Search under Section 132 of the Income-tax Act, 1961 (“IT Act”) is conducted to unearth cases of assessees with undisclosed income and is always considered as invasion of privacy by the assessees on whom it is conducted. The assessees also fear search because information found during search will not only affect that assessment year but would also empower Authorities to conduct Assessment/Reassessment proceedings for preceding six years.
Section 132(4A), empowers an Assessing Officer to presume that anything that is found in searched premises belongs to the occupant of such premises. However, this power to presume is not absolute in the hands of the Assessing Officer, in that the presumption is rebuttable. This Article attempts to elucidate the scope and extent of the presumption contained in Section 132(4A) in light of a recent judgement of Allahabad High Court in the case Ajay Gupta v. Commissioner of Income Tax 1 .
Section 132(4A) extracted 2
“(4A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed-
- that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person;
- that the contents of such books of account and other documents are true; and
- that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person's handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.”
Before insertion of this sub-section, the onus of proving that the books of account, other documents, money, bullion, jewellery, etc. found in the possession or control of a person in the course of a search belonged to that person, was on the Income-tax Department. After insertion of sub-section 4A, the expression “may be presumed” enables an Assessing Officer to raise a rebuttable presumption.
In Shorter Oxford English Dictionary, it is mentioned that, in law ‘presume’ means ‘to take as proved until evidence to the contrary is forthcoming’. Therefore, it is clear that the onus is on the person searched to rebut the presumption and prove it otherwise. Now the question that arises for consideration is whether mere denial that the documents found during search do not belong to an assessee can be considered as a possible rebuttal to prove the presumption wrong and whether the use of the phrase ‘may be presumed’ plants a discretion on the Assessing Officer to invoke the presumption only based on evidence. Precisely this issue was considered in Ajay Gupta case.
Facts and decision in Ajay Gupta v. CIT
In this case, an assessment was completed for a block period under Section 158BC based on search conducted in the residential premises and bank locker of the assessee, subsequent to which some jewellery was seized. Statements were also recorded from the assessee during the search proceedings. Additions were made by the AO to the total income of the assessee based on two papers which were found during search. The matter travelled up to the High Court.
The High Court, in this case, without considering any other factors, arrived at a finding by emphasizing only on the expression “may be presumed” provided in the Section 132(4A). The Court held that the word used in the section is “may” and not “shall” thereby making the presumption not absolute unless supported by corroborative evidence. While the Court in its judgement did mention assessee’s statement denying any knowledge about the documents found, onus was cast only on the department for not corroborating the evidences found during the search proceedings to the assessee, thereby making the presumption not eligible for addition.
Analysis of the judgement
The expression ‘may be presumed’ used in Section 132(4A), though not defined in the IT Act, can be examined from the point of view of evidence law as held by the Supreme Court in the case of Chuharmal v. CIT 3 . Section 4 of the Evidence Act, 1872 provides that whenever the expression “may presume” is provided in a statute, the Court may regard such facts as proved unless and until it is disproved, or may call proof of it. In the case of Chuharmal, the Apex Court held that the wrist watches in possession of assessee which were seized during search proceedings under the Customs Act, represented concealed income of the assessee. In arriving at the conclusion, reliance was placed on Section 110 of the Evidence Act which provides that where a person is found to be in possession of anything, the onus of proving that he was not the owner lies on such person. The Apex Court opined that while rigours of rules of evidence would not apply to the IT Act, the principles of Evidence Act may be invoked for proceedings under the IT Act. Thus, to state that the phrase ‘may be presumed’ casts onus on the Department to demonstrate why the presumption can be invoked, seems to be contrary to the law laid down by the Apex Court.
The next question is, where the Revenue relies on the presumption under Section 132(4A) to make additions to total income, would a mere statement of denial, as was given by the assessee in Ajay Gupta, be sufficient rebuttal to the said presumption? Though it is an accepted fact that rebuttal to the presumptions will vary from case to case, the question is what should be the level of onus an Assessee must discharge to disprove the presumption?
It is pertinent to note that many Courts have ruled in favour of the assessee after taking into consideration the plausible explanations given by the assessee rebutting the presumption created against them. For instance, in the case of CIT v. Raj Pal Singh Ram 4 , a paper was seized from the respondent’s business premises which contained details of the amount advanced to various persons and the interest earned thereon. It also contained the dates along with the amounts and therefore, the Assessing Officer had added the principal amount as also the interest as income from undisclosed sources based on the presumption under Section 132(4A) of the IT Act. The Tribunal, on considering the detailed explanations given by the assessee rebutting the presumptions, was however satisfied that the assessee had discharged his burden in proving that there was no connect between him and the documents found in the searched premises and that both the Assessing Officer and the first appellate authority were at fault in making the addition without considering the explanations made by the assessee.
In a judgement of the Delhi High Court in the case of CIT v. Naresh Kumar Aggarwala 5 , some documents with respect to purchase of property for a consideration was found in a search conducted and a presumption was framed by the Assessing Officer under Section 132(4A) of the IT Act. In this case, the Delhi High Court ruled in favour of the department distinguishing the Allahabad High Court judgement in the case of Raj Pal Singh Ram on the ground that unlike in the latter’s case, the assessee in the present case did not make any effort to rebut the presumption by giving plausible explanation. The Court further held that a letter submitted by the assessee without any proper explanation to disprove the presumption cannot be considered as reasonable and therefore, upheld the addition made by the Assessing Officer, thus reversing the order of the Tribunal.
This being the position, the author is of the humble opinion that the view taken by the Allahabad High Court in Ajay Gupta may not be correct and is likely to be challenged in due course.
This view taken by the Court seems to put forth that the onus to prove that the documents seized belongs to the assessee is on the department and not vice versa. This may not be the correct position for the reason that the presumption provided in the statute is a rebuttable presumption, to be rebutted by the assessee. It is for the assessee to come forward and explain as to why the documents found during search should not be associated with him/her. While the assessee did mention in the statement which was recorded by the Investigating officer that he had no knowledge about the papers or the names mentioned in the papers, this cannot be considered as a plausible rebuttal to the presumption formed by the Assessing Officer.
The author is of the view that the burden to prove will be shifted to the department only when an assessee has proven beyond doubt that the presumptions framed against him are incorrect. A mere statement of denial will not shift the onus.
If the view taken by the Allahabad High Court is to be accepted, then it will plant a seed in every assessee’s mind that mere denial of knowledge of the documents found during search without any reasonable explanation to deny the same would be sufficient to obtain a free pass from the addition being made unless proven by the department. If this being the case, the purpose of inserting sub-section 4A into the Act will fail since the onus to prove that the document belongs to the person searched would again fall on the department as it existed prior to the amendment.
[The author is a Senior Associate in Direct Tax Team, Lakshmikumaran & Sridharan Attorneys, Chennai]
- Ajay Gupta v. Commissioner of Income Tax, TS-732-HC-2019 (All.).
- Inserted by Taxation Law (Amendment) Act, 1975 with effect from 01-10-1975.
- Chuharmal v. CIT, (1988) 172 ITR 250 (SC).
- CIT v. Raj Pal Singh Ram,  288 ITR 498 (All.).
- CIT v. Naresh Kumar Aggarwala,  331 ITR 510 (Delhi).