(1971) 82 ITR 540 (SC)
Unexplained cash credits
No. Though an apparent state of affairs is to be treated as real unless shown otherwise, the onus of showing that the apparent is not the real lies on the party asserting it, and the authorities may test the story against ordinary human conduct.
Where a transaction is recorded in formal documents, is the taxing authority bound by the apparent state of affairs those documents disclose?
The assessee claimed that property standing in his name had in fact been purchased with funds belonging to his wife, which she was said to have received from a trust and held in cash over a long period. Formal documents were produced in support of the claimed arrangement. The Revenue did not accept the account, considering it improbable that funds of that magnitude would have been held in cash for years and that the arrangement was in substance a means of explaining the assessee's own money.
The matter reached the Supreme Court, which considered how far the taxing authorities may go behind documents in assessing the genuineness of a claimed state of affairs.
For the assessee
The transactions were evidenced by documents which the Revenue had not shown to be fabricated. In the absence of evidence displacing them, the apparent state of affairs must be taken as real and the authorities cannot proceed on conjecture.
For the Revenue
Documents record what the parties chose to record. The account given was contrary to ordinary human conduct, and the authorities are entitled to examine whether the recitals reflect reality rather than accepting them because they exist.
The Court accepted the general proposition that an apparent state of affairs is to be treated as the real state of affairs, but held that the party asserting that the apparent is not the real bears the onus of establishing it — and that the Revenue may discharge that onus by reference to the improbability of the account rather than by direct evidence, which will rarely be available. It held that taxing authorities are not required to put on blinkers and look only at the documents produced; they are entitled to look into the surrounding circumstances to find out the reality, and must act on a test of human probabilities. The Court observed that self-serving recitals in documents are of limited value where the story they support runs contrary to ordinary conduct, and that an assessee who advances an improbable account must expect it to be scrutinised. It cautioned that the authorities must not act on mere suspicion and must confront the assessee with the circumstances relied on, but held that a claim which no reasonable person would accept does not become acceptable because it has been reduced to writing.
Applied under Section 102 of the IT Act 2025 and across the Act wherever genuineness is in issue. Together with Sumati Dayal it forms the evidentiary framework for cash credit and unexplained income disputes, and the reasoning extends well beyond that context — to sham transactions, benami arrangements and the substance-over-form analysis in avoidance cases.