Theory of the Test of Human Probabilities and sorrounding circumstances and its applicability to the provisions of Income Tax Act 1961

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)]