High Court of Andhra Pradesh: Failure to prove donor’s creditworthiness and source renders cash gifts unexplained income

 Recently, the Hon’ble High Court of Andhra Pradesh in the case of Bathina Srilakshmi v. Income-tax Officer held that where the assessee fails to substantiate the identity, creditworthiness, and source of funds of the donor with credible evidence, the claim of receipt of cash gifts cannot be accepted. The Court emphasised that mere assertions or unsupported explanations are insufficient to discharge the onus cast upon the assessee, and in the absence of proper documentation establishing the genuineness of the transaction, such amounts are liable to be treated as unexplained income.

In the instant case, the assessee, an individual, filed her return declaring a modest income. However, during assessment, it was observed from the cash book that although she had shown a cash balance of approximately Rs. 2.02 crore, the cash payments recorded during the year amounted to Rs. 3.84 crore, thereby exceeding the available cash and resulting in a negative cash balance of about Rs. 1.82 crore. This indicated that the assessee had recorded outflows without sufficient explained inflows in the books. To reconcile this deficit, the assessee initially claimed that she had received cash gifts from “others” without furnishing any details or supporting evidence, which was rejected by the Assessing Officer (‘AO’) and treated as unexplained income. In appeal, she changed her stand and claimed that the amount was received as a gift from her grandmother, but failed to substantiate the source of such funds. While the Commissioner (Appeals) granted relief, the Tribunal reversed the same citing lack of evidence and inconsistency, against which the assessee appealed before the High Court.

The High Court held that the addition on account unexplained cash credits was justified where the assessee failed to substantiate the identity, creditworthiness, and source of funds of the alleged donor. It observed that the assessee had initially claimed receipt of cash gifts from “others” and subsequently changed her stand to attribute the same to her grandmother, thereby creating inconsistency in her explanation. The Court further noted that no credible evidence was furnished to establish the source of funds in the hands of the grandmother, and the claim remained unsubstantiated. Accordingly, it held that such contradictory and unsupported explanations could not be accepted, upheld the findings of the Tribunal, and dismissed the appeal of the assessee.

The ruling reinforces that in cases involving unexplained cash credits, the onus lies squarely on the assessee to establish the identity, creditworthiness, and genuineness of the transaction with credible evidence. It provides important clarity that mere assertions or shifting explanations, without substantiating the source of funds, are insufficient to discharge this burden, thereby emphasizing the importance of consistency, transparency, and proper documentation.