Facts of the Case

The assessee was engaged in the business of sale, purchase and financing of three-wheelers and scooters on commission basis and also earned rental income from house property. For Assessment Year 2005-06, the assessee declared taxable income of ₹4,05,265.

During assessment proceedings, the Assessing Officer noticed cash deposits aggregating ₹92,80,000 in the bank accounts of the assessee and his minor sons. Upon failure of the assessee to satisfactorily explain the source of these deposits, the Assessing Officer invoked Section 68 and made an addition based on peak cash credit amounting to ₹36,80,000.

In appellate proceedings before CIT(A), the assessee introduced a new explanation that ₹33,00,000 had been received as advance against sale of property under Agreements to Sell executed with prospective purchasers. CIT(A) accepted the explanation and deleted the addition. However, the Revenue succeeded before the ITAT, and the addition was restored. The matter thereafter reached the Delhi High Court.

Issues Involved

  1. Whether the cash deposits made in the bank accounts of the assessee and his minor sons were satisfactorily explained under Section 68 of the Income Tax Act?
  2. Whether the alleged property advance receipts constituted genuine source of funds?
  3. Whether the Tribunal was justified in restoring the addition made by the Assessing Officer?

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee contended that ₹33,00,000 was received as advance against sale of property.
  • The Agreements to Sell, confirmations from proposed buyers, PAN details and Income Tax Returns of buyers were furnished.
  • It was argued that the transaction failed subsequently and the advance amount was returned in cash.
  • The assessee submitted that the Tribunal failed to properly appreciate documentary evidence.
  • It was further argued that if further verification was required, the matter should have been remanded to the Assessing Officer.

Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue argued that the explanation regarding property advance was introduced belatedly and was not disclosed during assessment proceedings.
  • The alleged buyers lacked financial capacity to pay such substantial cash consideration.
  • The transaction structure itself was improbable, as 75% of sale consideration was allegedly paid in cash.
  • The cash deposits were made on multiple dates and not in a manner consistent with a genuine sale transaction.
  • The story of repayment in cash further weakened the credibility of the explanation.

Court Findings / Court Order

The Delhi High Court upheld the order of the Tribunal and dismissed the appeal of the assessee.

The Court observed that:

  • The explanation regarding advance sale consideration was not disclosed before the Assessing Officer and was raised for the first time before CIT(A).
  • The property was a commercial property already rented out to a bank, making the transaction structure commercially improbable.
  • The alleged buyers did not have the financial capacity to make such payments.
  • The cash transaction lacked commercial logic and documentary credibility.
  • The subsequent alleged return of money in cash further cast doubt on the genuineness of the transaction.

The Court concluded that the Agreements to Sell and cash receipt story were sham and make-believe arrangements created only to explain unexplained cash deposits. No substantial question of law arose for consideration. Accordingly, the appeal was dismissed.

Important Clarification

This judgment clarifies that:

  • Mere production of Agreements to Sell and confirmations is not sufficient to discharge the burden under Section 68.
  • The assessee must establish identity, genuineness and creditworthiness.
  • Belated explanations without contemporaneous disclosure before the Assessing Officer invite adverse inference.
  • Human probability and commercial reality are crucial tests for determining genuineness of transactions under tax law.

Sections Involved

  • Section 68, Income Tax Act, 1961 – Unexplained Cash Credits
  • Section 260A, Income Tax Act, 1961 – Appeal to High Court
  • Rule 46A, Income Tax Rules, 1962 – Additional Evidence before CIT(A)

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:1814-DB/SKN14032018ITA1012017.pdf

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