Chennai ITAT Deletes ₹76.45 Lakh Addition: Proven Cash Source Cannot Be Rejected on Suspicion

Background of the case

The assessee filed his return for AY 2017–18 declaring total income of ₹25,56,450. The return was selected for scrutiny to examine cash deposits of ₹76,45,000 made during FY 2016–17 in a Central Bank of India account.

The assessee had been a partner in South India Prime Tannery, Hyderabad. Following dissolution of the firm under an order of the City Civil Court, Hyderabad, an immovable property at Bakaram, Hyderabad devolved upon him. The property was sold in February 2014 for ₹1,04,49,000, and the registered sale deeds recorded that the consideration was received in cash.

Assessee explains the source of the deposits

The sale proceeds were reflected as closing cash in hand as on 31 March 2014 and, according to the assessee, carried forward in the books. From those funds, ₹76.45 lakh was later deposited into the bank account during FY 2016–17.

To explain the intervening period, the assessee stated that amounts had temporarily been advanced without interest to economically weaker persons associated with the Jamaat in Musheerabad and were subsequently recovered. After deposit, the money was used towards the income-tax liability connected with the erstwhile partnership firm.

Why the Assessing Officer made the addition

The Assessing Officer considered the explanation about numerous small, interest-free advances improbable. The officer reasoned that lending and recovering a very large amount through payments below ₹20,000 to hundreds of individuals was inconsistent with normal human conduct.

The explanation was also questioned because the assessee had reported interest income in earlier returns. Treating the narrative about temporary use as unacceptable, the Assessing Officer added ₹76,45,000 as unexplained investment under Section 69 and applied Section 115BBE.

CIT(A) confirms the Section 69 addition

The assessee produced registered sale deeds and argued that they established a direct connection between the property sale proceeds and the later cash deposits. He also pointed to the cash reflected in the books and the immediate use of the deposited amount for the tax liability of the dissolved firm.

The CIT(A), however, agreed with the Assessing Officer that the account of nearly ₹1 crore being advanced as hand loans to poor persons was inherently improbable. The addition was therefore sustained, leading to the appeal before the Chennai ITAT.

Tribunal focuses on the original source of cash

The Chennai ITAT held that the authorities had focused on the temporary utilisation of cash rather than the original source. The registered sale deeds established that the assessee received ₹1,04,49,000 in cash from the property sale, and Revenue did not dispute the genuineness of that transaction or the cash consideration recorded in the documents.

Once the primary source was proved, the relevant question was whether Revenue had evidence showing that the cash was exhausted, diverted, invested elsewhere or otherwise ceased to be available. No such positive evidence had been brought on record.

Suspicion about human conduct cannot replace evidence

The Tribunal explained that an unusual or commercially imprudent course of conduct is not, by itself, proof that an explanation is false. The Income-tax Act does not authorise an addition merely because the Assessing Officer believes that a prudent person would not retain substantial cash or provide temporary interest-free assistance.

Suspicion, however strong, cannot substitute legal proof. To reject a supported explanation, Revenue must rely on cogent material demonstrating falsity, not merely conjecture about how a taxpayer would ordinarily behave.

Burden shifts after the assessee proves the source

The assessee discharged the initial burden through registered sale deeds, the recorded cash consideration, cash-in-hand entries and the connection between the sale proceeds and the later deposits. At that stage, the burden shifted to Revenue to rebut the explanation with evidence.

Because there was no material establishing an alternative use or undisclosed source, the presumption that the original cash must have been spent elsewhere remained speculative. The immediate use of the deposited amount towards the tax liability of the erstwhile firm also supported the stated purpose of the deposit.

Judicial precedents considered

• Sreelekha Banerjee and Others v. Commissioner of Income-tax, Supreme Court, 49 ITR 112
• S. R. Venkata Ratnam v. Commissioner of Income-tax, Karnataka High Court, 127 ITR 807
• Smt. P. Padmavathi v. Income Tax Officer, Karnataka High Court, ITA No. 414/2009
• Jaya Aggarwal v. Income Tax Officer, Delhi High Court
• Ganapathy Panneerselvam v. Income Tax Officer, Chennai ITAT, ITA No. 609/Chny/2025

Final decision of Chennai ITAT

The Tribunal held that the conditions for sustaining the addition under Section 69 were not established. The source and nexus of the cash had been supported by documentary evidence, while the rejection rested on assumptions concerning the intervening period.

The order of the CIT(A) was set aside, and the Assessing Officer was directed to delete the addition of ₹76,45,000 under Section 69 read with Section 115BBE. The assessee appeal was allowed.

Practical lessons for taxpayers

• Preserve registered deeds and receipts proving the original source of significant cash.
• Maintain year-wise cash books, balance sheets and cash-flow statements showing continuity of cash in hand.
• Document the dates, purpose and parties involved in any temporary advances or repayments.
• Reconcile later bank deposits with the earlier recorded source and explain the time gap clearly.
• Keep evidence of the final use of deposited funds, such as tax-payment challans or bank entries.
• Remember that proving the source is essential, but complete contemporaneous records remain the strongest defence.

Important limitation of the ruling

This decision does not mean that every explanation for an old cash balance must be accepted. The result turned on registered sale deeds, recorded cash consideration, entries showing cash in hand and the absence of evidence of another use or undisclosed source.

Where documents are inconsistent, cash is not recorded in the books, the transaction itself is disputed, or Revenue establishes that the funds were spent elsewhere, the outcome may be different. Each Section 69 case depends on its own evidence.

Conclusion

Humnabad Mohammed Omer v. DCIT reinforces a fundamental evidentiary rule: once the taxpayer proves the original source and establishes a credible nexus with the deposit, Revenue must rebut that evidence with positive material. Doubt about temporary retention or utilisation cannot, without more, turn explained money into unexplained investment.

The Chennai ITAT therefore deleted the ₹76.45 lakh addition and confirmed that tax additions cannot be sustained on suspicion, subjective notions of prudence or conjecture alone.