Unexplained Negative Cash Balance Can’t Be Justified by Unverified Cash Gifts: Andhra Pradesh HC

The Andhra Pradesh High Court while upholding the Income Tax addition as unexplained income held that the unexplained negative cash balance cannot be justified by unverified cash gifts. A Division Bench comprising Justice R. Raghunandan Rao and Justice T.C.D. Sekhar upheld the decision of the Income Tax Appellate Tribunal (ITAT) rejecting a taxpayer’s claim that a large deficit in her cash balance was funded through a gift from her grandmother, holding that the alleged gift could not be accepted in the absence of proof regarding the identity, creditworthiness, and source of funds of the donor. The dispute arose from the assessment for Assessment Year 2014–15, where the assessee had initially declared an income of ₹2,48,490 in her return. During the scrutiny assessment, the Assessing Officer noticed discrepancies in the assessee’s cash book. Although the books showed a cash balance of ₹2,01,83,834 as on March 1, 2014, subsequent cash payments resulted in a negative cash balance of ₹1,82,34,150 as on March 26, 2014. The tax authorities questioned the assessee about the deficit. The Assessing Officer eventually concluded that the assessee had not provided a satisfactory explanation for the shortfall and treated the amount as income from unexplained sourcesunder the Income Tax Act. In response to the queries raised during the assessment, the assessee claimed that the deficit was due to cash gifts amounting to ₹1.83 crore, for which she produced self-signed receipt vouchers. However, the Assessing Officer rejected the claim because the assessee failed to disclose the identity of the donors, their financial capacity, or any reason why such substantial gifts would have been made. The officer concluded that the claim appeared to be an attempt to justify the negative cash balance. The assessee challenged the assessment before the Commissioner of Income Tax (Appeals). At this stage, she altered her explanation and stated that the entire amount had been received as a cash gift from her grandmother on March 5, 2014, though it had been mistakenly recorded in the books on March 31, 2014. She further claimed that the grandmother had withdrawn ₹3.5 crore from her capital account in a partnership firm, M/s R.R. Estates and Projects, Bengaluru, and gifted part of that amount to her. Accepting the declaration given by the grandmother, the Commissioner (Appeals) allowed the assessee’s appeal. The Income Tax Department challenged this decision before the ITAT, which reversed the relief granted by the Commissioner. The Tribunal noted that the department had obtained information from income tax authorities in Bengaluru revealing that the firm M/s R.R. Estates and Projects had not filed its income tax return for the relevant assessment year. Consequently, the claim that the grandmother had withdrawn large sums from the firm could not be verified. The Tribunal therefore held that the assessee had failed to prove the financial capacity of the donor, making the alleged cash gift unreliable. While examining the appeal, the High Court agreed with the Tribunal’s reasoning and held that the assessee had not produced sufficient evidence to establish the source of funds in the hands of the donor. The Court also pointed out a significant inconsistency in the assessee’s explanation. During the assessment proceedings, she had stated that the gifts were received from “others.” However, at the appellate stage she claimed that the money had been given by her grandmother. According to the Court, if the grandmother had indeed been the donor, the assessee would have disclosed this fact during the initial assessment itself instead of referring vaguely to gifts from unspecified persons. Finding no error in the Tribunal’s reasoning, the High Court dismissed the appeal and upheld the addition of ₹1.83 crore as unexplained income. The Court concluded that a claim of large cash gifts cannot be accepted unless the assessee establishes the identity, financial capacity, and source of funds of the donor with credible evidence. Case Details Case Title: Bathina Srilakshmi Versus ITO Citation: Jurishour-244-Hc-2026(AP) Case No.: Income Tax Tribunal Appeal No: 53/2025 Date: 06/03/2026 Counsel For Petitioner: P Pavan Kumar Rao Counsel For Respondent: Y N Vivekananda Click Here To Read Order Read More: SCN Unwarranted When Service Tax Paid Before Notice U/S 73(3): Karnataka HC

Unexplained Negative Cash Balance Can’t Be Justified by Unverified Cash Gifts: Andhra Pradesh HC

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