2025 (9) TMI 642 - AT - Income Tax

Affidavits and handwritten diary accepted as evidence for improvement costs when long gaps preclude contemporaneous documents

Shri Hari Mohan Versus The Income Tax Officer, Ward -6 (3) (1), Bangalore

ITAT held that affidavits and a handwritten diary constitute admissible evidence to substantiate cost of improvement where long time gaps preclude ... Denial of the cost of improvement while calculating the capital gains - Claim disallowed by the AO on the ground that there was no supporting evidence furnished by the assessee - whether the Affidavits and the hand written diary are sufficient to justify the cost of improvement claimed by the assessee? HELD THAT:- Affidavit are piece of evidence and the same can be considered while deciding the issue on hand. Considering the huge time gap when the cost was incurred by the assessee vis-à-vis to justify such cost based on documentary evidence, it is a difficult task to bring the supporting materials. It is for the reason that nobody could predict while incurring the cost of improvement that 17 years later, it will be asked to justify such cost. Accordingly, we are of the view that the Affidavits filed by the assessee are sufficient enough for consideration with respect to the cost of improvement. Even under the Income-tax Act, the proceedings can be initiated up to 10 years, which implies that the information pertaining to the earlier year i.e. before 10 years, the assessee is not required to maintain the same. Accordingly, balance of connivance lies in favour of the assessee. Hence, we set aside the finding of the ld. CIT(A) and direct the AO to allow the cost of improvement to the assessee while calculating the capital gain in dispute. Thus, the ground of appeal of the assessee is hereby allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the cost of improvement of immovable property incurred by the transferor (mother) in 2004, claimed by the assessee as part of indexed cost for computation of long-term capital gains, can be accepted in the absence of contemporaneous documentary evidence. 2. Whether affidavits and a hand-written diary produced for the first time before the Appellate Tribunal constitute sufficient evidence to substantiate the cost of improvement for the purpose of allowing deduction while computing capital gains. 3. Whether, having regard to the long lapse of time since the expenditure was incurred and the statutory provisions permitting reopening of assessment under section 147 read with section 144B, the onus of producing documentary proof remains absolute or may be relaxed in appropriate circumstances. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of Cost of Improvement in Absence of Contemporaneous Documentary Evidence Legal framework: Deduction of cost of improvement is allowable for computation of capital gains where proven; the assessee bears the burden of proof to establish the amount of cost of improvement. Precedent treatment: The Tribunal relied on an earlier Tribunal decision which held that, in the absence of direct documentary evidence, sworn affidavits supported by circumstantial evidence and consistent explanation may be acceptable to substantiate expenditure. A High Court judgment was also placed before the Tribunal but the Tribunal principally relied on the cited Tribunal view. Interpretation and reasoning: The Tribunal recognized the admitted fact that the property was acquired from the mother and that improvement expenditures were claimed to have been incurred in 2004. It considered the practical difficulty of producing detailed documentary evidence after a prolonged interval (17 years) and the statutory backdrop that assessments can be reopened up to ten years, implying that taxpayers may not retain records beyond extended periods. Given these realities, the Tribunal held that denial solely for absence of contemporaneous documents would be unduly harsh where the assessee provides sworn statements and corroborative circumstantial material (hand-written diary). Ratio vs. Obiter: Ratio - Where expenditure on improvement was incurred long before the assessment proceedings and contemporaneous documents are not available, affidavits and consistent circumstantial evidence can suffice to discharge the assessee's burden to prove the cost of improvement for capital gains computation. Obiter - Observations on general record-retention practices and policy considerations underlying extended reopening periods are explanatory and not strictly necessary to the operative direction. Conclusion: The Tribunal concluded that the cost of improvement could not be rejected solely for want of contemporaneous documentary evidence and that the affidavit(s) and diary filed justified allowing the claimed cost for computation of capital gains. Issue 2 - Admissibility of Evidence Filed for the First Time Before the Tribunal (Affidavits and Hand-written Diary) Legal framework: Evidence not placed before lower authorities may be admitted by an appellate forum where deemed crucial to adjudication, subject to scrutiny of credibility and probative value; the appellate authority has discretion to permit additional evidence in appropriate cases. Precedent treatment: The Tribunal relied on the cited Tribunal decision which accepted sworn affidavits and circumstantial evidence as adequate proof in similar circumstances. The Tribunal treated such evidence as admissible and capable of discharging evidentiary burden. Interpretation and reasoning: The Tribunal accepted the explanation that the documentary gap arose from the passage of time and the impracticability of preserving proof for many years. The affidavits of the assessee and his mother together with the hand-written diary were treated as a coherent evidentiary package that, in the factual matrix, met the threshold for establishing the cost of improvement. The Tribunal expressly exercised its discretion to admit and consider the material filed for the first time before it because those documents were material and crucial for just adjudication. Ratio vs. Obiter: Ratio - Where critical documentary proof is unavailable due to lapse of time and the appellant furnishes sworn affidavits and consistent contemporaneous-style notes (e.g., diary), the Tribunal may admit and rely on that material to substantiate claims of expenditure. Obiter - The degree to which such evidence will suffice in different factual permutations was noted but not exhaustively determined. Conclusion: The Tribunal admitted the affidavits and diary filed for the first time and held them sufficient to substantiate the claimed cost of improvement, thereby directing the assessing officer to allow the deduction in computing capital gains. Issue 3 - Burden of Proof and Balance of Convenience in Context of Long-Lapsed Expenditure and Reopening Proceedings under Section 147 read with Section 144B Legal framework: The assessee carries the onus of proof to substantiate deductions; however, the extent of required documentary proof may be influenced by the factual circumstance of the claim and availability of records. Proceedings under section 147 (reopening) read with section 144B were the statutory mechanism by which assessment was reopened in the present matter. Precedent treatment: The Tribunal relied on prior tribunal authority that accepted a relaxed approach to documentary strictness where circumstantial and affidavit evidence are cogent; the Tribunal implicitly treated such approach as consistent with practical realities of record retention over long periods. Interpretation and reasoning: The Tribunal balanced the strict evidentiary expectations against the reality that expenditures incurred many years earlier are often unsupported by preserved vouchers. It concluded that the 'balance of convenience' favored the assessee because the absence of records was plausibly explained by the lapse of time and because the affidavits and diary provided a coherent account. The Tribunal further noted the policy implication of extended reopening periods which create situations where taxpayers may not preserve ancient evidence; this militated in favor of accepting alternative proof forms in suitable cases. Ratio vs. Obiter: Ratio - When a tax authority reopens assessments for remotely earlier years and the taxpayer cannot produce contemporaneous documents because of the lapse of time, the adjudicatory authority may accept affidavits and circumstantial evidence if credible, thus shifting the balance of convenience in favor of the taxpayer. Obiter - General commentary on the interplay between reopening periods and record retention obligations is illustrative rather than determinative. Conclusion: The Tribunal found that, on the facts, the balance of convenience lay with the assessee; the evidentiary deficiency was satisfactorily explained and cured by affidavits and diary entries, and therefore the cost of improvement must be allowed in computing the capital gain. The matter was remitted to the assessing officer for implementation.