax proceedings will amount to
disbelieving the whole system. The assessee has not claimed that the
documents are false or fabricated;
(ix) As regards the burden of proof,
if the Assessing
Officer comes across material indicating accrual or receipt of
income in the hands of the assessee, he is empowered to investigate the matter
and ask relevant questions. The Assessing
Officer’s burden is initial in nature. Thereafter, the assessee has to give a proper explanation and disclose facts
which are in his exclusive knowledge. The assessee has no option to
remain selective, elusive, evasive or restrained in disclosure.
After such explanation, the Assessing
Officer has to ascertain the correctness of the assessee’s
submissions on the basis of material available on record, the surrounding
circumstances, the conduct of the assessee, the preponderance of probabilities
and the nature of incriminating information/ evidence available with him.
(x) Surprise expressed on why the
department has taken no proceedings against the other parties including Bofors,
the alleged payer, for failure to deduct TDS on payments to the assessee. Pointed out that inaction to take action against the others
“may lead to a non-existent undesirable and detrimental notion that India is
a soft state and one can meddle with its tax laws with impunity”.
We are conscious of the fact that the Income Tax Department was carrying out investigations in difficult
circumstances ascribable to the sensitive nature of enquiries, their ramification on national politics and public
perception. It was very difficult to get information and documents and to examine concerned links due to the
premeditated surreptitious cover up of transactions and smokescreen corporate jugglery. 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. In such clandestine operations and transactions, it is impossible to have direct evidence or
demonstrative proof of every move. The income tax liability is to be assessed on the basis of the above
parameters and when the witness i.e. the assessee is not forthcoming with proper facts and chooses to be
elusive and evasive, the Assessing Officer has no choice but to take recourse to estimate. - [Hersh Win Chadha
(Legal heir of Late Sh. W. N. Chadha) v. DCIT (International Taxation)(2011)135 TTJ 513 : 43 SOT 544 :
9 taxmann.com 1 (ITAT Delhi)]
Section
68: Amount received through Gift
- For a gift to be genuine, surrounding
circumstances, human probabilities and reality of human life are to be
considered for determining genuineness of the gifts
Where assessee
explained source of funds as cash gift from his mother, which assessee stated
his mother accumulated from agricultural savings- was Held rightly rejected by
Assessing Officer; CIT-A & ITAT on the Ground of human probabilities/surrounding
Circumstances (that is Keeping cash in remote village – is against human
probability and before rejecting mother’s confirmation, it is not sine qua non
that she must be examined and Assessing Officer on basis of human conduct
reject assessee’s version) – [T Krishnamurthy
- ITA 262/2008 (ITAT Bangalore)]
In
case of Smt. Vasantibai Shah, the court observed that The Income tax Officer is
entitled to take into consideration the totality of the facts and circumstances
of the case and to draw his own inference on the basis thereof. Circumstantial
evidence in such cases is not impermissible. – [Smt. Vasantibai Shah v. CIT (1995) 213 ITR 805 : 81 Taxman 348 (Bom)]
Onus to prove
that the apparent is not real is on the party who claims it to be so
In CIT
v.Daulat Ram Rawat Mull, the Supreme Court held that onus of
proving what was apparent is not real is on the party who claims it to be so.
There should be some direct nexus between the conclusions of fact arrived at by
the authorities concerned and the primary facts upon which the conclusion is
based. Use of extraneous or irrelevant material in arriving at the conclusion
would vitiate the conclusion of fact, because it is difficult to predicate to
what extent, the extraneous and irrelevant material has influenced the
authority in arriving at the conclusion of fact. – [CIT v. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC)]
In CIT v. Deviprasad Khandelwal & Co. Ltd., the Bombay
High Court took the view that in every case where the Income Tax Officer
rejects the explanation submitted by an assessee in respect of unexplained cash
credits in his books of accounts, a finding against the assessee must be made
that the cash credit entry represents the assessee's income from undisclosed
sources. After the Tax Authorities reject the explanation submitted by the
assessee the further question that must always arise for decision would be,
"whether it could justly, in the facts and circumstances of the case, be
held that the unexplained cash credit was the income of the assessee." The
Tribunal in that case on the basis of evidence and surrounding circumstances
even after disbelieving the explanation of the assessee still held that it
cannot be held to be the income of the assessee. The said finding was held to
be a finding of fact not to be interfered with by the High Court. (Related
Assessment Year : 1946-47) – [CIT v.
