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CaseIQ

The Commissioner Of Income Tax v. Jayalakshmi Devarajan

Kerala High Court

Jun 27, 2006

Judgment

Subsequent
References

CaseIQ

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Structured Summary of the Opinion — K.S. Radhakrishnan, J.

Factual and Procedural Background

The appeal was brought by the Commissioner of Income-tax, Trivandrum, against the order of the Income-tax Appellate Tribunal in ITA 79.Coch/96 dated 28-4-2000. The principal grievance of the revenue was that the Tribunal wrongly placed the burden of proof on the revenue.

The assessee is an individual proprietrix carrying on business as M/s. Padmaja Jewellers. A search was conducted at the assessee's business premises on 23-1-1992. During the search 77 newly made gold bangles weighing 502.330 grams were found. At the time of search Govindarajan (brother of the assessee's husband) was present and gave a sworn statement that approximately 450 gms of gold were delivered on the morning of 22-1-1992 by one Raju (partner of M/s. Karthika Jewellery) and that the gold was received by Devarajan (the assessee's husband) and given to Govindarajan to prepare ornaments; the gold given the previous day, according to that sworn statement, was yet to be converted into new bangles.

The assessing officer concluded that the 77 new bangles found on 23-1-1992 were unaccounted for, that their source was not explained, and assessed their value at Rs. 233,081 as income from undisclosed sources. The assessee, however, submitted a written statement and letters asserting that the seized ornaments belonged to five named customers who had given gold to be remade into bangles; the names and quantities they were said to have entrusted were furnished.

The Commissioner of Income-tax (Appeals) allowed the appeal, accepting the claim of the five persons as owners of the ornaments. The Income-tax Appellate Tribunal concurred with the appellate authority. The revenue appealed to this Court, principally contending that the lower authorities had placed the burden of proof on the revenue contrary to law.

Legal Issues Presented

Whether the Tribunal and the Commissioner of Income-tax (Appeals) wrongly placed the burden of proof on the revenue in respect of the 77 gold bangles found in the possession of the assessee.
Whether, having established possession of the gold ornaments with the assessee, the onus was on the assessee to prove that the ornaments did not belong to her (i.e., to prove the source), particularly in the absence of reliable documentary evidence such as a statutory register.
Whether the alleged wrong application of settled law by the lower authorities gave rise to a substantial question of law within the meaning of Section 260-A of the Income-tax Act, warranting this Court's interference.

Arguments of the Parties

Appellant's (Revenue) Arguments

Senior Central Government Standing Counsel (Taxes) P.K. Ravindranatha Menon submitted that both the Commissioner of Income-tax (Appeals) and the Tribunal committed a grave error by placing the burden of proof on the revenue.
Reliance was placed on the sworn statement recorded from Govindarajan during the search, which stated that the gold ornaments were brought on the morning of 22-1-1992 by V.S. Raju and received by Devarajan, and that the gold given the previous day had not yet been converted into new bangles.
Counsel argued there was no reason to disbelieve Govindarajan's sworn statement and that the subsequent letters of five customers were obtained only to explain away that sworn statement.
Authorities relied on by the revenue's counsel included Chuharmal v. CIT (1988) 172 ITR 250, Parimisetti Seetharamamma v. Commissioner of Income-tax (1965) 57 ITR 532, J.S. Oparkar v. V.B. Palekar (1974) 94 ITR 616 and Commissioner of Income-tax v. Precision Finance Pvt. Ltd. (1994) 208 ITR 465. Counsel also relied on Section 110 of the Evidence Act to submit that where a person is found in possession of anything, the burden of proving that he is not the owner is on the person who asserts that he is not the owner.
On those bases counsel argued that the onus was on the assessee to prove that the seized ornaments did not belong to her and that the lower authorities had erred in placing the onus on the revenue.

