Law of Evidence and its Importance under the Income Tax Act, 1961 & Fundamental concepts regarding Reassessment

Law of Evidence and its Importance under the Income Tax Act, 1961 & Fundamental concepts regarding Reassessment By Shri K. Gopal, Advocate 309, Churchgate Chambers, 5, New Marine Lines, Mumbai 400 020 +91 (022) 22623010/11 +91 9820050141 Gopal_kandarpa@yahoo.com (Presentation prepared by Mr. Rahul Hakani & Jitendra Singh, Advocates) 1

Brief History of Law of Evidence in India No uniform law prior to passing of Indian Evidence Act 1872. Rules of Evidence on the basis of customs and usages of Muslims. Continued some time even after British Rule Presidency Towns- English Rules of Evidence Muffasil areas- Mohammedan rules as well as English Rules For the first time Evidence Act II of 1855 prescribed some rules On 15 th March 1872 after great deal of deliberations, it become law as the Indian Evidence Act. Draft bill was introduced under the chairmanship of Mr. Stephan (Later Sir James Stephen) Object of codification point specifically dealt with by an Act. 2

Objects and Reasons Evidence is to legal practice what logic is to all reasoning Judge separates the wheat from the Chaff among the Mass of Facts. 3 main objects- Evidence must be confined to the matters in issue Hearsay evidence must not be admitted The best Evidence must be given in all cases 3

Applicability of Evidence Act to the Income Tax Proceedings The statement that the Evidence Act is not applicable to the proceedings under the Income Tax Act is a misnomer. The Hon ble Bombay High Court in the case J.S. Parker vs. V.B. Palekar [1974] 94 ITR 616 (Bom) held that what was meant by saying that the Evidence Act did not apply to the proceedings under the Act was that the rigours of the rules of evidence contained in the Evidence Act was not applicable but that did not mean that when the taxing authorities were desirous of invoking the principles of the Act in proceedings before them, they were prevented from doing so. Evidence Act embodies principle of common law jurisprudence which could be attracted to a set of circumstances that satisfy its conditions 4

Applicability of Evidence Act cont.. Not applicable to inquiries by Tribunals even though they may be judicial in character. Rules of natural justice should be followed Where act provides that Tribunal or Special Court would be a Civil Court then Evidence Act applies. E.g. Court of Session. Does not apply to affidavits, proceedings before Arbitrator. Affidavit means a statement of declaration in writing on oath or affirmation or before a person having authority to administer an oath or affirmation. Affidavit can be taken as evidence as provided under order 19 & 18 of Civil Procedure Code. Order 19 Rule 3 : Affidavit must state how much of it is based on knowledge and how much of it is based on beliefgrounds of belief to be stated. Person giving affidavit must come for cross examination. 5

Affidavit cannot be treated as substantive evidence but can be treated as admission Affidavit can be treated as evidence if statute provides. Eg: Section 45 of The Indian Divorce Act, 1869. Arbitrator has no power to administer oath and need not examine witness confirm to rules of natural justice Award cannot be set aside on the ground that rules of evidence is not allowed As far as possible, he must follow rules of evidence and not admit inadmissible evidence. The contents of affidavit are proved to be correct unless proved otherwise. Mehta Parikh & Co. vs. CIT [1956] 30 ITR 181 (SC) (187). 6

Special rules of evidence Order XXVI of Civil Procedure Code, 1908 Issue of Commissions by court to examine witness. Section 291 of Criminal Procedure Code, 1973 Deposition of Medical witness. Section 293 Criminal Procedure Code, 1973 Report of certain Government Scientific Experts. Section 59 & Section 123 of Transfer of Property Act, 1882 - Execution and attestation of mortgages and gifts. Section 17, 49 and 50 of Indian Registration Act, 1908. Bankers Book Evidence Act, 1891. Co-operative Societies Act, 1912. Income Tax Act, 1961- Chuhurmal vs. CIT [1988] 172 ITR 250 (SC) What was meant by saying that the evidence act did not apply to the proceedings under the I.T. Act was that the rigor of the rules of evidence act was not applicable. 7

