The decision in CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) is one of the most influential judgments in Indian tax jurisprudence. It laid down the principle that tax authorities are entitled to look beyond the apparent documents and examine the true nature of a transaction. This case is repeatedly cited in matters involving tax avoidance, sham transactions, colourable devices, and unexplained income. Its relevance has only grown over the decades, as courts continue relying on its reasoning to uncover the real intent behind transactions presented in tax assessments.
The Supreme Court in this case made it clear that taxation is a practical subject, and tax officers cannot be expected to accept every document as gospel truth when circumstances suggest otherwise. This judgment built the foundation for what later came to be described as the doctrine of “substance over form” and the test of human probabilities. These principles have been applied in numerous subsequent cases involving bogus capital gains, fictitious loans, unaccounted cash credits, false gifts, and accommodation entries.
Background of the Case
Durga Prasad More claimed that certain properties were purchased not by him but by his wife using her own funds. The Income Tax Officer rejected the claim and treated the investments as the assessee’s undisclosed income. The assessee argued that documentary evidence supported the claim that the wife was the real owner and that he should not be taxed merely based on suspicion.
The Revenue contended that despite the documents, all circumstances pointed to the fact that the purchases were actually made by the assessee, and the documents were merely a facade for tax avoidance.
The crucial issue before the Supreme Court was:
Are tax authorities bound by the documents produced by the assessee, or can they examine the surrounding circumstances to determine the real nature of a transaction?
Key Observations of the Supreme Court
The Court delivered a landmark ruling that reshaped tax law interpretation. It observed that:
- Evidence must be evaluated based on human conduct and surrounding circumstances.
- Courts and tax authorities are not required to put on blinkers while evaluating documents.
- Taxation must consider realities, not artificial constructions.
The Court famously remarked:
“Science has not yet invented any instrument to test the reliability of the evidence placed before a court. Therefore, courts and tribunals must judge evidence by applying the test of human probabilities.”
This became the foundation for rejecting many tax-motivated claims in future cases.
Also Read: CIT v. Ramaraju Surgical Pvt. Ltd. (2012)
Doctrine of Human Probabilities
The Supreme Court introduced the concept that:
Even if a transaction is supported by documents, the tax officer must consider whether it is consistent with normal human behavior and probabilities.
This doctrine empowered tax authorities to look beyond artificial paperwork when:
- the assessee presents improbable explanations,
- the documents appear self-serving,
- the surrounding circumstances contradict the documents.
Tip
“When documents appear genuine but conduct appears suspicious, examine the human probabilities — not just the paperwork.”
Substance Over Form Rule
The judgment established that taxation must look at the substance of a transaction rather than its form. If documents hide the real nature of the transaction, they can be ignored.
This principle is now used extensively in cases involving:
- bogus gifts,
- shell companies,
- hawala transactions,
- accommodation entries,
- circular trading,
- sham share capital and share premium.
The Revenue is permitted to lift the corporate veil or personal veil to determine the real source of funds.
Impact on Burden of Proof
The case clarified that:
- The assessee must first offer a reasonable explanation for any transaction.
- If the explanation defies logic or normal human conduct, the Revenue is entitled to reject it.
- The burden then shifts to the assessee to substantiate the claim.
This burden-shifting principle has become central to assessments under:
- Section 68 (unexplained cash credits),
- Section 69 (unexplained investments),
- Section 69A (unexplained money),
- Section 69C (unexplained expenditure).
Application in Later Cases
The ruling in Durga Prasad More has been relied upon in several landmark decisions, including:
1. CIT v. Sumati Dayal (1995)
The Supreme Court rejected claims of improbable lottery winnings and reiterated the “test of human probabilities.”
2. McDowell & Co. v. CTO (1985)
The Court cited Durga Prasad More in condemning colourable devices used for tax avoidance.
3. Azadi Bachao Andolan (2003)
Although the Court upheld treaty benefits, the principle that sham transactions are not protected was reaffirmed.
4. Vodaphone International (2012)
Even while allowing the appeal, the Supreme Court reiterated that sham or artificially structured transactions are always open to challenge.
Tip
“Every tax dispute involving sham or artificial structuring must be analyzed using the principles from Durga Prasad More.”
Why This Case Is a Cornerstone in Tax Law (Academic Significance)
For law students and professionals, this case is essential because:
- It forms the basis of anti-abuse principles in tax law.
- It is widely cited in income tax litigation involving unexplained income.
- It bridges the gap between evidence law and tax law by making human conduct a relevant factor.
- It limits the ability of taxpayers to rely solely on paperwork to justify questionable transactions.
- It continues to shape judicial reasoning in modern tax avoidance cases.
This decision also interacts with Evidence Act principles, particularly Sections 114 and 106, regarding presumptions and facts within special knowledge of the assessee.
Conclusion
The ruling in CIT v. Durga Prasad More (1971) stands as a foundational precedent establishing that tax authorities need not blindly accept documents at face value. They are empowered to question improbable transactions, examine real intentions, and apply judicial commonsense. By building the doctrines of human probabilities and substance over form, the case ensures that taxation remains grounded in reality, preventing abuse of legal structures. Its influence spans five decades and continues shaping India’s modern tax system.
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