The trend, of course, is slowly changing, particularly among the judiciary, and there is a growing realisation that taxes are not penalties levied on citizens but is their contribution towards the working of the country. As it was said a long time ago, "taxes are the price of civilization". The law has also tried to keep pace with this approach and often, provisions are made, whereby a certain income is deemed to have arisen to a citizen on availability of prima facie evidence unless he is able to clearly rebut it. In other words, the onus shifts to the citizen. The question, however, which arises is whether such a deeming provision can be carried further to even prosecute him and put him in jail? This is on the ground that having established thatcertain income has arisen to him which, therefore, must have been concealed by him, whether substantive punishment be also meted out to him. Let us understand this issue in more detail before we discuss a recent decision of the Supreme Court on this matter, which has laid down some important principles.

As discussed, to get over the burden of proving that income has arisen to an assessee, deeming provisions in law are made. An example of this is in cases of search and seizure where, it is presumed that papers found which appear to be in the handwriting of a certain person are presumed to be written by him. This presumption enables the officer to add the income revealed by the said document in the hands of the said assessee. Thus, such income would be added by a deeming provision unless clearly refuted. Generally speaking, if an assessee has concealed income, he will be liable to penalty and prosecution. The question therefore is: Will such presumption as regards income will also hold true as regards levy ofpenalty and prosecution?

In the decision in Prem Dass v. ITO (1999) 236 ITR 683 (SC), the assessee was sentenced to imprisonment for allegedly having, in effect, filed a return with incorrect particulars. The chief judicial magistrate originally convicted him. On appeal, the sessions judge acquitted him. The high court on further appeal confirmed the originally order of conviction. Finally, the Supreme Court, as we will see later, acquitted him!

However, the main and substantive point which the Supreme Court made and whereby it found fault with the approach of the high court was with regard a presumption made in one provision of law, whereby assessee is deemed to have concealed income. Under section 132(4A), presumptions are made (i) that assets found during the search belonged to person searched, (ii) that documents purporting to be in the handwriting of a certain person were his, and (iii) that contents of books of accounts found were true, etc. The provision which enabled prosecution of the assessee inthe present case (section 276C) required that it should be demonstrated that the accused wilfully attempted to evade tax. In another provision (Section 277), it was required that the assessee should have knowingly made a false statement.

However, a presumption made as regards a state of affairs relevant for adding an item to the income of the assessee could not help in any way, as the Supreme Court held, in determining whether the pre-requisites of prosecuting an assessee were satisfied. In the words of the Hon'ble Supreme Court, "Wilful attempt to evade any tax, penalty or interest chargeable or imposable under the Act under section 276C is a positive Act on the part of the accused which is required to be proved to bring home the charge against the accused. Similarly, a statement made by a person in any verification under the Act can be an offence under section 277 if the person making the same either knew or believed the same to be false or does not believe it to be true. Necessary means are, therefore,required to be established by the prosecution to attract the provisions of section 277. We see nothing in section 132(4A) which would establish the ingredients of the aforesaid two criminal offences contemplated under sections 276C and 277 of the Income-tax Act."

Thus, to prosecute an assessee, it would have to be positively established that the assessee had knowingly perpetrated that Act sought to be punished. Presumption regarding income has limited application and cannot be carried further beyond a point and certainly not for convicting an assessee, without positively establishing further facts and state of mind.

It is one thing to make a person pay tax on the basis of some presumptions which he is unable to refute or prove wrong. But it is entirely a different proposition to state that, just because he is unable to refute such presumption, he can also be put into jail.

Of course, in this case, there were certain additional factors in the assessee's favour. The assessee succeeded in cancellation ofthe penalty levied, which was seen by the Supreme Court as a relevant factor. It was also observed that much of the difference between the income shown by the assessee and the amount assessed by the Department was because of different estimates. In other words, neither side had the advantage of accuracy and it was a question of judgement and application of two estimates.

In any case, however, the Supreme Court was quite unequivocal on the point that the Department would have to be positively establish a guilty state of mind of the assessee, and deeming provisions of the Act would not help much in this direction. This decision will help avoid injustice to assessees and upholds the principle that many guilty parties may be worth letting go free rather than one innocent party being punished.

(The author is a Mumbai-based Chartered Accountant)