It is a very well-known fact that High court only entertains question of law and Income tax Appellate Tribunal (ITAT) is the last fact-finding authority. Thus, finding of fact as given by the ITAT would be basis for deciding the matter by High Court or Supreme Court. If, however findings given by the ITAT is disputed by either of the parties then in such case, that can even become question of law as has been held by Apex court in case of CIT v/s SP JAIN (87 ITR 370), otherwise matter is to be decided by the higher court only by interpreting the law on undisputed facts of the case.
It is very important for us to first understand what is a Fact, FACT has been defined by Indian Evidence Act, 1872, as Facts means and includes –
a) Any thing, state of things or relation of things capable of being perceived by senses,
b) Any mental condition of which any person is conscious.
The facts in relation to any dispute is nothing but the papers/documents relied upon by either of the parties to dispute. It is these papers/documents which are relied upon to prove one’s case or justify claims made by the party. When a question is raised by the department as to say a particular expense to be not genuine, then it is assessee who has to submit details like details as to what was the nature of expense, to whom the payments have been made, details of payments made, proof that goods/services have been received, confirmation of the party etc. by submission of these documents assessee tries to justifies its claim and all the papers/documents submitted before AO becomes the documents in support of facts.
The question also arises as to which party is duty bound to produce evidence, this is answered by provisions of section 101 to 110 of Indian Evidence Act, 1872 and relevant provisions of the same can be summarized as under:
a) When right or liability depends on a particular fact, then the person who wants that right or wants it to be others liability must prove, that fact exist. (Sec 101)
b) Onus is on person who would fail, if no party submits any evidence. (Sec 102)
c) Onus is on person who wants court to believe in its existence, unless law shifts the liability on another person to prove it. (Sec 103)
d) Onus is on person who claims that his case falls under exception clause. (Sec 105)
e) Onus is on the person who claims that, the things found in his possession are not owned by him. (Sec 110)
Applying the above provisions, to the above example the primary liability is of the assessee to justify the claim of expense made by him. If, all the details in relation to expense made are submitted then in such case, it can be said that assessee has discharged his primary liability and now onus shifts on the assessing officer to prove that details submitted or explanation given by the assessee is not correct. Assessing Officer may issue Notice u/s 133(6) or summons u/s 131 to the party in whose name expense has been booked and in case if party does not accept such transaction with assessee or accepts it in part or fails to respond to such notices, AO can once again shift the burden on assessee to prove the expense. The issue of onus in Income Tax proceedings has been wonderfully explained in case of A-One Housing Complex Ltd. Vs ITO (2008) (110 ITD 361) wherein it has illustrated different scenarios by way of examples to show cause the quantum of burden to be discharged by the assessee in different cases which is not exhaustive as claimed by the Hon’ble Tribunal. Thus, burden of proof and the quantum of burden to be discharged by the assessee
cannot be given a straight jacket formula but has to be ascertained based on facts and circumstances of each case.
Now, once the evidence is submitted then, when it can be said to be proved, we may once again take assistance of Section 3 , of Indian Evidence Act, which states that a fact is said to be proved when, after considering the matters before it, the court either believes it to exist or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists.
Another relevant issue, is that if a question of law which has already been decided by the court, then the same is binding on all the lower courts and they cannot differ from the same, provided facts of the case are same, it is also known as doctrine of precedent or stare decisis. So, as we all know that as per Article 141 of the Constitution of India states that any matter which is decided by the Supreme Court is binding on all the authorities below it including High Courts, Tribunals, Commissioner (Appeals) and Assessing officer except supreme court itself which may take different stand if earlier decision in not correct.
After the above discussion on doctrine of precedent, it is relevant for all of us to be reminded of two judgments of the Apex court which is heart of every assessment order, at some places it is rightly quoted, whereas in other cases it is quoted for placing reliance on judgment of Supreme Court.
Yes, you all guessed it right, it is CIT v/s Durga Prasad More (82 ITR 540) and CIT v/s Sumati Dayal (80 TAXMAN 89). Since, the issue that we are dealing with today is such that we shall go a bit deeper into these cases instead of its summarized form, which we all are so used to when it comes to these two cases.
Lets first look at CIT v/s Durga Prasad More rendered in the year 1971, wherein
CIT (A) and ITAT: Against Assessee, HC: Favour of Assessee, SC: Against the Assessee.
Brief Facts:
A particular property was purchased by assessee and its income was offered to tax in assesses hands. After say 15-18 years, assessee claimed that such income is not taxable in hands of assessee as property was purchased on behalf of trust created by wife and relied on conveyance deed and trust deed. When asked of the source of purchasing property it was stated that wife had stridhan and Rs. 2 Lacs was there with wife of assessee in cash which was kept with her father-in-law.