Deviprasad Khandelwal & Co. Ltd. (1971) 81 ITR 460 (Bom)]
It was held that in considering probabilities properly
arising from the facts alleged or proved, the Tribunal did not indulge in
conjectures, surmises or suspicions. (Related Assessment year : 1946-47) – [Homi Jehangir Gheesta v. CIT (1961) 41
ITR 135 (SC)]
Assessment
could not be based on background of suspicion and in absence of any evidence to
support the same
The Hon’ble Supreme Court in the
case of Lalchand Bhagat Ambica Ram v. CIT (1959) 37 ITR 288 (SC) held that
assessment could not be based on background of suspicion and in absence of any
evidence to support the same. The Hon’ble Court held:
“Adverting to the various
probabilities which weighed with the ITO might be observed that the notoriety
for smuggling food grains and other commodities to Bengal by country boats
acquired by ‘S’ and the notoriety achieved by ‘D’ as a great receiving centre
for such commodities were merely a background of suspicion and the appellant
could not be tarred with the same brush as every arhatdar and grain merchant
who might have been indulging in smuggling operations, without an iota of
evidence in that behalf. The mere possibility of the appellant earning
considerable amounts in the year under consideration was a pure conjecture on
the part of the ITO and the fact that the appellant indulged
in speculation (in Kalai account) could not legitimately lead to the
inference that the profit in a single transaction or in a chain of transactions
could exceed the amounts, involved in the high denomination notes,—this
also was a pure conjecture or surmise on the part of the ITO. As regards the
disclosed volume of business in the year under consideration in the head office
and in branches the ITO indulged in speculation when he talked of the
possibility of the appellant earning a considerable sum as against which it
showed a net loss of about Rs. 45,000. The ITO indicated the probable source or
sources from which the appellant could have earned a large amount in the sum of
Rs. 2,91,000 but the conclusion which he arrived at in regard to the appellant
having earned this large amount during the year and which according to him
represented the secreted profits of the appellant in its business was the
result of pure conjectures and surmises on his part and had no foundation in
fact and was not proved against the appellant on the record of the
proceedings. If the conclusion of the ITO was thus either perverse or
vitiated by suspicions, conjectures or surmises, the finding of the Tribunal
was equally perverse or vitiated if the Tribunal took count of all these
probabilities and without any rhyme or reason and merely by a rule of thumb, as
it were, came to the conclusion that the possession of 150 high denomination
notes of Rs. 1,000 each was satisfactorily explained by the appellant but not
that of the balance of 141 high denomination notes of Rs. 1,000 each.” - [Lalchand Bhagat Ambica Ram v. CIT
(1959) 37 ITR 288 (SC)]
Suspicion
however strong, cannot take the place of evidence
There was no material on which the Income-tax
Officer could come to the conclusion that the firm was not genuine and further
observed that the conclusion is the result of suspicion which cannot take the
place of proof in these matters. In the
present case too, the Assessing Officer had rejected the evidence produced and
based his conclusion only on surmises; there was hardly any material for him to
conclude that the amount in question was not a gift. – [Umacharan Shaw & Bros. v. CIT (1959) 37
ITR 271 (SC)]
No addition can
be made on the basis of surmises, suspicion and conjectures.
We are aware that the Income-tax Appellate Tribunal is a fact
finding Tribunal and if it arrives at its own conclusions of fact after due
consideration of the evidence before it this court will not interfere. It is
necessary, however, that every fact for and against the assessee must have been
considered with due care and the Tribunal must have given its finding in a
manner which would clearly indicate what were the questions which arose for
determination, what was the evidence pro and contra in regard to each one of
them and what were was the reached on the evidence on record before it. The
conclusions reached by the Tribunal should not be coloured by any irrelevant
considerations or matters of prejudice and if there are any circumstances which
required to be explained by the assessee, the assessee should be given an
opportunity of doing so. On no account whatever should the Tribunal base its
findings on suspicions, conjectures or surmises nor should it act on no
evidence at all or on improper rejection of material and relevant evidence or
partly on evidence and partly on suspicions, conjectures or surmises and if it
does anything of the sort, its findings, even though on questions of fact, will
be liable to be set aside by this court. (Related Assessment year : 1948-49)
– [Omar Salay Mohamed Sait v. CIT (1959) 37 ITR 151 (SC)]
