Facts of the Case

The assessee filed a return declaring income primarily from interest sources. The case was selected for scrutiny based on AIR information showing substantial cash deposits exceeding prescribed limits in bank accounts. During the assessment year, the assessee deposited significant cash amounts and submitted a cash flow statement claiming that ₹21.82 lakh was received as loans from friends and relatives.

The Assessing Officer (AO) required details of the lenders, including identity, creditworthiness, and genuineness, which were not furnished. Consequently, the AO treated the deposits as unexplained and added them to income.

During appellate proceedings, the assessee changed the explanation, claiming receipt of ₹24 lakh in cash as advance for sale of a flat to M/s Avtar Chemist under an agreement to sell. The Commissioner (Appeals) conducted inquiries and found that the alleged buyer did not have sufficient cash resources to make such payment. The agreement to sell was also considered doubtful.

Issues Involved

  1. Whether cash deposits in bank accounts were explained or constituted undisclosed income.
  2. Whether the alleged cash advance against sale of property was genuine.
  3. Whether additions for low household expenses and unexplained investments were justified.
  4. Whether the assessee discharged the burden of proof regarding identity, creditworthiness, and genuineness of transactions. 

Petitioner’s Arguments (Assessee)

  • Cash deposits originated from advance received in cash for sale of property.
  • The buyer confirmed payment and produced accounts.
  • Identity and creditworthiness of the buyer were established.
  • Authorities improperly demanded proof of “source of source.”
  • Bank passbook is not books of account; therefore, provisions relating to unexplained credits should not apply.
  • Additional evidence before appellate authority established the genuineness of transactions.

Respondent’s Arguments (Revenue)

  • The assessee failed to provide details of alleged lenders during assessment.
  • Explanation changed at appellate stage, undermining credibility.
  • The alleged agreement to sell was unregistered and doubtful.
  • The buyer lacked sufficient funds to make cash advance.
  • Large cash payments and subsequent refund story lacked evidentiary support.
  • Household expenses declared were unrealistically low considering lifestyle indicators.

Court Order / Findings (ITAT)

  • The assessee provided inconsistent explanations at different stages.
  • The alleged advance payments preceded the agreement to sell, which was against normal human conduct.
  • Stamp papers and documentation raised serious doubts about authenticity.
  • The purported buyer lacked financial capacity to pay the alleged amount.
  • The story of borrowing small sums from numerous persons to generate funds was not credible.
  • The subsequent cancellation of the agreement and refund of cash after several years further weakened the claim.

Important Clarification

The Tribunal clarified that mere paper documentation or confirmation does not establish genuineness if surrounding circumstances indicate otherwise. Tax authorities are entitled to examine the reality of transactions beyond formal evidence. 

Link to download the order - https://itat.gov.in/public/files/upload/1636693126-544-2014ok.pdf

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