Section 68 requires a real cash credit; circular book entries without actual cash movement do not attract the provision.

Section 68 applies only where a real cash credit exists in the books and its nature and source remain unexplained. On the facts, the entries were found to be notional book adjustments among group concerns, with no actual passing of cash and no cash balance available for real advances or receipts. The surrounding circumstances showed a restructuring of liabilities in exchange for shares rather than an unexplained cash inflow. The result was that the amount was not treated as unexplained cash credit, and the addition as income from undisclosed sources was not sustained.

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Issues: Whether the amount of Rs. 11,20,000 represented unexplained cash credit assessable under section 68 of the Income-tax Act, 1961, or only a series of book adjustments without any actual passing of cash.

Analysis: The transactions were recorded through cash-book entries, but the finding on the record was that cash did not pass at any stage and the parties themselves had no cash balance to make real cash advances or receipts. Where the entries were merely notional and completed a circular adjustment among group concerns, the absence of an actual cash receipt or credit meant that the basic prerequisite for invoking section 68 was not established. The court also treated the Reserve Bank direction relied on by the assessee as a public document under the Indian Evidence Act, 1872, and held that the surrounding circumstances showed a restructuring of liabilities in exchange for shares, not an unexplained cash inflow.

Conclusion: The amount of Rs. 11,20,000 was not liable to be treated as unexplained cash credit under section 68 and the finding was against the Revenue.

Final Conclusion: The reference was answered in favour of the assessee, and the addition of Rs. 11,20,000 as income from undisclosed sources was not sustained.

Ratio Decidendi: Section 68 applies only when there is a real cash credit in the books and the assessee fails to explain its nature and source; mere notional or circular book entries without actual passing of cash do not attract the provision.

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