Facts of the Case

The assessee, Mrs. Jaya Aggarwal, filed her return for Assessment Year 1998–99 declaring a loss. During scrutiny assessment, the Assessing Officer observed a cash deposit of ₹1,60,000 in the assessee’s bank account dated 13 January 1998.

The assessee explained that an amount of ₹2,00,000 had been withdrawn in cash on 2 May 1997 for making payment towards earnest money for the purchase of immovable property. However, since the proposed property transaction could not be finalized, ₹1,60,000 out of the withdrawn amount was re-deposited into the bank account.

The Assessing Officer rejected the explanation primarily on the ground that the re-deposit occurred after a gap of more than seven months and treated the amount as unexplained cash credit under Section 68. The addition was confirmed by the Commissioner (Appeals) as well as the Income Tax Appellate Tribunal.

Issues Involved

  1. Whether cash re-deposited into a bank account out of an earlier cash withdrawal can be treated as unexplained cash credit under Section 68?
  2. Whether mere delay between withdrawal and re-deposit is sufficient to reject the assessee’s explanation?
  3. Whether the principle of preponderance of probability should be applied while appreciating the explanation of the assessee?

Petitioner’s Arguments (Assessee’s Contentions)

  • The cash deposited was not unexplained and originated from an earlier withdrawal of ₹2,00,000 from the same bank account.
  • The withdrawal was made for purchasing immovable property and paying earnest money.
  • Since the property deal failed, the amount remained unused and was re-deposited.
  • Supporting material, including a certificate from the property dealer, was produced to substantiate the intended property transaction.
  • The explanation was genuine, reasonable, and supported by surrounding circumstances.

Respondent’s Arguments (Revenue’s Contentions)

  • The time gap of more than seven months between withdrawal and deposit created doubt regarding the genuineness of the explanation.
  • No conclusive evidence was produced to establish a direct nexus between the withdrawn amount and the re-deposited cash.
  • The burden of proving the source of the deposited amount was upon the assessee, which remained undischarged.

Court Findings / Observations

The Delhi High Court held that:

  • The withdrawal of ₹2,00,000 from the bank account was an admitted and undisputed fact.
  • The explanation that the money was withdrawn for purchase of immovable property was plausible and could not be rejected merely on assumptions.
  • Human conduct and behavior vary, and tax authorities cannot reject explanations by applying rigid “prudent man” standards.
  • The correct legal test is the preponderance of probability, not conjecture or suspicion.
  • Oral evidence and plausible explanations deserve due consideration.
  • The authorities below had wrongly disregarded this principle.

Court Order / Final Decision

The Delhi High Court allowed the appeal in favour of the assessee and against the Revenue. The Court directed deletion of the addition of ₹1,60,000 made under Section 68 of the Income Tax Act.

Important Clarification 

This judgment clarifies that:

  • Mere time gap between cash withdrawal and subsequent deposit cannot automatically justify addition under Section 68.
  • If the source of cash is explained and the explanation is probable, addition cannot be sustained merely on suspicion.
  • The principle of preponderance of probability is sufficient to discharge the burden of proof in tax proceedings.
  • Tax authorities must evaluate explanations on realistic human conduct and practical circumstances.

Sections Involved

  • Tax Law Section 68 of the Income Tax Act, 1961 – Unexplained Cash Credits
  • Principles relating to Burden of Proof
  • Doctrine of Preponderance of Probability in tax assessment proceedings

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:1776-DB/SKN13032018ITA3152005.pdf

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