Tribunal:
Tribunal did not believe assessee that property in question was that of trust as, Income was always offered in hands of assessee for 15-18 years. Existence of trust was always in question and there was no conclusive proof to prove that consideration flowed from trust or her wife.
High Court:
High court while deciding the matter, stated that department has failed to prove that concealed income belongs to assessee, department did not discharge the onus that income belonged to assessee, apart from that high court further stated that there is trust deed and conveyance deed and it must be taken as real unless contrary is proved. The fact that for years assessee was offering it as his income is not relevant.
Supreme Court:
It held that it is true that apparent must be real, but party who relies on a particular document has to prove the correctness of it. Apart from that how it can be believed that someone had two lacs, neither deposited in bank nor advanced to anybody, also source of two lacs was also not substantiated. So, when wife does not have source that is explainable, consideration flowed from assessee and income has to be assessed in hands of assessee. It is nothing but a story which does not accord with human probabilities. Considering the facts, it was essential to look into surrounding circumstances to find out the reality.
Second judgment was rendered in case of Sumati Dayal v/s CIT in the year 1995, wherein
Settlement Commission: Against Assessee, SC: Against the Assessee.
Brief Facts:
Assessee had shown that it had won around 16 jackpots from the race horses and at that point in time it was not taxable. Assessee tried to justify that these were winnings based on certificates issued by the clubs to the effect that assessee had won jackpots. It continued for 2 years after which it stopped as from that point law was amended making it taxable.
Settlement Commission (In Ratio of 2 :1, wherein there was dissent by Chairman)
The majority recorded the findings that, there was no expertise of assessee in horse races, there were no withdrawals reflected in books showing purchase of tickets, also even a person visiting regularly wins occasionally, however assessee here has claimed to won for large number of times and if she was winning why it stopped post amendment.
Chairman however dissented with the majority view by stating that, assessee has produced certificates which goes to show that it was winnings, apart from that as far as expertise is concerned there is no requirement at all, he further stated that it is duty of department to prove that assessee had purchased winning tickets after the event and the claim is made by the department.
Supreme Court
Supreme Court while deciding the matter rejected the observations made by Chairman in his dissenting opinion, it stated that considering the facts and circumstances matter should be decided based on human probabilities. The amendment was made because there was prevalent malpractice of converting black money into white. Also, there can be no direct evidence of the fact that department can produce to prove that winning tickets were purchased by assessee. Since, the explanation given by the assessee is not considered reasonable by the officer the addition is confirmed.
After studying these two judgments in detail on application of Human probabilities to facts of the case and emphasis on considering the surrounding circumstances, we now deal with two burning issues which are being decided by the higher appellate authorities including ITAT, High Court and Supreme Court wherein, some cases are decided after relying on cases of Durga Prasad More and Sumati Dayal (reliance on human probability), while others rejects the same and relies on the facts of the case for deciding the matter.
The two burning issues are, firstly on the subject of addition made on account of unexplained share premium and another on account of penny stocks, in both these cases addition is made by the Assessing Officer under provisions of section 68, of Income Tax Act of the amount of share premium and in second case of the amount of sale consideration. Let’s deal with each of them in some detail after looking at section 68 which is relevant for both the issues.
Section 68 of The Income Tax Act, 1961 is as under:
“68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :
Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10.”
So, if the explanation offered is not satisfactory amount shall be added as income of the assessee. Further, the proviso was added to the section with effect from 01st April, 2013 and held only to be prospective in nature. So, in case if the year that we are dealing with is AY 2013-14 or thereafter, source of source will be required to be proved in case of Share capital being received by company in which public are not substantially interested, which otherwise is not required in case of section 68.
ADDITION ON ACCOUNT OF SHARE PREMIUM
In these cases where, a company is receiving share capital with premium, addition is being made in the hands of the company for an amount of premium by stating that premium is not justified based on financial statements, there is no valuation report, no specific track record of company justifying the premium, statements of certain persons claiming it to be not true, parties not responding to notices issued, directors not responding to summons issued etc.
The one judgment on the issue of Share Premium came in the year 2009 in case of CIT v/s Lovely Exports Private limited (216 CTR 195), wherein it was held that if share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law. Thus, supreme court stated that additions, if any can be made in the hands of shareholders and not in the hands of the company.
Courts have also held that, it is duty or onus of department that when addition is made it is satisfactorily brought on record or proved that money trail has been established, in the absence of this exercise addition cannot be sustained. Value Capital Services (307 ITR 334) (Del HC) and Kamdhenu Steel and Alloys Limited (206 Taxmann 254) (Del HC).
Now, lets run through the recent judgments on the said issue wherein, while deciding the issue courts have relied on theory of human probability as enunciated in case of Durga Prasad More and Sumati Dayal.
a) Principal CIT v/s NRA IRON & STEEL PVT LTD (412 ITR 161)
CIT (A) and ITAT: Favour of Assessee, HC: Favour of Assessee, SC: Against the Assessee.