Evidence means and includes Section 3 of the Indian Evidence Act reads as follows: Evidence-Evidence means and includes- All statements which the Court permits or requires to be made before it in relation to matters of fact under inquiry, such statements are called oral evidence All documents including electronic records produced for the inspection of the Courts such documents are called documentary evidence. 8

Classification of Evidence Direct and indirect or circumstantial evidence Direct Evidence are those which established a fact in issue, requires no mental process, production of document, witness testimony who perceived the fact Indirect Evidences means that other facts are so proved that existence of a given fact may be logically inferred. Circumstantial evidence includes which gives rise to logical inference that such a fact does exist. Circumstances must be fully established. 9

Primary Evidence Section 62 of the Evidence Act to prove contents of documents, means best evidence must be given first. Original Document Includes documents, executed in several parts. Document executed in counterpart, each counterpart is primary evidence against the parties executing it. No. of documents made by one uniform process each is primary evidence of the contents of the rest. Copies of a common original, they cannot be primary evidence of the contents of the Original. Eg: Carbon copy, printing, lithography, photography or tape recorded. 10

Secondary Evidence Section 63 of Evidence Act to be given in absence of primary evidence. certified copies Section 79 presumption as to genuineness of certified copies copies made from original and copies compared with such copies. Eg: photography of original, copy with copy of letter made by copying machine if copy made from copying machine was made from original. Copies made from or compared with the Original- must be compared with the original. True copy not admissible under section 63 unless it can be shown that it has been made from or compared with the Original. Counterparts of Documents as against the person who did not execute them. (understand from father) oral accounts of the contents of a document by a person who has seen it. 11

Oral Evidence and Documentary Evidence No to be given of the contents of documents or electronic records. Documentary evidence prevails over oral evidence Real and Hearsay Evidence all hearsay statement is not admissible Is admissible only to establish factum of Statement and not truth of statement. 12

Admission and Confessions Statements Oral, documentary, electronic form Suggests any inference as to any fact in issue or relevant facts. Statements made by: Party to the proceeding or his agent Suit in representative character. Party interested is subject matter. Person from whom interest derived. Person expressly referred to by party to the suit. Admissions may be proved as against the persons who make them. Cannot be proved by or on behalf of him by person who makes them. 13

Admissions are not conclusive proof but may operate as estoppels. Section 24 of Evidence Act- confession caused by threat, inducement or promise is irrelevant Section 25 of Evidence Act- no confession made to a police officer shall be proved as against a person accused of any offence. 14

Burden to prove prima facie case in respect of cash credit lies on Assessee as it is within the knowledge of assessee as to how the cash credit came to be introduced Section 106 of Evidence Act. Various judicial Precedents held that proof of identity, capacity of creditor and genuineness of transaction is required to be proved by Assessee. Books or Books of Accounts under I. T. Act 1961- Section 34 of Evidence Act. Definition -: Section 2 (12A) Ledgers, day books, cash books, Account books and other books written or electronic form. 15

Service of Notice under Income Tax Act Section 282 of the Income tax Act A notice or requisition under the Act may be served either by post or as if it were a summons issued by a Court under the Code of Civil Procedure, 1908. Service of notice by affixture at the place of business premises without mentioning the names and addresses of the persons who identified the place of business of the assessees, is not in accordance with law. CIT vs. Ramendra Nath Ghosh [1971] 82 ITR 888 (SC). Service of Notice upon a person who is not the member of HUF is invalid and improper under the Act. ACIT vs. Prem Kumar Rastogi. [1980] 124 ITR 381 (ALL.) Mere knowledge of a notice is not equivalent to proper service under the Act. B. Johar Forest Works vs. CIT [1977] 107 ITR 409 (J&K) 16

