Exchange of legal tender notes accepted where surrounding evidence supported the assessee's explanation

Exchange of small denomination legal tender into higher denomination notes was accepted as a satisfactory explanation where the assessee showed the amount came from collections and the surrounding balance position supported the claim. Absence of proof of the exact person and date of exchange was held insufficient to discredit the explanation, because such details were not necessary while the notes remained legal tender. The addition was therefore not sustainable and was decided in favour of the assessee.

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Issues: Whether the addition of Rs. 58,000 was justified on the ground that the assessee failed to prove exchange of small denomination notes into high denomination notes.

Analysis: The assessee explained that the amount represented collections received in small denomination notes which were exchanged into high denomination notes for convenience. The fact that no evidence of the precise person with whom the exchange occurred or the exact dates of exchange was produced was held to be insufficient, because such proof was not necessary when the notes were then legal tender. The existence of sufficient balance with the relevant society also supported the explanation.

Conclusion: The addition was not sustainable and the issue was decided in favour of the assessee.

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