Unexplained cash credit claim fails where documentary evidence supports the sale and later inconsistent statements do not displace it.

Where an assessee supports a sale credit with a purchase bill, VDIS declaration, valuation material and account payee cheque payment, the credit cannot be treated as unexplained merely because of a later inconsistent statement by the purchaser. The Tribunal majority accepted that the surrounding facts were materially similar to an earlier relied-upon decision and held that the Revenue had not displaced the documentary explanation with reliable contrary evidence. The contrary view treated the transaction as fictitious, but the operative result was that the addition as unexplained income under section 68 was deleted.

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Issues: Whether the addition of Rs. 10,35,562 as unexplained income from the sale of diamonds declared under the VDIS, 1997 could be sustained under section 68 of the Income-tax Act, 1961.

Analysis: The assessee claimed that the credit in the capital account represented sale proceeds of diamonds earlier declared under the VDIS. The majority accepted that the sale was supported by the purchase bill, the VDIS declaration, the valuation material and payment by account payee cheque, and held that the surrounding facts in the assessee's case were materially similar to the earlier Tribunal decision relied upon. The majority treated the later adverse statement of the purchaser as insufficient to dislodge the assessee's explanation in the face of the supporting material and concluded that the addition could not be sustained. The dissenting view held that the surrounding circumstances, bank entries and the purchaser's earlier statement showed a fictitious transaction and that the assessee had failed to discharge the burden under section 68.

Conclusion: The addition of Rs. 10,35,562 was deleted and the issue was decided in favour of the assessee.

Ratio Decidendi: Where the assessee produces credible documentary support for a sale transaction and the Revenue fails to displace that explanation with reliable contrary evidence, the credit cannot be sustained as an unexplained cash credit merely on suspicion or on the basis of a later inconsistent statement.

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