Service of Notice Cont As per order V, rule 12 of the Code of Civil Procedure that wherever it is practicable, the service has to be effected on defendant in person or on his agent. Under order V, rule 17 of the Code of Civil Procedure, the affixation can be done only when the assessee or his agent refused to sign the acknowledgement or could not be found. CIT vs. Hotline International (P.) Ltd. [2008] 296 ITR 333 (Delhi) Notice for reopening of assessment was served on a person who was neither an employee nor an authorized agent of assessee, it was an invalid service of notice. Chetan Gupta vs. ACIT [2013] 144 ITD 344 (Delhi - Trib.) 17

Service of Notice under Income Tax Act The proviso to section 143(2)(ii) of the Act prescribes the service of notice on the assessee within six months from the end of the financial year in which the return is furnished as a pre-requisite to enable the AO to complete an assessment other than summary assessment. Issuance of Notice under section 143(2) is mandatory. ACIT vs. Hotel Blue Moon [2010] 321 ITR 362 (SC). Assessment is invalid if notice under section 143(2) was sent at wrong address. CIT vs. Sunil Kumar Chhabra [2012] 250 CTR 195 (Punjab & Haryana) Contrary view in V.R.A. Cotton Mills (P.) Ltd. vs. Union of India [2013] 359 ITR 495 (Punjab & Haryana) wherein the Hon ble court has held that the expressions 'serve' and 'issue' are interchangeable, as has been noticed in section 27 of the General Clauses Act, 1887. The date of receipt of notice by the addressee is not relevant to determine, as to whether the notice has been issued within the prescribed period of limitation. 18

Resort cannot be had to section 292B to validate mandatory requirement of service as postulated in section 143(2). CIT vs. Avi-Oil India (P.) Ltd. [2010] 323 ITR 242 (P&H). SLP rejected by Hon ble Supreme Court. Failure to issue a notice under section 143(2) within prescribed period cannot be cured by taking recourse to section 292BB. CIT vs. Salarpur Cold Storage (P.) Ltd [2014] 50 taxmann.com 105 (Allahabad) 19

Some Case Laws 1. CBI vs. V. C. Shukla [1998] 3 SCC 410 (SC) Book - collection of sheets of paper or other material Loose sheets of paper or scraps not Books Spiral notes and spiral pads can be regarded as Books Regulating in maintenance of Books of Accounts depends on the occupation. Mere entries in Books of Accounts even if correct and authentic cannot fix a liability without independent evidence. 20

2. CIT vs. Bhaichand H. Gandhi [1983] 141 ITR 67(BOM) Bank Passbooks is not Books for the purposes of Section 68. C.C. recorded in Pass Book but not in Cash Book. Relationship between Banker and Customer is that of Debtor and Creditor and not of Trustee and beneficiary. Pass Book is not maintained by Bank as agent of constituent or under instruction of constituent. However addition can be made under section 69. Contrary view in Smt. B. Indira Rani vs. CIT [1995] 211 ITR 346 (KER) 21

3. No addition can be made solely on the basis of third party Statements and Loose sheets/diary In S.P. Goyal vs. DCIT [2002] 82 ITD 85 (Mumbai)(TM) following the ratio of apex court in CBI v V.C. Shukla [1998] SCC 410, has deleted the addition of Rs. 60 lakhs on the basis of noting on loose sheets of diary seized during the course of search operation at the premises of the assessee. The tribunal has held that explanation offered by the assessee could not be rejected and the addition made on mere suspicion without any corroborative evidence was liable to be deleted. In M.M. Financers (P) Ltd. vs. DCIT [2007] 107 TTJ (Chennai) 200, the tribunal held that no addition could be made in the hands of assessee on the basis of the statement made by a third party and the unsigned agreement and dumb loose slips seized from his residence, in the absence of any corroborative material to show payment of any undisclosed consideration by the assessee towards purchase of land. 22

