Before we move towards main question i.e. whether addition of income can be made on the basis of entries found in diaries or books of account during income tax search, we need to analysis whether entries in diaries found during search is fall under evidence as per Section 34 of Indian Evidence Act, 1872
Hon’ble Supreme Court of India in the matter of Central Bureau of Investigation vs V.C. Shukla & Ors (Judgement passed on 02/03/1998) has made following analysis whether entries in diaries found during search is fall under evidence as per Section 34 of Indian Evidence Act, 1872.
Section 34 of Indian Evidence Act, 1872 reproduced as below;
“Section 34: Entries in books of account when relevant-
Entries in the books of account [including those maintained in an electronic form] regularly kept in the course of business, are relevant whenever they refer to a matter into which the court has to inquire, but such statements shall not alone be sufficient evidence to charge any person with liability.”
In the aforesaid case the Central Bureau of Investigation (CBI), New Delhi, searched the premises of J.K. Jain at G-36 Saket, New Delhi to work out an information received while investigating RC Case No. 5(S)/91 SIU (B)/CBI/New Delhi. In course of the search they recovered, besides other articles and documents, two diaries (marked MR 68/91 and MR 71/91), two small note books (MR 69/91 and MR 70/91) and two files (MR 72/91 and MR 73/91) containing details of receipts of various amounts from different sources recorded in abbreviated forms of ditties and initials and details of payments to various persons recorded in similar fashion.
Analysis of Hon’ble Supreme Court of India
From a plain reading of the Section it is manifest that to make an entry relevant thereunder it must be shown that it has been made in a book, that book is a book of account and that book of account has been regularly kept in the course of business. From the above Section it is also manifest that even if the above requirements are fulfilled and the entry becomes admissible as relevant evidence, still, the statement made therein shall not alone be sufficient evidence, still, the statement made therein shall not along be sufficient evidence to charge any person with liability. It is thus seen that while the first part of the section speaks of the relevancy of the entry as evidence, the second park speaks, in a negative way, of its evidentiary value for charging a person with a liability. It will, therefore, be necessary for us to first ascertain whether the entries in the documents, with which we are concerned, fulfil the requirements of the above section so as to be admissible in evidence and if this question is answered in the affirmative then only its probative value need be assessed.
‘Book’ ordinarily means a collection of sheets of paper or other material, blank, written, or printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as ‘book’ for they can be easily detached and replaced. In dealing with the work ‘book’ appearing in Section 34 in Mukundram vs. Dayaram [AIR 1914 Nagpur 44], a decision on which both sides have placed reliance, the Court observed:-
“In its ordinary sense it signifies a collection of sheets of paper bound together in a manner which cannot be disturbed or altered except by tearing apart. The binding is of a kind which is not intended to the moveable in the sense of being undone and put together again. A collection of papers in a portfolio, or clip, or strung together on a piece of twine which is intended to be untied at will, would not, in ordinary English, be called a book…………………………. …………………………..I think the term “book” in S. 34 aforesaid may properly’ be taken to signify, ordinarily, a collection of sheets of paper bound together with the intention that such binding shall be permanent and the papers used collectively in one volume. It is easier however to say what is not a book for the purposes of S. 34, and I have no hesitation in holding that unbound sheets of paper in whatever quantity, though filled up with one continuous account, are not a book of account within the purview of S. 34.”
We must observe that the aforesaid approach is in accord with good reasoning and we are in full agreement with it. Applying the above tests, it must be held that the two spiral note books (MR 68/91 and 71/91) and the two spiral pads (MR 69/91 and MR 70/91) are “books” within the meaning of Section 34, but not the loose sheets of papers contained in the two files (MR 72/91 and MR 73/91).
The next question is whether the above books fulfil the other requirements of Section 34 so as to be admissible in evidence. Mr. Altaf Ahmed, the learned Additional Solicitor General, appearing for the appellant submitted that the interpretation of the High Court that the expressions “books of account” and “business” appearing in the above section refer and relate to only such business as may exist between two persons such as a seller and purchaser, creditor and debtor, is anomalous for such a truncated view would disable law from dealing with illicit business and situations connected therewith, such as the case in hand, where a conspiracy was hatched up to receive money through hawala channels and other sources and to distribute it as bribes to politicians to influence favorable decisions from them. According to Mr. Altaf Ahmed, the expression “business” under Section 34 should receive the widest possible meaning and should be under stood and construed to mean and include all such efforts of people, which, by varied methods of dealing with each other are designed to improve their individual economic conditions and satisfy their desires. he submitted that any book in which monetary transactions are recorded and reckoned would answer the description of ‘book of account’ within the meaning of the aforesaid section. Relying upon the dictionary meanings of the above two words, namely, ‘business’ and ‘account’ and the interpretations given to those words by various Courts of law, he submitted that the book (MR 71/91) and the connected documents would clearly prove that they were books of account maintained in respect of the illegal business that the Jain were carrying. His last contention on this aspect of the matter was that the transactions contained in MR 71/91 and the connected documents were an inherently credible record of the business in question and the books were maintained with such regularity as was compatible with the nature of the business the Jain brothers were carrying and consequently those books would be admissible in evidence under Section 34.
