2010 (4) TMI 1246 - HC - Income Tax

Loose paper not enough to tax others; presumptions under sections 132(4A), 292C limited to possessor only

CIT, Kanpur Versus Shadiram, Ganga Prasad, S.P. Kanodia & Smt. Premlata Kanodia

HC held that loose paper (parcha) recovered from the possession of one individual could not, by itself, justify additions as unexplained investments or ... - ISSUES PRESENTED AND CONSIDERED 1. Whether entries in a loose paper (parcha) recovered from the possession of one person can be treated as establishing unexplained investments and interest assessable in the hands of other persons named in the parcha. 2. Whether the Tribunal erred in interpreting and applying the presumption under section 132(4A) of the Income-tax Act, 1961 (and related evidentiary presumption under section 292C) to bring the amounts shown in the parcha to tax in the hands of persons other than the person from whose possession the document was seized. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility and evidentiary weight of entries in a parcha recovered from another person's possession Legal framework: The statutory scheme permits drawing a presumption in favour of the Department regarding documents seized during search proceedings (sections 132(4A) and section 292C are invoked), but the evidentiary value of such entries depends on corroboration and the burden to explain possession and contents. Precedent Treatment: The Court relied upon principles applied in decisions holding that where entries adverse to an assessee are found in books or papers of another person, the Department must produce corroborative evidence and, where it relies on the entries, should make the person available for cross-examination; absent such proof, adverse inferences are inappropriate. Interpretation and reasoning: The parcha was recovered from the leather wallet of A (the person in possession). The first legal presumption, accordingly, at best attaches to that person; it does not ipso facto make the entries binding against others named. The entries concerning two of the named persons were struck out on the face of the parcha, raising a direct doubt about the accuracy of the jottings. No statement by the person in possession admitted that the entries recorded investments by the named persons, and that person was not produced for cross-examination to test the authenticity or source of the entries. The Department produced no independent corroborative material to show that the investments or interest actually belonged to the named persons or that sums were paid outside books of account. Ratio vs. Obiter: Ratio - where a document adverse to an assessee is recovered from another person's possession, the Department must produce corroborative evidence (or the person for cross-examination) before the entries can be treated as establishing unexplained investments/receipts in the hands of the named persons. Observations about the significance of struck-out entries and on the proper approach to adverse inference are integral to this ratio. Conclusions: The Tribunal's factual conclusion that the entries in the parcha could not be read against the named persons without corroboration was a permissible finding of fact and not liable to interference. Accordingly, additions based solely on such uncorroborated parcha entries as against persons other than the one from whose possession the paper was seized cannot be sustained. Issue 2 - Application and scope of presumptions under section 132(4A) and section 292C Legal framework: Section 132(4A) permits drawing certain presumptions about documents found during search; section 292C creates rebuttable presumptions in certain circumstances. However, presumptions do not dispense with the Department's obligation to produce supporting evidence where necessary to attribute transactions to persons other than the possessor of the document. Precedent Treatment: The Court treated earlier authority as establishing that the Department, when relying on entries in books/papers of third parties, must produce the third parties (or otherwise provide corroboration) so that the assessee may test the entries by cross-examination; mere reliance on statutory presumptions without supporting proof is insufficient to establish taxability in other hands. Interpretation and reasoning: Even if a prima facie presumption attaches to the possessor under section 132(4A)/292C, that presumption is limited in scope. It cannot be extended automatically to conclude that the amounts relate to other named individuals unless the Department discharges its burden to show the link - either by producing the person in possession for cross-examination or by adducing independent corroborative material. The existence of struck-out entries on the face of the document further weakens any uncorroborated statutory presumption. The Court emphasised that the Tribunal's rejection of the Department's contention was founded on absence of corroboration and lack of opportunity to cross-examine, constituting a valid factual application of the statutory framework. Ratio vs. Obiter: Ratio - statutory presumptions arising from documents recovered on search are not conclusive as to third parties named in those documents; the Department must produce corroborative evidence or the possessor for cross-examination to attribute the entries to other persons. Observations elaborating limits of section 132(4A)/292C in varied factual matrices are explanatory but flow from the core ratio. Conclusions: The Tribunal did not err in law in its interpretation or application of section 132(4A)/292C to the facts. In the absence of corroborative evidence or opportunity to cross-examine the possessor, the presumptions could not sustain additions in the hands of the named persons; the Court affirmed the Tribunal's deletion of the additions. Cross-references and integration of issues The two identified issues overlap: the Court treated the question whether the parcha could be read against persons other than the possessor as a mixed question of law and fact informed by the scope of statutory presumptions. The legal requirement for corroboration and cross-examination (discussed under Issue 1) determines the permissible reach of the presumptions under section 132(4A)/292C (Issue 2). The Tribunal's factual finding of lack of corroboration and the presence of struck-out entries was decisive and binding on the Court. Final disposition The questions referred were answered against the Revenue and in favour of the assessees: uncorroborated entries in a document recovered from one person's possession could not be used to make additions in the hands of other persons without independent corroboration or the production of the possessor for cross-examination; the Tribunal's deletions were upheld.