4. Merely on the basis of statement additions cannot be made. a) Instruction No. 286 /2/2003 (Inv.) It Dt. 10/3/2002 b) Vinod Solanki vs. UOI [2009] (233) ELT 157 (SC) c) Jagmohan Singh Arora vs. DCIT [2006] 101 TTJ 682 (689) (Mum)(on-money-third party statement-no cross examination) d) Rajesh Jain vs. Dy. CIT [2006] 100 TTJ 929 (Del.)(confessional statement-no corroboration) e) Asst. CIT vs. Jorawar Singh M. Rathod [2005] 94 TTJ 867 (Ahd) (nothing found) f) Aishwarya Rai vs. Dy. CIT [2007] 104 ITD 166 (TM) (Mum) A statement under section 132(4) Is not the last word, and it can be retracted/clarified subsequently. a) ACIT vs. Mrs. Sushiladevi Agarwal [1994] 50 ITD 524 (Ahd.) Pg. 526 Addition merely on basis of statement without any material or evidence not justified. 23

5. CCIT & Anr. vs. Pampapathi [2009] 310 ITR 64 (Ker) Section 24 and section 28 of Evidence Act do not apply to Income tax Act. 6. Survey under Section 133 A of I.T. Act, 1961 Paul Mathew & Sons vs. CIT [2003] 263 ITR 101 (Ker) Statements recorded under Section 133 A has no evidential value. 7. CIT vs. Uttamchand Jain [2010] 320 ITR 554 (Bombay) No assessment merely on retracted confession 24

Relevance of materials Relevance of facts Evidence Act CIT vs. Sahibgans Electric cattes Pvt. Ltd. [1978] 115 ITR 408 (CAL) Anything which has a bearing on the question at issue before the judicial tribunal would be a relevant fact.. Principals emerging from Evidence Act applicable to I. T. Act 25

Satisfaction/ Presumption How much of fact to be proved and presumed 1. Poonjabhai Vanmali and Sons vs. ITO [1989] 33 TTJ 91 (AHD) Explanation must be reasonable man of ordinary prudence, appeals to human reasons, happening are quite probable. 2. What explanation would be considered satisfactory and how much of details should be furnished to make the explanation satisfactory normally depends on the facts of each case. 3. Rohini Builders v. Dy. CIT [2001] 117 Taxman 25 (Ahd.- ITAT) (Mag.), [2002] 256 ITR 360 (Guj.) (HC). 26

Presumptions presumptions Evidence Act. Search & Burden of Proof Section 110 of Evidence Act 1872 1. Presumptions of ownership is strongest in the case of cash found in possession of person. 2. Mangilal Agrawal (late) vs. ACIT [2008] 300 ITR 372(RAJ) presumptions Under section 69 A cannot be invoked merely on possession but only on further being found as the Owner. 3. CIT vs. Ravi Kumar [2007] 294 ITR 78(P& H) (loose papers) If Assessee fails to explained contents of the slips, it was for the revenue to prove the on basis of material on record that they represented transaction of sales of stock in hand before making addition. 4. Mahendra D. Jain vs. ITO [2010] 323 ITR 644 (Bom) (Confiscation of gold bars) when assessee had committed infraction of law by smuggling gold into country, loss caused to him pursuant to confiscation of contraband gold could not be said to be a trading or commercial loss connected with or incidental to his business. 27

4. K.P. Agrawal vs. ACIT [2008] 306 ITR (AT) 181(Agra) As loose documents seized from premises of the Assessee, it was not material that no date was found on it. Section 110 of the Evidence Act 1872 was applicable to taxation proceedings where a person was found in possession of anything and the onus of proving that he was not its owner was on that person. 28

Cross Examination Evidence Act CIT vs. Eastern Commercial Enterprises [1994] 210 ITR 103 (CAL) Kishninchand chellaram vs. CIT [1980] 125 ITR 713 (SC). Creditor Turns Hostile Hostile witness Sohan Lal Jain vs. ZTO [1987] 59 CTR (TRIB) (JP) contention of assessee cannot be disbelieved even if creditor turns hostile. A.O. must examine such creditor. 29

Examination in chief section 137 by party who calls him Cross- examination Re-examination Leading Questions section 141 Witness not excused from answering on ground that answer will criminate. However shall not be subjected to arrest or prosecution except prosecution for giving false evidence. Section 132.(Abuse). Impeaching credit of witness- section 155: Evidence of person that witness is unworthy of credit Proof that witness is bribed or accepted offer of bribe Former statement inconsistent with the present evidence 30

