The Additional Judicial Magistrate First Class, Rajkot, has acquitted an accused facing prosecution under Sections 277 and 277A of the Income Tax Act, 1961, holding that the Income Tax Department failed to establish the essential ingredients of false statement and falsification of books of account beyond reasonable doubt.
The bench of D.D.Shah (Additional Judicial Magistrate First Class) has observed that merely alleging that documents were fabricated or that statements were false was not sufficient to sustain criminal liability. The prosecution was required to identify the specific false statement or entry and prove its falsity through cogent and admissible evidence.
Buy Now: Supreme Court Judgments E-Magazine – 5 Month Combo (2026) (1st February – 30th June 2026)
The prosecution originated from the seizure of cash amounting to ₹17,06,000 from the accused’s brother on December 19, 2016, during the demonetisation period.
According to the prosecution, the brother stated that the cash belonged to the accused, who was associated with Timir Trading Company, a proprietorship engaged in the retail business of edible oil. Following the seizure, the Income Tax Department issued summons under Section 131(1A) of the Income Tax Act requiring production of books of account and cash vouchers for the relevant financial years to establish the source of the cash.
The Department alleged that the accused subsequently produced non-genuine and fabricated voucher books and books of account to explain the cash. It pointed to several alleged irregularities, including the similar physical condition of voucher books, similarities in handwriting and signatures, absence of buyers’ signatures and the fact that individual vouchers were below ₹20,000.
The prosecution alleged that the documents were prepared or fabricated to establish cash-in-hand and thereby evade tax and penalty. On this basis, prosecution proceedings were initiated under Sections 277 and 277A of the Income Tax Act.
The accused pleaded not guilty and argued that the prosecution was founded on assumptions and doubts rather than legally admissible evidence.
A central defence contention was that Section 277 requires the prosecution to establish a specific false statement or account, demonstrate that it was actually false and further prove that the accused knew or believed it to be false, or did not believe it to be true.
With respect to Section 277A, the defence argued that the Department was required to establish that the accused had wilfully made or caused a false entry or statement with the intention of enabling another identifiable person to evade tax, interest or penalty.
The defence further contended that the prosecution had not identified even a single sentence in the accused’s statement dated December 21, 2016, which was allegedly false. It was argued that the complaint, show-cause notice, sanction order and deposition of the prosecution witness merely described the statement generally as “false” without specifying the particular falsehood.
The defence relied upon the Supreme Court’s decision in Prem Dass v. ITO to contend that the ingredients of Section 277 had to be affirmatively established by the prosecution and that the presumption under Section 278E could not relieve the prosecution of proving the underlying act itself.
While examining the documentary evidence, the Court noted that the Department had relied substantially upon its sanction order and the allegations contained therein.
The Court observed that the sanction order itself recorded that the business had substantial turnover and that the cash book covering November 8, 2016 to December 19, 2016 had been produced on December 20, 2016, at the time of recording the statement before the Income Tax Department.
The record also showed that the accused had produced audit reports, income-tax returns, bank statements, purchase and sales records, registers and VAT returns relating to the relevant financial years. However, the Court noted that the Department had not provided adequate details explaining why these materials were actually fabricated or non-genuine.
The Court observed that merely repeating an allegation that documents were fabricated does not establish fabrication. It noted that the cash book had been produced immediately during the recording of the statement and therefore the prosecution had to establish, through evidence, why and how it was fabricated.
The Court also noted that the Department had not examined buyers of the firm to establish that the absence of their signatures on vouchers was intentional and connected with tax evasion. Further, if tax, interest or penalty was allegedly sought to be evaded, the Department was required to establish the relevant amount of evasion.
The Court found significant evidentiary gaps in the prosecution case.
The officers who had allegedly examined the documents and formed the opinion that the voucher books were fabricated were not examined during the trial. The Court also noted that the voucher books themselves were not produced or exhibited before it.