Mr. Sibal, the learned counsel for the Jains, did not dispute that the spiral note books and the small pads are ‘books’ within the meaning of Section 34. He, however, strongly disputed the admissibility of those books in evidence under the aforesaid section on the ground that they were neither books of account nor they were regularly kept in the course of business. he submitted that at best it could be said that those books were memoranda kept by a person for his own benefit. According to Mr. Sibal, in business parlance ‘account’ means a formal statement of money transactions between parties arising out of contractual or fiduciary relationship. Since the books in question did not reflect any such relationship and, on the contrary, only contained entries of monies received from one set of persons and payment thereof to another set of persons it could not be said, by any stretch of imagination that they were books of account, argued mr. Sibal. He next contended that even if it was assumed for argument’s sake that the above books were books of account relating to a business still they would not be admissible under Section 34 as they were not regularly kept. It was urged by him that the words ‘regularly kept’ mean that the entries in the books were contemporaneously made at the time the transactions took place but a cursory glance of the books would show that the entries were made therein long after the purported transactions took place. In support of his contentions he also relied upon the dictionary meanings of the words ‘account’ and ‘regularly kept’.
The word ‘account’ has been defined in Words and Phrases, permanent Edition, Volume IA at pages 336 to 338 to mean (i) a claim or demand by one person against another creating a debtor-creditor relation’ (ii) a formal statement in detail of transactions between two parties arising out of contracts or some fiduciary relation. At page 343 of the same book the word has also been defined to mean the preparation of record or statement of transactions or the like; a statement and explanation of one’s administration or conduct in money affairs; a statement of record of financial transactions, a reckoning or computation; a registry of pecuniary transactions or a reckoning of money transactions’ a written or printed statement of business dealing or debts and credits; or a certain class of them. It is thus seen that while the former definitions give the word ‘account’ a restrictive meaning the latter give it a comprehensive meaning. Similarly is the above word defined, both expansively, in Black’s Law Dictionary (Sixth Edition) to mean’s detailed statement of the mutual demands in the nature of debit and credit between parties arising out of contracts or some fiduciary relation. A statement in writing, of debits and credits, or of receipts and payments; a list of items of debits and credits, with their respective dates. A statement of pecuniary transactions; a record or course of business dealings between parties; a list of statement of monetary transactions, such as payments, losses, sales, debits, credits, accounts payable, accounts receivable, etc., in most cases showing a balance or result of comparison between items of an opposite nature.’ Mr. Altaf Ahmed relied upon the wider definition of the word ‘account’ as mentioned above to conned that MR 71/91 fulfills the requirements of ‘account’ as it records a statement of monetary transactions – such as receipts and payments – duly reckoned. Mr. Sibal on the other hand urged that business accounts must necessarily mean only those accounts which record transactions between two parties, arising out of a contract or some fiduciary relations ( a meaning accepted by the High Court). He submitted, relying upon the definition of ‘memorandum’ as appearing in ‘words and Phrases’, that MR 71/91 could at best be described as a memorandum of some transactions kept by a person for his own benefit to look into same if and when the occasion would arise.
From the above definitions of ‘account’ it is evident that if it has to be narrowly construed to mean a formal statement of transactions between two parties including debtor-creditor relation and arising out of contract, or some fiduciary relations undoubtedly the book MR 71/91 would not come within the purview of Section 34. Conversely, if the word ‘account’ is to be given wider meaning to include a record of financial transactions properly reckoned the above book would attract the definition of ‘book of account’.
It cannot be gainsaid that the words ‘account’, ‘books of account’, ‘business’ and ‘regularly kept’ appearing in Section 34 are of general import. necessarily, therefore, such words must receive a general construction unless there is something in the Act itself, such as the subject matter with which the Act is dealing, or the context in which the words are used, to show the intention of the legislature that they must be given a restrictive meaning.