Attestation : Section 68 to Section 72 If law requires document to be attested than execution has to proved by examining the attesting witness. E.g. Mortgage deed Section 59 of Transfer of Property Act, 1882. gift of Immovable property Section 123 of Transfer of Property Act, 1882. Wills Exception : documents registered under Indian Registration Act, 1908 Except Wills. If attesting witness could not be found then the signature of attesting witness is to be proved. if party to document admits the execution then no need to examine attesting witness. If attesting witness denies the execution, execution to be proved by other Evidence. 31

Fundamental concepts regarding Reassessment When a notice under section 148 is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notice. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. GKN Driveshafts (India) Ltd. vs. ITO [2003] 259 ITR 19 (SC). Once the assessee receives such reasons, he would be expected to raise his objections, if he so desires, within 60 days of receipt of such reasons. If objections are received by the A. O. from the assessee within the time permitted hereinabove, the A. O. would dispose of the objections, as far as possible, within four months of date of receipt of the objections filed by the assessee. Sahkari Khand Udyog Mandal Ltd. vs. Asst. CIT [2014] 225 Taxman 51 (Gujarat)(MAG.). 32

Notice under section 148 must be issued Prior to re-opening of assessment, notice under section 148 must be issued and served upon the assessee. CIT vs. Mani Kakkar [2009] 18 DTR 145(Del.) Notice should be served on the latest address available with the department, even if the old address on the PAN data is not changed. CIT vs. Eshaan Holding (Pvt) Ltd. [2012] 344 ITR 541 (Del.) Rachna Gupta vs. ITO ITA No. 5527/Del/2012 dated 05.07.2013 33

Petitions under writ jurisdiction cannot be entertained by High Court when an alternative remedy is available, unless an exceptional case warranting such interference is made out by assessee. CIT vs. Chhabil Dass Agarwal [2013] 357 ITR 357 (SC) Notice under section 148(1) as well as the order dispossing off the objections cannot be challenged in Writ Petition. JCIT vs. Kalanithi Maran Writ Appeal Nos.347 to 349 of 2014 order dated 04.07.2014 (Madras High Court) 34

Recording of reasons Recording of reasons is a condition precedent for issuing the notice under section 148(1) of the Act. CIT vs. Rajindra Rosin & Turpentine Industries [2008] 305 ITR 161 (PUNJ. & HAR.) Reason to suspect cannot be equated with reason to believe. Indian Oil Corporation vs. ITO [1986] 159 ITR 956 (SC) & Joti Parshad v. State of Haryana, AIR 1993 SC 1167: [1992] 6 JT 94 (SC) 35

Reasons recorded should be supplied The A.O. is bound to furnish the reasons recorded to the assessee within a reasonable time. Haryana Acrylic Manufacturing Co. vs. CIT [2009] 308 ITR 38 (Delhi). The A.O. is bound to furnish reasons and, on receipt of objections from the assessee against those reasons, A.O. is bound to decide those objections separately by passing a speaking order after giving an opportunity to the assessee of being heard. Allana Cold Storage Ltd. vs. ITO [2006] 287 ITR 1 (Bombay). 36

Reasons cannot be altered or improved The reasons are required to be read as they were recorded by the A.O. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. Hindustan Lever Ltd. vs. R.B. Wadkar [2004] 268 ITR 332 (Bom) Even the assessee is not entitled to raise a new ground of objection before the court in Writ Petition, if the same has not been specifically raised before the A.O. in the objections for reopening of the assessment. Crown Consultants (P.) Ltd. vs. CIT [2014] 362 ITR 368 (Bombay) 37

Reassessment on change of opinion Reopening of an assessment on the basis of change of opinion is not permissible under the Act. M. J. Pharmaceuticals Ltd. vs. Dy. CIT [2008] 297 ITR 119 (Bom) Kalvinator of India [2002] 256 ITR 1 (FB)(Del) Approved by Supreme Court [2010] 320 ITR 561 (SC) CIT vs. Usha International [2012] 348 ITR 485 (Delhi) Aditya Arvind Kapoor vs. ITO Writ Petition No. 2857 of 2006 dated 27.08.2014 The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power. Aventis Pharma Ltd. vs. Asst. CIT [2010] 323 ITR 570 (Bom.) 38

