[Opinion] Preponderance – The Test of Probability

CA Sanjeeva Narayan – [2024] 162 taxmann.com 150 (Article)

1. Introduction

The concept of “preponderance of evidence/probabilities” (also referred to as “test of probabilities” or “human probabilities”) is commonly used by the tax authorities in the tax adjudication process as a legal standard for discharging burden of proof. The Department has in recent times, more particularly, invoked and relied upon this legal principle when dealing with the issue of discharge of onus under the deeming provisions and attempting to unearth the actual facts, ground realities and legality or otherwise of certain transactions where direct/conclusive/irrefutable evidence is not available. Illustrative cases where the Department has applied the principle include discharge of onus u/s 68 in respect of cash credits (“accommodation entries”) and allowability of exemption of Long Term Capital Gains u/s 10(38) in respect of transactions in shares (most euphemistically referred to as “penny stock” cases). The attempt in this article is to understand the concept, the underlying intricacies, complexity in its interpretation and nuances in its practical application against the backdrop of decided judicial cases.

2. Standards of Proof

The results of any legal/quasi legal proceedings rest to a large-extent on discharging the burden of proof i.e. the obligation of a party to prove its allegation or a disputed assertion or charge. This, in turn, involves the “standard of proof” he must meet in presenting evidence to the judge/adjudicating authority. A standard of proof determines the type, degree and the amount of evidence that the plaintiff/defendant needs to provide to establish proof in any civil/criminal proceedings in order for the jury to reach a particular result.

3. Depending on the level of certainty and the degree of evidence necessary to establish proof in a civil or criminal proceedings, the various standards of proof can be graded as follows:-

1. “Preponderance of evidence/probability” which requires a plaintiff to show that a particular fact/event is more likely than not to have occurred.
2. “Clear and convincing evidence” which requires the plaintiff to prove that a particular fact is substantially more likely than not to be true.
3. “Beyond reasonable doubt” which is the highest standard of proof and which requires the prosecution to show that the only logical explanation that can be derived from the facts is that the defendant committed the crime and no other logical explanation can be inferred or deduced from the evidence.

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