In Mukundram (supra) after dealing with the word ‘book’ (to which we have earlier referred) the Court proceeded to consider what is meant by a ‘book of account’ under Section 34 and stated as under:
” To account is to reckon, and I an unable to conceive any accounting which does not involve either addition or subtraction or both of these operations of arithmetic. A book which contains successive entries of items may be a good memorandum book; but until those entries are totalled or balanced, or both, as the case may be, there is no reckoning and no account. In the making of totals and striking of balances from time to time lies the chief safeguard under which books of account have been distinguished from other private records as capable of containing substantive evidence on which reliance may be placed.”
We have no hesitation in adopting the reasoning adumbrated in the above observations. The underlined portion of the above passage supports the contention of Mr. Altaf Ahmed and rebuts that of mr. Sibal that Mr 71/91 is only a memorandum for the entries made therein are totalled and balanced. We are, therefore, of the opinion that MR71/91 is a ‘book of account’ as it records monetary transactions duly reckoned.
Coming now to the word ‘ business’, we need not search for its meaning in Black’s Law Dictionary, or words and Phrases for this Court has dealt with the word in a number of cases. In Narain Swadesh Weaving Mills vs. The Commissioner of Excess profits Tax [ 1955 (1) SCR 952], a five judge bench of this Court held that the word ‘business’ connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose’ and the above interpretation was quoted with approval in Mazagaon Dock Ltd. vs. The Commissioner of Income Tax and Excess Profits Tax [1959 SCR 848]. Again in Barendra Prasad Ray vs. I.T.O. [1981 92) SCC 693] this court observed that the word ‘business’ is one of wide import ad it means an activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. The activities of the Jain brothers, as sought to be projected by the prosecution now on the basis of the materials collected during investigation (detailed earlier) would, therefore, be ‘business’ for they were being carried on continuously in an organised manner, with a set purpose (be it illegal) to augment their own resources. mr. 71/91 is, therefore, a book of account kept in the course of business.
That brings us to the question whether it was ‘regularly kept’ so as to satisfy the last requirement of Section 34 to be admissible in evidence as a relevant fact. Mr. Altaf Ahamed submitted that the above question has got to be answered keeping in view the nature of business the Jain brothers were carrying on and that when MR 71/91 is Scanned in that perspective it is obvious that it was regularly kept. In refuting the above contentions Mr. Sibal relied upon $ 1550 of American Jurisprudence, proof of Facts (Volume 34, Second Series) wherein it has been observed that not merely regularity is required; the entry must have been fairly contemporaneous with the transaction entered. he also referred to $ 1526 of the same book which reads as under:
The entry should have been made at or near the time of the transaction recorded – not merely because this is necessary in order to assure a fairly accurate recollection of the of the matter, but because any trustworthy habit of making regular business records will ordinarily involve the making of the record contemporaneously. The rule fixes no precise time’ each case must depend on its own circumstances.” (emphasis supplied) Mr. Sibal submitted that from a cursory glance of MR 71/91. It would be apparent that the entries therein were not contemporaneously made; and, on the contrary, they were made monthly which necessarily meant that those entries were made long after the dates the purported transactions of receipt and disbursement took place.
What is meant by the words ‘regularly kept’ in Section 34 came up for consideration before different high Courts; and we may profitable refer to some of those decisions cited at the Bar. In Ramchand Pitembhardar Vs. Emperor [19 Indian cases 534] it has been observed that the books are ‘regularly kept in the corse of business’ if they are kept in pursuance of some continuous and uniform practice in the current routine of the business of the particular person to whom they belong. In Kesheo Rao vs. Ganesh [AIR 1926 Nagpur 407] the court interpreted the above words as under:
” The regularity of which S.34 speaks cannot possibly mean that there is not mistake in the accounts, as that would make the section a dead letter; no accounts could be admitted in evidence till they had been proved to be absolutely correct, which is in itself an impossible task and also cannot be begun till they have been admitted in evidence. Regularly or systematically means that the accounts are kept according to a set of rules or a system, whether the accountant has followed the rules or system closely or not. Nor is there any thing in the section that says the system must be an elaborate or reliable one. Both those matters, the degree of excellence of the system and the closeness with which it has been followed, affect the weight of the evidence of an entry, not it s admissibility. The roughest memoranda of accounts kept generally according to the most elementary system, though often departing from its, are admissible in evidence, but would of corse have no weight.”