Respondent's (Assessee) Arguments

Counsel for the respondent (Sri. K. Anand) contended that the letters and affidavit from the five customers (claimants) dated 13-5-1992 were credible and ought to be accepted; the claimants were described as persons of means and standing in society.
It was submitted that the Commissioner of Income-tax (Appeals) and the Tribunal concurrently found on facts that the five customers had entrusted the gold for conversion and there was no reason to discard their evidence.
Counsel further submitted that no substantial question of law arose and that the concurrent findings of fact by the authorities below should not be disturbed. Reference was made to a recent apex court decision cited as (2005) 2 SCC 550.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Chuharmal v. CIT, (1988) 172 ITR 250	Cited by revenue's counsel to support the proposition that, once possession of the gold ornaments with the assessee is established, the onus of proving that those ornaments do not belong to the assessee is on the assessee.	The opinion records reliance on the general principle that a person in possession must explain the source. The Court applied that principle to find that the burden was on the assessee to dislodge the presumption arising from possession and restored the assessing officer's order.
Parimisetti Seetharamamma v. Commissioner of Income-tax, (1965) 57 ITR 532	Mentioned by revenue's counsel (as authority supporting burden-related principles invoked by the revenue).	The opinion records the authority as relied upon by revenue; the Court proceeded on the trite proposition that possession entails a heavy burden on the possessor to explain source and applied that proposition to the facts.
J.S. Oparkar v. V.B. Palekar, (1974) 94 ITR 616	Referenced by revenue's counsel in support of the burden/onus arguments.	The opinion records the reference; the Court's reasoning reiterates the settled law about burden on the person in possession and applies that reasoning to allow the revenue's appeal.
Commissioner of Income-tax v. Precision Finance Pvt. Ltd., (1994) 208 ITR 465	Cited for the proposition that an assessee must prove the identity of creditors, their creditworthiness and the genuineness of transactions.	The opinion cites the Precision Finance decision as part of the authorities relied upon by revenue; the Court relied on the absence of reliable documents and the heavy burden on the assessee, consistent with the principles set out in that decision.
(2005) 2 SCC 550	Referenced by counsel for the respondent; the text does not specify the authority's name or the principle drawn from it.	The opinion records that counsel for the respondent made reference to this recent apex court decision, but the text does not state how (or whether) the Court applied that specific authority to its reasoning.

Court's Reasoning and Analysis

The Court's analysis proceeded in the following sequence, relying on the materials and findings recorded in the proceedings below:

The Court identified the primary legal error alleged by the revenue: that the Commissioner of Income-tax (Appeals) and the Tribunal had placed the burden of proof on the revenue rather than on the assessee who was in possession of the goods.
The Court stated the settled principle that where a person is found in possession of an article, the burden of proving its source (i.e., that it does not belong to the possessor) rests on that person. The opinion describes this as "trite law."
The Court examined the sworn statement of Govindarajan (recorded during the search), which explicitly stated that the ornaments were received from Raju on the morning of 22-1-1992 and that the gold given was yet to be converted into new bangles. The Court noted that this sworn statement contradicted the later letters produced on behalf of the assessee.
The Court addressed the Tribunal's reliance on the social status or means of the five claimants as a basis for accepting their statements. The Court rejected the relevance of "means" or social standing to determine the acceptability of their statements, observing that such a factor does not determine credibility in the face of sworn statements contrary to those claims.
The Court observed that the seized items were newly made bangles (77 in number) whereas the sworn statement indicated the gold given the previous day had not yet been converted. From that factual posture the Court found "overwhelming evidence" that the bangles were unaccounted for and there was no credible evidence of their source.
The Court noted the absence of reliable documentary evidence such as the statutory register under rule 16(3) of the Gold Control (Forms etc.) Rules, and recorded that because the assessee had not complied with that statutory requirement, the burden on the assessee to explain the nature and source of the seized articles was heavy.
For these reasons the Court concluded that the lower authorities had erred in placing the burden on the revenue; that this constituted a wrong application of settled legal principles; and that such an error amounted to a substantial question of law under Section 260-A of the Income-tax Act.
Consequently the Court allowed the revenue's appeal, set aside the orders of the Commissioner of Income-tax (Appeals) and the Tribunal, and restored the assessing officer's order.

