The judgment in Commissioner of Income Tax v. P. Mohanakala (2007) 291 ITR 278 (SC) is one of the most important Supreme Court decisions explaining the law on unexplained cash credits, burden of proof, and the interpretation of Section 68 of the Income Tax Act, 1961. This decision strengthened the principle that mere documentation is not enough to prove the genuineness of a transaction—taxpayers must establish identity, creditworthiness, and genuineness in a meaningful manner. For law students, the case stands as a landmark for understanding evidentiary standards in taxation.
Background of the Case
The assessees in this case were individuals belonging to the same family. They received multiple foreign remittances, allegedly in the form of gifts from foreign donors. These amounts were routed through normal banking channels, and the assessees argued that since remittances through banks were genuine, they could not be treated as unexplained income.
However, the Assessing Officer doubted the identity and creditworthiness of the alleged donors. He found that the donors had no close relationship with the assessees, no history of giving such gifts, and no financial capability to justify such large transfers. Based on this, the Assessing Officer treated the gifts as unexplained cash credits under Section 68.
The assessees challenged the order before appellate authorities. The Tribunal upheld the Assessing Officer’s view. However, the High Court reversed the findings and held in favour of the assessees. The matter eventually reached the Supreme Court.
Legal Issue Before the Supreme Court
The central issue was:
Whether foreign remittances received as “gifts” can be treated as unexplained cash credits under Section 68 when the assessees fail to establish the identity, creditworthiness of the donors, and genuineness of transactions?
This required the Court to interpret Section 68 and determine the evidentiary burden on the assessee when claiming that a credit entry is a genuine gift.
Supreme Court’s Analysis
1. Burden of Proof Under Section 68
The Court emphasized that Section 68 places a clear burden on the assessee. Whenever a credit entry is found in the books, the assessee must prima facie prove:
- the identity of the creditor/donor,
- the creditworthiness of the person giving the money, and
- the genuineness of the transaction.
The Court cited earlier rulings, including Roshan Di Hatti v. CIT and Sumati Dayal v. CIT, where it held that suspicious explanations or unrealistic claims cannot be accepted.
2. Banking Channels Do Not Automatically Make Transactions Genuine
Merely receiving funds through a bank does not make the transaction legitimate. The Court noted:
“Use of banking channels is relevant but not conclusive.”
The donors had no financial capacity or personal connection to justify such substantial gifts. Thus, the explanation offered by the assessee lacked substance.
3. Surrounding Circumstances Must Be Considered
The Court observed that tax authorities are entitled to look beyond documents and evaluate the surrounding circumstances, including economic relationships, motive, and conduct.
The alleged donors had no demonstrable reason to gift large sums to the assessees. Therefore, the Court held that the explanation was inherently improbable.
4. Tribunal’s Findings Were Findings of Fact
The Court upheld the Tribunal’s reasoning that the transactions were suspicious. It emphasized that the High Court should not have interfered with the Tribunal’s findings unless perverse or unreasonable—which they were not.
“Tip: The genuineness of a transaction cannot rest solely on paperwork—substance always outweighs form.”
Decision (Held)
The Supreme Court set aside the judgment of the High Court and held in favour of the Revenue.
Key Findings:
- The assessees failed to establish the identity, creditworthiness, and genuineness of the alleged donors.
- The foreign remittances claimed as gifts were unsupported by credible evidence.
- The Assessing Officer rightly treated the sums as unexplained cash credits under Section 68.
- High Court erred in interfering with factual findings of the Tribunal.
Thus, the remittances were considered income of the assessees.
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Significance of the Case
1. Reinforces strict interpretation of Section 68
The judgment confirmed that Section 68 is a powerful anti-abuse provision. Any unexplained credit—even if supported by documents—can be treated as the assessee’s income.
2. Establishes high evidentiary standards for “gifts”
The Court clarified that large gifts from strangers without any established relationship or donor capacity are not credible.
3. Strengthens the principle of “test of human probabilities”
Borrowing from Sumati Dayal, the Court held that tax authorities can apply human probabilities to assess genuineness.
4. Limits judicial interference in factual tax findings
The ruling highlights that High Courts must not disturb Tribunal findings unless they are patently unreasonable.
“Tip: When claiming gifts in tax assessments, always prove who gave the gift, why they gave it, and how they could afford it.”
Impact on Future Cases
After P. Mohanakala, courts have consistently held that:
- Gifts without natural love and affection must be scrutinized.
- Identity, creditworthiness, and genuineness must be proved together.
- Cash credits cannot be justified by banking entries alone.
- Explanations that defy logic or economic reality are unacceptable.
This case is now taught widely in taxation law as a leading precedent on unexplained cash credits.
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