MUMBAI: The Income Tax Appellate Tribunal or ITAT in a recent ruling has said that a person can be asked to explain large cash transactions even if the total income declared in tax returns is within the taxable limit. The case before the ITAT was of a 36-year-old chartered accountant Shrenik Manish Mehta who had declared an income of Rs 6.30 lakh in his tax returns for Assessment Year 2017-18. He received a tax demand notice of around Rs 1.5 lakh.
The entire cash expenditure of Rs. 13,95,020 therefore was treated by the Taxman as unexplained money and accordingly added to the taxable income of Mehta under Section 69A of the Act.
However, substantial relief has been granted to the Assessee by the Judicial Member, Pawan Singh, in his order dated 16-03-2025 in ITA No. 2107/Mum/2025 in the case of Shrenik Manish Mehta v. ITO, Ward 22(3)(6), Mumbai, as the learned Judicial Member has deleted the addition of Rs. 12,70,000 made by the Assessing Officer under Section 69A of the Act.
Large cash transactions made by a taxpayer and not reflected in his reported income are a common tax risk.
How the dispute started
ITAT in ITA No. 6936/Mum/2019, dated 11 October 2022 deleted large portion of Addition made by AO under Section 69A of the Income Tax Act in assessment of taxpayer whose total income was reported by him in his return of income for Assessment Year 2023-24 at Rs 6,30,820.
AO scrutinized the return of taxpayer and found that during the year under consideration, taxpayer had paid credit card bills of Rs. 27,65,834. Out of total credit card bills paid by taxpayer during the year, cash component of Rs. 13,95,020 was found to be very high and required to be explained by taxpayer as it did not commensurate with income declared by him in return of income. He selected case of taxpayer for scrutiny and after conducting assessment added entire cash payment of Rs. 13,95,020 under section 69A of the Act to total income of taxpayer and taxed accordingly.
However, when the Assessing Officer enquired about the large cash payments towards the credit card bills, he found that there were large cash payments made towards the said bills. Therefore, his case was selected for scrutiny assessment. During the assessment proceedings, the Assessing Officer questioned the taxpayer about the source of the cash payments towards the credit card bills.
Taxpayer’s explanation: Cash came from family members
The Assessee also filed Affidavals of his father, mother and wife. In these Affidavits, it was stated that the Assessee’s father was carrying on the business of agarbatti and was also involved with the transport business which had been closed. The Assessee’s mother was stated to be engaged in tuition classes and in sale of homemade food articles. The Assessee’s wife was stated to be carrying on consultancy work. Together, they had provided the Assessee an amount of Rs.15,50,000/-(Rupees Fifteen Lakhs and Fifty Thousand only) in cash which had been utilized by the Assessee in making payments towards his credit card dues.
Affidavits of Mehta’s father, mother and wife were filed in support of his case.
Affidavits were filed by Mehta’s father, mother and wife. Affidavits of Mehta’s father stated that he is carrying on business of agarbattis, is running his father’s transport business which was closed several years ago. Affidavits of Mehta’s mother stated that she is conducting tuitions of students of schools and colleges and is also preparing and selling homemade food articles to be served to patients in hospitals. Affidavits of Mehta’s wife stated that she is rendering consultancy services and is earning good income from the same.
Why the tax department rejected the explanation
The Assessing Officer was not convinced.
The Assessing Officer stated that Affidavits are not enough to prove the source of large cash transactions and that the assessee has not been able to establish the income generating capacity of his family members who have made the said gifts.
There was not enough evidence to establish the financial capability of the donors to make such huge gifts.
In conclusion, the entire amount of cash payment of Rs. 13,95,000 /- was treated as unexplained under Section 69A of the Act and added to taxpayer’s income.
The First Appellate Authority i.e. The Commissioner of Income Tax (Appeals) also did not accept the explanation of assessee regarding large cash gifts from his family members and held that there was sufficient evidence to establish the income of donors to the extent of gifts received by the assessee from them.
What happened before ITAT
Taxpayer was able to place before the Tribunal a large number of affidavits, confirmations, income tax returns of assessee and his family members, and also a number of years account of profit and loss of father, mother of assessee.
Additional evidence produced by taxpayer before the Tribunal consisted of Affidavits, Confirmations, Income Tax Returns of all the three family members, their respective Profit and Loss Accounts and their Bank Statements.
The ITAT therefore went through the various documents filed by the taxpayer and his family members in support of their income and their ability to make such huge gifts. The various documents included their affidavits, confirmations, their income tax returns, their profit and loss accounts and their bank statements.