Holding and Implications

Holding: The appeal is allowed. The High Court set aside the orders of the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal and restored the order of the assessing officer (i.e., the assessing officer's assessment treating the value of the seized gold bangles as the assessee's income from undisclosed sources was restored).

Implications:

Direct effect on the parties: The assessing officer's finding that the 77 newly made gold bangles (totaling 502.330 gms and valued at Rs. 233,081) were unaccounted for and belonged to the assessee is restored; the addition treated as income stands reinstated.
On the law of burden: The Court reaffirmed the settled proposition that possession of an article gives rise to a heavy burden on the possessor to prove the source of that article. The Court held that the lower authorities erred in reversing that onus and accepting post-search letters without reliable contemporaneous documentation or satisfactory explanation in the face of a sworn statement recorded during the search.
Statutory/documentary compliance: The Court emphasized that the absence of a statutory register under rule 16(3) of the Gold Control (Forms etc.) Rules and the lack of reliable documents increased the assessee's burden to explain the origin of the seized articles.
Precedential scope: The opinion proceeded on established principles and treated the error below as raising a substantial question of law under Section 260-A. The opinion does not purport to lay down a new legal principle beyond applying settled law to the facts; the direct effect is the restoration of the assessing officer's order in this matter.

ITA is allowed.

Show all summary ...

The Judgment of the Court was delivered by

K.S Radhakrishnan, J.:— This appeal has been preferred by the Commissioner of Income-tax, Trivandrum aggrieved by the order of the Income-tax Appellate Tribunal in ITA. 79.Coch/96 dated 28-4-2000. Though four questions have been framed in the appeal, revenue is primarily aggrieved by the order of the Tribunal in wrongly placing the burden of proof on the revenue.

2. Assessee is an individual and carries on business as the proprietrix of M/s. Padmaja Jewellers. A search was conducted in the business premises of the assessee on 23-1-1992. During the search operations it was found that the assessee was in possession of unaccounted stock of gold weighing 502.330 gms in the form of 77 numbers of new gold bangles. At the time of search on 23-1-92 one Govindraj, brother of the assessee's husband was present in the assessee's jewellery shop. Statement was recorded from him. He stated that he was engaged in the work of making gold ornaments, particularly bangles and that G.S 12 register was kept for such work and that his brother Devarajan, the assessee's husband, was writing the said register. Further it was also stated that gold weighing 450 gms. were given for preparing ornaments by one Raju, brother of the assessee, on the morning of 22-1-92, a day previous to the date of search. Govindarajan also stated that gold was accepted by his elder brother Devarajan who was at the shop when the gold was given to him for making the ornaments. Govindarajan had also stated that gold given by Raju on the previous day was yet to be converted into new bangles. From the above facts the assessing officer came to the conclusion that if at all Raju had given to Govindarajan any gold ornaments, they were not converted into new gold ornaments, and therefore the new gold ornaments of 77 bangles found at the time of search at the shop was not accounted for and the source for the acquisition of the gold was not known or explained. The assessee however, at the time of hearing filed a written statement before the Assistant Directpr of Investigation stating that the gold ornaments seized belong to five customers who had given gold ornaments for remaking them to new bangles. A letter to that effect was also sent to the investigating officer. Following are the names and quantity of gold ornaments alleged to have been given by five customers.

1. Smt. Krishammal 116.400 gms. 2. Shri. B. Rajendran 98.870 gms. 3. Shri. P. Pushpadas 96.300 gms. 4. Shri. P.M Prasanna Babu 112.40 gms. 5. Shri Chandrasekharan Pillai 150.200 gms.

3. Assessing authority noticed that the statement filed by the assessee was contrary to the worn statement recorded from Govindarajan during the course of search. Govindarajan lad clearly stated that about 450 gms. of gold ornaments were brought by Raju, partner of M/s. Karthika Jewellery on the morning of the previous day and that ornaments were received by his brother Devarajan. Assessing authority did not believe the statement of the assessee that the gold ornaments were entrusted by five customers mentioned herein before. Assessing authority therefore concluded that the 5 claimants joined the fray just to help the assessee. It was therefore concluded that the gold ornaments weighing 502.330 gms. seized from the business premises of the assessee really belong to the assessee. Value of gold ornaments assessed at Rs. 233081/- was treated as the assessee's income from undisclosed source.