Reassessment on the basis of audit objection Audit Objection cannot be the basis for reopening of assessment. Indian & Eastern Newspaper Society vs. CIT [1979] 119 ITR 996 (SC). If AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void. Raajratna Metal Industries Ltd. vs. ACIT [2014] 49 taxmann.com 15 (Gujarat) A.O. having allowed assessee s claim in the regular assessment and reopened the assessment pursuant to audit objection, it cannot be said that he had formed his own opinion that the income had escaped assessment, and the reopening being based on mere change of opinion, same was not valid. IL & FS Investment Managers Ltd. vs. ITO & Ors [2008] 298 ITR 32 (Bom.) Vijaykumar M. Hirakhanwala (HUF) vs. ITO & Ors [2006] 287 ITR 443 (Bom.) CIT vs. Lucuns TVS Ltd. [2001] 249 ITR 306 (SC) Purity Tech Textiles Pvt. Ltd. vs. ACIT [2010] 325 ITR 459 (Bom) 39

Re-assessment on the basis of Valuation Report The opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-tax Act, 1961. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. The Department was not entitled to reopen the assessment. ACIT vs. Dhariya Construction Co. [2010] 328 ITR 515 (SC) Report of Department Valuation Officer as to cost of construction of property cannot be a basis of reopening assessment. CIT vs. V.T. Rajendran [2007] 288 ITR 312 (MAD.) Opinion of DVO is per se not an information for purpose of reopening of an assessment. Mahashay Chunnilal vs. DCIT [2014] 362 ITR 314 (Delhi) A valuer s report cannot be a information which can attract under section 147(b). ACIT vs. Pokar Hotel [2006] 101 TTJ 1042 (JODH) Contrary views: The Assessing Officer is free to refer the building for valuation and the valuation report is certainly a specialized information which can constitute the basis for reopening. When investment valued by the approved valuer is over and above the cost declared by the assessee, the same constitutes the basis for reopening. CIT vs. Medical Trust Hospital [2010] 325 ITR 191 (KER.) Sunder Carpet Industries vs. ITO [2010] 324 ITR 417 (ALL.) 40

Other Additions If the A.O. has not made addition on the reasons on which the reassessment proceedings have been initiated, the A.O. is not justified in making other additions. CIT vs. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom) 41

Some important case laws Reopening within 4 years held to be unjustified An assessment order passed after detailed discussion cannot be reopened within a period of 4 years unless the A.O. has reason to believe that there is to some inherent defect in the assessment. German Remedies Ltd vs. Dy. CIT [2006] 285 ITR 26 (Bom.) Siemens Information System Ltd. vs. Asst. CIT [2007] 295 ITR 333 (Bom) Godrej Agrovet Ltd. vs. Dy. CIT [2010] 323 ITR 97 (Bom) Techspan India (P) Ltd. vs. ITO [2006] 283 ITR 212 (Del) 42

Some important case laws Reopening beyond the period of 4 years held to be unjustified Reopening beyond the period of 4 years without any allegation in the reasons recorded that any income has escaped assessment due to failure on the part of the assessee to disclosed the material facts. Sound Casting (P) Ltd vs. Dy. CIT [2012] 250 CTR 119 (Bom.) Jashan Textiles Mills P. Ltgd. Vs. DCIT [2006] 284 ITR 542 (Bom) German Remdeis Ltd vs. DCIT [2006] 287 ITR 494 (Bom) 43

Some important case laws Reopening in the absence of new tangible material is unjustified CIT vs. Amitabh Bachchan [2012] 349 ITR 76 (Bom.) Xerox Modicorp Ltd. vs. Dy. CIT [2013] 350 ITR 308 (Delhi) Direct Information (P.) Ltd. vs. ITO [2012] 349 ITR 150 (Bombay) 44

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