The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that once an assessee establishes the genuine source of cash deposits through documentary evidence, the Income Tax Department cannot invoke Section 69 of the Income Tax Act merely because it considers the assessee’s explanation regarding retention or temporary use of cash to be improbable.
The bench of S.S. Viswanethra Ravi (Judicial Member) and S. R. Raghunatha (Accountant Member) ruled that suspicion, conjecture, or subjective notions of human conduct cannot substitute legal proof while making additions for unexplained investments.
The appeal arose from the assessment for the Assessment Year 2017-18, where the assessee had declared a total income of ₹25.56 lakh. During scrutiny proceedings, the Assessing Officer (AO) noticed cash deposits amounting to ₹76.45 lakh in the assessee’s bank account during the financial year 2016-17 and called upon him to explain the source of the deposits.
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The assessee explained that he had previously been a partner in a Hyderabad-based partnership firm, M/s. South India Prime Tannery. Following the dissolution of the firm pursuant to an order of the City Civil Court, Hyderabad, an immovable property situated at Bakaram, Hyderabad, devolved upon him. The property was sold in February 2014 for ₹1.0449 crore, and the entire consideration was received in cash, as reflected in the registered sale deeds. According to the assessee, this cash remained available with him and formed the source of the subsequent bank deposits made during the relevant assessment year.
The assessee further stated that during the intervening period, the cash had been temporarily advanced as small, interest-free financial assistance to economically weaker members of the Jamaat in accordance with his religious beliefs prohibiting the charging of interest. The amounts were allegedly recovered later and deposited into the bank account primarily to discharge the income tax liability of the erstwhile partnership firm.
The Assessing Officer found the explanation implausible, observing that lending nearly ₹1 crore in small amounts below ₹20,000 to hundreds of individuals without interest was contrary to normal human conduct and commercial prudence. The officer also noted that the assessee had disclosed interest income in earlier years, which contradicted his claim that his religious beliefs prohibited earning interest.
Holding that the explanation failed the test of human probabilities, the AO treated the cash deposits of ₹76.45 lakh as unexplained investment under Section 69 read with Section 115BBE of the Income Tax Act and added the amount to the assessee’s taxable income. The Commissioner of Income Tax (Appeals) affirmed the addition, agreeing that the assessee’s explanation regarding interest-free hand loans to numerous poor persons was inherently unbelievable.
Allowing the appeal, the ITAT observed that both the Assessing Officer and the CIT(A) had focused on the temporary utilisation of the cash rather than its original source.
The Tribunal noted that the Revenue never disputed the genuineness of the property sale, the registered sale deeds, or the fact that the sale consideration had been received in cash. Once the assessee established the origin of the cash through authentic documentary evidence, the burden shifted to the Revenue to prove that the money had been spent, diverted, invested elsewhere, or otherwise ceased to remain available with the assessee. However, no such evidence was produced by the Department.
The Bench held that the addition was based solely on assumptions that a prudent person would not retain large amounts of cash or temporarily lend it without charging interest. Such reasoning, according to the Tribunal, was founded on conjectures and subjective perceptions rather than evidence.
The Tribunal relied upon its earlier decision in Ganapathy Panneerselvam v. ITO, wherein it was held that once the source of cash is satisfactorily established and the Revenue fails to prove that the money was utilised elsewhere, mere delay between receipt and redeposit cannot justify an addition under Section 69.
The Bench also referred to the Karnataka High Court’s decisions in S.R. Venkata Ratnam v. CIT and Smt. P. Padmavathi v. ITO, which held that after an assessee establishes the source of cash, the Department cannot concern itself with how the money was retained during the intervening period unless there is evidence showing it was diverted elsewhere.
Further reliance was placed on the Delhi High Court’s judgment in Jaya Aggarwal v. ITO, where it was held that explanations cannot be rejected merely by applying subjective tests of prudent human behaviour.
The Tribunal additionally cited the Supreme Court’s landmark ruling in Sreelekha Banerjee v. CIT, reiterating that the Department cannot arbitrarily reject a reasonable explanation supported by evidence and thereby convert good proof into no proof.
The Tribunal held that the assessee had successfully discharged the statutory burden by producing registered sale deeds establishing the source of the cash, explaining its continued availability, and demonstrating a clear nexus between the sale proceeds and the subsequent deposits.
It observed that the Revenue had failed to produce any material showing that the cash had been exhausted or invested elsewhere. Consequently, the Department’s conclusion rested merely on disbelief and speculation, which cannot legally sustain an addition under Section 69.
The Bench emphasized that suspicion, however strong, can never substitute legal proof, and additions under Section 69 require positive evidence disproving the assessee’s explanation rather than subjective assessments of human behaviour.
Setting aside the order of the Commissioner of Income Tax (Appeals), the Chennai ITAT directed the Assessing Officer to delete the addition of ₹76.45 lakh made under Section 69 read with Section 115BBE of the Income Tax Act and allowed the assessee’s appeal in full.
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