4. Aggrieved by the order of assessing officer assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals) who allowed the appeal on the following reasoning:

“On Consideration of the aforesaid evidence which have not been disproved in the impugned order, it is difficult to accept that the ornaments represented the assessee's undisclosed income. The persons who had claimed ownership are persons of standing. One of the claimants is an employee in the Panchayat Office, another in a Kerala Govt. Undertaking yet another is a practicing lawyer and the fourth is a Live-stock Inspector in the Veterinary Department of the Kerala Government. Considering the status of the claimants and the quantum of jewellery claimed to have been entrusted by them for converting into new ones and the fact that the machinery is capable for making more than 77 bangles, the preponderance of probability is that they belong to the claimants and not to the assessee. The addition on this account is therefore deleted.”

5. Revenue aggrieved by the said order took up the matter in appeal before the Tribunal. Tribunal concurred with the view of the appellate authority and held as follows:

“Considering the facts brought on record, we are of the view that there is no reason to disturb the order of the First appellate authority. The reason is, as rightly pointed out by the first appellate authority, the persons who came forward with the claim that they had entrusted gold with the assessee, are persons of means. Therefore, there is no reason why their statements should be discarded or disbelieved. It is not brought on record to show that the claim of the assessee that the machinery installed at her jewellery shop could produce or convert gold into 100 bangles per day was incorrect. No attempt has been made to discredit the above statement. It is true that there is inconsistencies in the statements of the assessee. The deponents say that they had entrusted gold as directed by Sri. Raju. The inconsistency in the statements that gold was entrusted by Sri. Raju or it was entrusted as directed by him alone is not sufficient to discredit the claim of the five parties. The reason is, it is difficult to believe that these five persons, who are either in service or carrying on profession as lawyer, will come forward with such a false claim only to accommodate the assessee. In the light of the above facts, we are of the view that no sufficient material has been brought on record to dislodge the finding of the CIT (Appeals).

6. Sri. P.K Ravindranatha Menon, Senior Central Government Standing Counsel (Taxes) submitted that that CIT (Appeals) as well as the Tribunal have committed a grave error in placing burden of proof on the revenue. Counsel submitted that the reasoning adopted by the appellate authority as well as the tribunal to accept the statement of five customers are unsustainable and made on an afterthought. Counsel took us through the sworn statement given by Govindarajan which was recorded during the course of search operation and which would indicate that the entire gold ornaments were brought by one V.S Raju, partner of M/s. Karthika Jewellery on the morning of the previous day of the search and that the gold ornaments were received by his brother Devarajan, who had handed over it to Govindarajan for preparing new ornaments. Counsel submitted there is no reason to disbelieve those statements made by a person in charge of jewellery, and it is only to wriggle out of the sworn statement made during the period of search that letters of five customers were subsequently obtained to show the source from where gold ornaments were obtained. Counsel placed reliance on the decision of the apex court in Chuharmal v. CIT, (1988) 172 ITR 250 and submitted that since possession of the gold ornaments with the assessee has been established, the onus of proving that those gold ornaments do not belong to the assessee is on the assessee. Counsel submitted that the burden of proof was wrongly placed on the revenue and it amounts to a substantial question of law. Counsel made reference to the decision of the apex court in Parimisetti Seetharamamma v. Commr. of Income-tax, (1965) 57 ITR 532. Counsel also made reference to the judgment of the Bombay High Court in J.S Oparkar v. V.B Palekar, (1974) 94 ITR 616. Reference was made to the provisions of the Evidence Act. Referring to section 110 of the Evidence Act counsel submitted that all that section 110 of the Evidence Act does is that it embodies a salutary principle of common law jurisprudence which could be attracted to a set of circumstances that satisfy its condition. section 110 of the Evidence Act provides that where a person is found in possession of anything, the burden of proving that he is not the wner is on the person who affirms that he not the owner. Counsel also referred to a lecision of the Calcutta High Court in Commissioner of Income-tax v. Precision Finance Pvt. Ltd., (1994) 208 ITR 465. The court held that it is for the assessee to prove the dentity of the creditors, their creditworthiness and the genuineness of the transactions.

