Documentary evidence and natural justice defeated cash disallowance and unexplained cash credit additions under tax law.

Cash payments for land purchase supported by books, ledger accounts and registered sale deeds were not liable to disallowance under section 40A(3) where the assessee was not given an effective show-cause opportunity before the adverse inference was drawn; the addition was deleted. Cash deposits backed by the cash book, cash receipts, withdrawals and bank statements could not be treated as unexplained cash credit under section 68 when the source was explained on record and the assessee was not properly confronted with the material relied upon; that addition was also deleted. The note applies the principle that contemporaneous documentary support and observance of natural justice are required before making such additions.

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Issues: (i) Whether disallowance of cash payments for purchase of land under section 40A(3) was sustainable when the assessee had maintained books and sale deeds showing payments in parts and had not been put to a proper adverse notice before addition; (ii) Whether cash deposits in the bank account could be assessed as unexplained cash credit under section 68 when the source was explained through the cash book and related records.

Issue (i): Whether disallowance of cash payments for purchase of land under section 40A(3) was sustainable when the assessee had maintained books and sale deeds showing payments in parts and had not been put to a proper adverse notice before addition.

Analysis: The addition was founded on cash payments recorded in the sale deeds and ledger entries. The assessee had produced the cash book, ledger accounts and registered sale deeds showing payments made in parts. The record also showed that no effective show-cause opportunity was given before drawing an adverse inference. In these circumstances, the disallowance under section 40A(3) was held to be inconsistent with the evidence on record and contrary to natural justice.

Conclusion: The disallowance under section 40A(3) was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether cash deposits in the bank account could be assessed as unexplained cash credit under section 68 when the source was explained through the cash book and related records.

Analysis: The assessee explained the deposits by reference to the opening cash balance, cash receipts and cash withdrawals reflected in the cash book and bank statements. The adverse view was taken without proper confrontation of the material relied upon, and the documentary record supported the explanation of source. On those facts, the deposits could not be treated as unexplained cash credit under section 68.

Conclusion: The addition under section 68 was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The consolidated appeals succeeded, with the impugned additions deleted on the two substantive issues decided on merits.

Ratio Decidendi: Where an assessee supports cash payments or cash deposits with contemporaneous books and supporting documents, and the Revenue does not confront the assessee with the material relied upon before making an adverse addition, disallowance or addition cannot be sustained merely on suspicion.

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