The view expressed by the Kerala High Court in Kunjamman Vs. Govinda Kurukkal [1960 kerala Law Times 184] in this regard is that the words ‘regularly kept’ do not necessarily mean kept in a technically correct manner for no particular set of rule or system of keeping accounts is prescribed under Section 34 of the Evidence Act and even memoranda of account kept by petty shopkeepers are admissible if they are authentic While dealing with the same question the Punjab & Haryana High Court observe in Hiralal Mahabir Pershad Vs. Mutsaddilal Jugal Kishore [(1967) 1 I. L. R P &: H 435] that the entries should not be a recital of past transactions but an account of transactions as they occur, of course, not necessarily to be made exactly at the time of occurrence and it is sufficient if they are made within a reasonable time when the memory could be considered recent.
In our considered opinion to ascertain whether a book of account has been regularly kept the nature of occupation is an eminent factor fr weighment. The test of regularity of keeping accounts by a shopkeeper who has dally transactions cannot be the same as that of a broker in real estates. Not only their systems of maintaining books of account will differ but also the yardstick of contemporaneity in making entries therein. We are, therefore, unable to subscribe to the view of Mr. Sibal that an entry must necessarily be made in the book of account at or about the time the related transaction takes place so as to enable the book to a pass the test of ‘regularly kept’. Indeed the above Section ($ 1526) expressly lays down (emphasised earlier) that the rule fixed no precise time and each case must depend upon its own circumstances. Applying the above tests and the principles consistently laid down by the different High Courts (referred to above) we find that Mr 71/91 has been regularly and systematically maintained. Whether the system in which the book has been maintained guarantees its correctness or trustworthiness is a question of its probative value and not of its admissibility as a relevant fact under Section 34. The other three books, namely MR 68/91 and MR 70/91 would not however come within the purview of the above Section, for, even though some of the emonetary transactions entered therein appear to be related to those in MR 70/91, they (the three books) cannot be said to be books of account regularly kept.
Therefore, entries in diaries found during search shall be considered as under evidence as per Section 34 of Indian Evidence Act, 1872 only if;
a. Such diaries fulfil the requirement of “book” i.e. a collection of sheets of paper bound together with the intention that such binding shall be permanent and the papers used collectively in one volume.
Unbound sheets of paper in whatever quantity, though filled up with one continuous account, are not a book of account within the purview of S. 34 i.e. loose sheets of papers are not book.
b. Once diaries fulfil the requirement of “book”, the next question needs to determine whether such book is fulfilling the requirement of books of account and regularly kept in the course of business. This question depends upon on the nature of business / occupation of the assessee and the same shall be changed according to the circumstances.
Now we move towards main question i.e. whether addition of income can be made on the basis of entries found in diaries or books of account during income tax search;
In aforesaid case Hon’ble Supreme Court of India has made following analysis on question i.e. whether addition of income can be made on the basis of entries found in diaries during income tax search
Mr. Sibal submitted that the evidence that has been collected during investigation only shows that the entries were made by J. K. Jain and that the Jain brothers had put certain signatures against some of those entries it there is no evidence whatsoever to prove that movies were actually paid by the Jains and received by the payees as shown in the entries, without proof of which no case, even prima facie, could be said to have ben made out against any of therm. According to Mr. Sibal and Mr. Jethmalani, learned Counsel for Shri Advani by more proof of a document the truth of the contents thereof is to proved and independent evidence for that purpose is required. In absence of any such evidence, they contended, no liability can be foisted under Section 34.
The rationale behind admissibility of parties’ books of account as evidence is that the regularity of habit, the difficulty of falsification and the fair certainty of ultimate detection give them in a sufficient degree a probability of trustworthiness (wigmore on evidence $ 1546). Since, however, an element of self interest and partisanship of the entrant to make a person – behind whose back and without whose knowledge the entry is made – liable cannot be ruled out the additional safeguard of insistence upon other independent evidence to fasten him with such liability, aha been provided for in Section 34 by incorporating the words such statements shall not alone be sufficient to charge any person with liability.
The probative value of the liability created by an entry in books of account came up for consideration in Chandradhar vs. Gauhati Bank [1967 (1) S. C. R. 898]. That case arose out of a suit filed by Gauhati Bank against Chandradhar (the appellant therein ) for recovery of a loan of Rs. 40,000/- . IN defence he contended, inter alia, that no loan was taken. To substantiate their claim the Bank solely relied upon certified copy of the accounts maintained by them under Section 4 of the Bankers’ Book Evidence Act, 1891 and contended that certified copies became prima facie evidence of the existence of the original entries in the accounts and were admissible to prove the payment of loan given. The suit was decreed by the trial Court and the appeal preferred against it was dismissed by the High Court. In setting aside the decree this Court observed that in the face of the positive case made out by Chandradhar that he did not ever borrow any sum from the Bank, the Bank had to prove that fact of such payment and could not rely on mere entries in the books of account even if they were regularly kept in the course of business in view of the clear language of Section 34 of the Act. This Court further observed that where the entries were not admitted it was the duty of the Bank, if it relied on such entries to charge any person with liability, to produce evidence in support of the entries to show that the money was advanced as indicated therein and thereafter the entries would be of use as corroborative evidence.