7. Counsel appearing for the respondent Sri. K. Anand on the other hand contended that there is no reason to disbelieve the letter of the assessee dated 13-5-1992 and the letters and affidavit submitted by five customers who had entrusted the gold for remaking the same to gold bangles. Counsel submitted that they are men of means and status in the society and their statements ought to have been accepted. Counsel further submitted that the Commissioner of appeals as well as the Tribunal on facts concurrently found that gold ornaments were entrusted by five customers and consequently there is no reason to discard their evidence. In any view of the matter, counsel submitted that no substantial question of law arises for consideration in this appeal and consequently, this court shall not disturb the findings of fact rendered by the authorities below. Counsel made reference to a recent decision of the apex court in (2005) 2 SCC 550.

8. We are of the view this is a case where the Commissioner of Income-tax (Appeals) as well as the Tribunal wrongly placed the burden of proof on revenue. It is trite law that a person who is in possession of an article has to prove its source. Tribunal in its order though found inconsistency in the statement of the assessee concluded that there is no reason to discard those statements of five customers. Further, tribunal has stated that those customers are persons of means and so there is no reason why their statement should not be disbelieved. We fail to see how the question of means determines the acceptability or otherwise of the statements. Further the assessee is pitted against the sworn statement of Govindrajan for which the assessee has no explanation. In the sworn statement given by Govindarajan the following questions were put to him.

“Q. As per G.S 21 Register of this shop, it is seen that nobody has given any gold to this institution for making after 1-11-1991. is this correct?

A. Yes, it is correct. The work has very less for the last may days. So no gold was received for work.

Q. What is the stock of gold in this shop at present?

A. There is approximately more than 500 gms of gold here at present.

Q. Who was given the above mentioned gold?

A. It was received yesterday at 9.00 A.M from Mr. Raju, Karthika Jewellery, Alleppey.

Q. When gold was received for working from Karthika Jewellery, whether the legal voucher was given along with its?

A. I do not know. It is my elder brother who is writing all these things.

Q. All the gold given by Mr. Raju yesterday from his shop are kept here working, isn't it so?

A. Yes”.

9. The original statement in Malayalam with regard to the last of the above questions and answers reads as follows:

10. Sworn statement given by Govindarajan would show that gold ornaments were brought to the shop by Raju, partner of Karthik Jewellery on the morning of the previous day, i.e, 22-1-1992 and the gold ornaments were received by his brother Devarajan who had handed over it for preparing new ornaments. It is evident from the sworn statement that the gold ornaments given by Raju on the previous day was yet to be converted into new bangles. But what was seized from the premises of the assessee on 23-1-1992 were 77 newly made bangles. There is overwhelming evidence to show that the new gold ornaments by way of 77 bangles found at the time of search at the shop Padmaja jewellery were not accounted for and there was no evidence for its source. Consequently, it can safely be concluded that those bangles belong to the assessee. Burden is heavy on the assessee to dislodge the above facts for which no evidence was adduced by the assessee. Without any reliable documents it is difficult to accept the subsequent statements of those customers even if they are men of standing or men of means. Commissioner of Income-tax (Appeals) as well as the Tribunal, in our view wrongly cast the burden on the revenue and a wrong application of settled principles of law amounts to an error of law giving rise to a substantial question of law within the meaning of Section 260-A of the I.T Act. No reliable document such as register under rule 16(3) of the Gold Control (Forms etc.) Rules was kept or produced at the rime of search. Since the assessee had not complied with the statutory requirement the burden was heavy on the assessee to show that the gold bangles does not belong to the assessee. That being the factual and legal position we are inclined to allow this appeal and set aside the orders of the Commissioner of Income-tax (Appeals) as well as the Tribunal and restore the order of the assessing authority.

11. ITA is allowed as above.