(1995) 214 ITR 801 (SC)
Unexplained cash credits
Yes. The taxing authorities are entitled to look at the surrounding circumstances and apply the test of human probabilities, and are not obliged to accept an explanation merely because it is supported by documents.
May the Revenue reject an explanation supported by documents where the surrounding circumstances make the story inherently improbable?
The assessee claimed to have won substantial sums in a series of horse race jackpots over a short period, and produced winning tickets and certificates from the race clubs in support. The amounts had been credited in her books as racing winnings, which at the relevant time were exempt. The Revenue found the pattern improbable — an extraordinary run of wins across different races and clubs by a person with no history of racing activity and no record of losing bets — and treated the credits as undisclosed income from other sources.
The Settlement Commission rejected the explanation, drawing on the improbability of the claimed pattern. The matter reached the Supreme Court, where the question was whether the authorities could go behind apparently genuine documents.
For the assessee
The winnings were evidenced by tickets and by certificates issued by the race clubs themselves. Unless those documents are shown to be forged or the issuing bodies are discredited, the explanation stands proved, and the authorities cannot substitute suspicion for evidence.
For the Revenue
The documents establish at most that the tickets were presented and paid. They do not establish that the assessee placed the bets or that the winnings were hers. The pattern claimed is so improbable that it cannot be accepted at face value, and the surrounding circumstances point to the purchase of winning tickets to launder undisclosed money.
The Court held that the question whether an explanation is satisfactory is one of fact, to be decided on a consideration of all the material and not by mechanically accepting documents produced. It endorsed the approach that the authorities are entitled to consider the surrounding circumstances and to apply the test of human probabilities: an apparent state of affairs may be rejected where the totality of circumstances makes it inherently improbable. On the facts, the Court considered the claimed run of jackpot wins, the absence of any evidence of losing bets or of habitual racing activity, and the concentration of the wins in a short period, and held that the Commission was entitled to conclude that the explanation was not genuine. It emphasised that this does not permit the Revenue to act on suspicion alone; the conclusion must be drawn from the material as a whole, and the taxpayer must be given an opportunity to meet the circumstances relied on. But where the material, viewed realistically, does not support the story, documentary formality will not save it.
Unexplained cash credits are dealt with in Section 102 of the IT Act 2025, taxed at the special rate in Section 195. The human probabilities test is the Revenue's principal answer to formally documented but commercially implausible transactions, and is central to disputes over accommodation entries, bogus capital gains from penny stocks, and share capital from shell entities. Read with Durga Prasad More, which supplies the apparent-versus-real framing.