ITAT: Held that when all the details were brought on record and Investors have confirmed of making Investments, merely because some of them could not comply with notices, addition cannot be made. The fact that several companies had same address does not prove anything.
HC: It relied on findings given by CIT Appeals and ITAT are exhaustive and since issue has been decided on facts, it requires no interference.
SC: Stated that some did not reply, income was low, source of source not beyond doubt, mere submitting PAN copies not proper. Because notice could not be served to 4 parties out of 17, and replies from other were received in DAK and hence everything seems questionable and onus of assessee is not discharged and addition is confirmed.
Here, no new facts were brought on record, but Supreme court decided the issue based on the fact that notice could not be served to 4 parties existence of which was proved in other parties case as relied by ITAT, reliance placed on sumati dayal and further source of source not proved was also one of the reason for confirming the addition, now whether this unsettling the past law or not is something that needs to be looked into.
b) Principal CIT v/s NDR PROMOTERS PRIVATE LIMITED (102 taxmann.com 182)
ITAT: Favour of assessee, HC: Against assessee
ITAT: Held that since all the details are submitted in relation to Investors, onus of assessee has been discharged and hence no addition can be made merely because directors of investors did not attend before ao.
HC: relied on facts that all the investors were having same address, operated by one Mr. Tarun goyal. The transaction is sham and make-believe with excellent paper-work and reasoning given is contrary to human probabilities.
However, there are various judgments given in favour of assessee when all the details are submitted, some of them are as under:
a) CIT v/s Oasis Hospitalities Pvt Ltd. (Del HC) (333 ITR 119)
b) VALUE CAPITAL SERVICES (Del HC) (307 ITR 334)
c) KAMDHENU STEEL AND ALLOYS LIMITED (Del HC) (361 ITR 220)
d) CIT V/S Gagandeep Infrastructure Pvt. Ltd. (Bom HC) (394 ITR 680)
ADDITION ON ACCOUNT OF PENNY STOCK
In these cases where, a person has dealt in shares of the company listed on stock exchange and has made huge gains (Exempt under 10(38)) were being questioned by saying that prices were controlled by you, there can be no dramatic increase in prices in such short time, financials are not supportive of prices, and thus the entire sale consideration was brought to tax under provisions of section 68.
Assessee against the said addition submits that the transactions have been carried through stock exchange and in support of which he submits the contract notes and other details trying to prove the genuineness of the transactions.
Now, let’s run through the recent judgments on the said issue wherein, while deciding the issue tribunals or courts have relied on theory of human probability as enunciated in case of Durga Prasad More and Sumati Dayal.
a) Rajkumar Agarwal v/s DCIT (ITA no. 1648/Pun/2015)
CIT: Negative ITAT: Negative
ITAT: Brokers were fined by SEBI, stock was under investigation by bse and sebi, mere furnishing of Contract Notes not sufficient for deleting addition. Even family members have made gains and thus relying on human probability theory, it was held to be penny stock and addition was confirmed.
b) USHA SHAH (6858/MUM/2011)
CIT: Negative ITAT: Negative
ITAT: While deciding against the assessee, ITAT held that purchase not substantiated as stated to have been adjustment against speculation gain, without margin money. Contract notes are doubted to be fabricated, no copy of share certificate available or share transfer form party from whom purchase made was not available for confirming it broker was convicted by sebi for manipulating share price. Reliance was placed on human probability theory for deciding the matter and reliance placed by assessee in other cases were rejected even though it related to same company whose gain was in question.
However, there are various judgments given in favour of assessee when all the details are submitted, some of them are as under:
a) CIT V/S JAMNADEVI AGARWAL (20 TAXMANN.COM 529) (BOM HC)
b) MUKTA GUPTA (ITA 2766/DEL/2018)
c) MAHAVIR JHANWAR (ITA NO. 2474/KOL/2018)
So, as can be seen from the above on a similar set of facts and similar issue matters are decided in favour of assessee and matters are decided against the assessee, by application of theory of human probability. However, these days human probability theory is scoring over evidence. In light of the above discussion certain questions which thus needs to be answered are as follows:
a) Whether, when all the details are submitted by the assessee is it correct to reject all of them by bringing into equation human probability theory or something more should be required from the AO for making addition?
b) To what extent the judgments rendered by Apex Court in case of Sumati Dayal and Durga Prasad More should be applied i.e. whether they need to be judiciously applied or can be applied in every alternate case where there is no alternate argument available to contest the case?
c) Further, how seriously are we adhering to the law of precedent or stare decisis, shouldn’t it be mandatory to follow the due procedure whenever a contrary stand is being decided to be taken?
d) Further, whether each party is duly discharging the onus placed on it by the law?
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