There was also no witness who identified the handwriting or signatures allegedly relied upon to demonstrate fabrication, nor was an expert examined on that aspect. The Court therefore found that opinions regarding unexhibited documents could not substitute for substantive evidence proving falsification.
The prosecution witness who ultimately deposed in the matter had joined the Income Tax Department after several of the material events had already occurred. During cross-examination, it emerged that the proposal submitted by the predecessor officer for launching prosecution had not been produced before the Court.
The Court observed that the complainant had not provided cogent evidence establishing the alleged non-genuineness of the documents or falsity of the statement, thereby creating reasonable doubt regarding the prosecution’s case.
One of the significant legal issues considered by the Court was whether the statement recorded under Section 131(1A) of the Income Tax Act could itself constitute a statement made in a “verification” for the purposes of Section 277.
The defence argued that Section 131(1A) primarily provides investigative powers, including examination on oath and compelling production of documents. According to the defence, an oral statement recorded during such an investigation could not automatically be treated as a statutory verification contemplated under Section 277.
The Court ultimately found that the prosecution had failed to establish that the statement recorded under Section 131(1A) constituted the kind of verification contemplated by Section 277.
It also found that the prosecution had not established which particular statement made by the accused was false. The Court therefore answered the first issue—whether the Department had proved an intentionally false statement attracting Section 277—in the negative.
The Court also examined Section 278E of the Income Tax Act, which creates a presumption regarding culpable mental state in prosecutions under the Act.
The Court noted the basic criminal law principle that the prosecution must establish the foundational facts of the offence beyond reasonable doubt. Only after the necessary foundational facts are established can the statutory presumption relating to mental state operate.
The Court considered the distinction between the physical elements of an offence and the mental element. It observed that the presumption under Section 278E concerns culpable mental state and does not automatically establish that a particular statement was made by the accused, that it was false, or that a particular entry in the books was fabricated by him.
In the present case, the Court found that no specific false sentence from the statement had been identified, the original record of the statement was not properly proved through the relevant officer, and the allegedly falsified voucher books and cash books were not established as fabricated.
Consequently, the Court held that the necessary foundational facts had not been established so as to invoke the presumption against the accused.
The Court separately considered the charge under Section 277A.
Section 277A concerns wilful falsification of books of account or documents with the intent to enable another person to evade tax, interest or penalty. The provision refers to the person making or causing the false entry as the “first person” and the person intended to benefit from the tax evasion as the “second person.”
The Court found that the prosecution had not clearly established how the accused fell within the statutory category of “first person.” More importantly, even assuming that he was the first person, the prosecution had not established whom he allegedly helped to evade tax.
The judgment specifically records that there was no clarity as to how the accused fell within the category of “first person” under Section 277A or, if he did, whom he had allegedly assisted in evading tax.
The Court therefore concluded that the prosecution had failed to prove the essential ingredients required for an offence under Section 277A.
The record also showed that the tax additions arising from the cash seizure had been challenged by the accused before the appropriate appellate forum.
The Court noted that the accused’s Chartered Accountant had stated that the seized cash belonged to the firm’s business but was not unaccounted money, and that the additions made by the Income Tax Department were already under challenge before the appellate authority.
However, the criminal case was considered independently on the evidence placed before the Court. The central question was whether the statutory ingredients of Sections 277 and 277A had been proved beyond reasonable doubt.
The Court concluded that the prosecution had failed to prove that the accused furnished false or fabricated information in his statement under Section 131(1A).
It further held that the statement had not been shown to constitute a verification attracting Section 277 and that the prosecution had failed to establish that the accused fabricated documents as a “first person” with the intention of enabling a “second person” to evade tax liability.
Accordingly, the Court held that none of the essential ingredients of Sections 277 and 277A had been established against the accused.
The accused was consequently held not guilty of offences punishable under Sections 277 and 277A of the Income Tax Act, 1961.
The Court directed him to execute a bail bond of ₹10,000 with a surety of the same amount for six months under Section 437A of the Code of Criminal Procedure, to remain present before the appellate court if required. Both parties were directed to bear their own litigation costs.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
