Explanation can not be rejected applying prudent mans behaviour test. HC deletes addition made for cash deposits

Explanation can not be rejected applying prudent mans behaviour test.  High Court deletes addition made for cash deposits applying Principle of preponderance of probability

ABCAUS Case Law Citation:
ABCAUS 2261 (2018) (03) HC

The appellant assessee had challenged the order of the ITAT in confirming the addition under section 68 of the Income Tax Act, 1961 (the Act) for deposit of cash made out of cash withdrawn from the same bank account for purchase of immoveable property.

The Assessing Officer (AO) noticed and asked the appellant to explain source of deposit of Rs.1,60,000/- in cash in her bank account. The appellant explained that cash of Rs. 2 lakhs was withfrawn from the bank account approx seven months before and cash deposit was from the amount so withdrawn. It was explained that the withdrawal was made to buy property for which earnest money in cash was to be paid. As the deal could not be finalized and Rs.1.60.000/- was re-deposited in the bank.

The Assessing Officer however rejected the explanation observing that the deposit made was after more than 7 months from the date of cash withdrawal. Accordingly, Rs.1,60,000/-was treated as unexplained cash credit and addition was made under section 68 of the Act.

Assessee preferred first appeal and had reiterated that the cash was withdrawn to buy immoveable property but as the deal did not materialize, Rs. 1,60,000/- was deposited in the bank. The assessee produced a certificate issued by a developer company in this regard as an additional evidence. However, the appeal was dismissed observing that the certificate given was not conclusive proof that the cash deposited was out of withdrawn made earlier. It was held that the onus to prove source of money deposited was on the appellant, which had not been discharged by showing nexus between the cash withdrawn and cash deposited.

The ITAT confirmed the addition and rejected the explanation given observing that  no prudent man would keep a huge amount of Rs. 2 lakhs at residence to negotiate a property deal when there is no bar in withdrawing the amount from the bank at any time.

The Hon’ble High Court expressed that it was difficult to accept the approach and findings recorded for several reasons. The order of the ITAT did not examine and consider the entire explanation and material on record as withdrawal of cash was undisputed.

The Hon’ble High Court observed that the huge withdrawal was for a purpose and objective. From the beginning the explanation given was that withdrawal was to pay earnest money for purchase of immovable property, which deal did not fructify.

The Hon’ble High Court opined that the explanation given was not fanciful and sham story. It was perfectly plausible and should be accepted, unless there was justification and ground to hold to the contrary. Delay of some months in redeposit of part amount was the sole and only reason to disbelieve the appellant. Persons can behave differently even when placed in similar situations. Due regard and latitude to human conduct and behaviour has to be given and accepted when we consider validity and truthfulness of an explanation.

The Hon’ble High Court was of the view that one should not consider and reject an explanation as concocted and contrived by applying prudent man’s behaviour test. Instead Principle of preponderance of probability should have been be applied and was sufficient to discharge onus. Probability means likelihood of anything to be true.

The Hon’ble High Court explained that probability refers to appearance of truth or likelihood of being realised which any statement or event bears in light of the present evidence. Evidence can be oral and cannot be discarded on this ground. Assessment order and the appellate orders fall foul and have disregarded the preponderance of probability test.

It was directed that addition made u/s 68 should be deleted.