The same question came up for consideration before different High Court on a number of occasions but to eschew prolixity we would confine our attention to some of the judgements on which Mr. Sibal relied. In Yesuvadiyan Vs. Subba Naicker [A. I. R. 1919 Madras 132] one of the learned judges constituting the Bench had this to say:
S.34, Evidence Act, lays down that the entries in books of account, regularly kept in the course of business are relevant, but such a statement will not alone e be sufficient to charge any person with liability. That merely means that the plaintiff cannot obtain a decree by merely proving the existence of certain entries in his books of account even though those books are shown to be kept in the regular course of business. he will have to show further by some independent evidence that the entires represent real and honest transactions and that the moneys were paid in accordance with those entries. The legislature however does not require any particular form or kind of evidence in addition to entries in books of account, and I take it that any relevant fact s which can be treated as evidence within the meaning of the Evidence Act would be sufficient corroboration of the evidence furnished by entries in books of account if true.”
While concurring with the above observations the other learned Judge stated as under:
” If no other evidence besides the accounts were given, however strongly those accounts may be supported by the probabilities, and however strong may be the evidence as to the honesty of those who kept them, such consideration could not alone with reference to s.34, Evidence Act, be the basis of a decree.”
In Beni Vs. Bisan Dayal [ A. I. R 1925 Nagpur 445] it was observed that entries in book s of account are not by themselves sufficient to charge any person with liability, the reason being that a man cannot be allowed to make evidence for himself by what he chooses to write in his own books behind the back of the parties. There must be independent evidence of the transaction to which the entries relate and in absence of such evidence no relief can be given to the party who relies upon such entries to support his claim against another. In Hira Lal Vs. Ram Rakha [ A. I. R. 1953 Pepsu 113] the High Court, while negativing a contention that it having been proved that the books of account were regularly kept in the ordinary course of business and that, therefore, all entries therein should be considered to be relevant and to have been prove, said that the rule as laid down in Section 34 of the Act that entries in the books of account regularly kept in the course of business are relevant whenever they refer to a matter in which the court has to enquire was subject to the salient proviso that such entries shall not alone be sufficient evidence to charge any person with liability. It is not, therefore, enough merely to prove that the books have been regularly kept in the course of business and the entries therein are correct. It is further incumbent upon the person relying upon those entries to prove that the were in accordance with facts.
The evidentiary value of entries relevant under Section 34 was also considered in Hiralal Mahabir Pershad (supra ) I.D. Dua, ]. (as he then was ) speaking for the Court observed that such entries though relevant were only corroborative evidence and it is to be shown further by some independent evidence that the entries represent honest and real transactions and that monies were paid in accordance with those entries.
A conspectus of the above decisions makes it evident that even correct and authentic entries in books of account cannot without independent evidence of their trustworthiness, fix a liability upon a person. Keeping in view the above principles, even if we proceed on the assumption that the entries made in MR 71/91 are correct and the entries in the other books and loose sheets which we have already found to be not admissible in evidence under Section 34) are admissible under Section 9 of the Act to support an inference about the formers’ correctness still those entries would not be sufficient to charge Shri Advani and Shri Shukla with the accusations levelled against them for there is not an iota of independent evidence in support thereof. In that view of the matter we need not discuss, deleve into or decide upon the contention raised by Mr. Altaf Ahmed in this regard. Suffice it to say that the statements of the for witnesses, who have admitted receipts of the payments as shown against them in MR 71/91, can at best be proof of reliability of the entries so far they are concerned and not others. In other words, the statements of the above witnesses cannot be independent evidence under Section 34 as against the above two respondents. So far as Shri Advani is concerned Section 34 would not come in aid of the prosecution for another reason also. According to the prosecution case itself his name finds place only in one of the loose sheets (sheet No. 8) and not in MR 71/91. Resultantly, in view of our earlier discussion, section 34 cannot at all be pressed into service against him.
Therefore, entries in the diaries or books of accounts are not by themselves sufficient to charge any person with liability.
In view of above where no excess cash or any other incriminating evidence is found, the alone entries in the diaries or books of account cannot be the basis to make the addition.
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