High denomination notes: explanation accepted only if supported by reliable proof and not inherently improbable.

In disputes over encashment of high denomination notes, an explanation may be accepted where the assessee shows possession of funds sufficient to cover the notes, but an adverse inference is permissible where no satisfactory source is proved. The Tribunal's rejection of the explanation for the amount traced to the currency office and the claimed cash component was supported by the record because reliable proof was lacking. However, the explanation relating to the loan transaction was not inherently improbable once prior receipt of high denomination notes on sale of property had been established, and that aspect was not properly evaluated. The addition was therefore sustained only to the extent of the proved unexplained amount, while the further addition was unsustainable.

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Issues: Whether the Tribunal's finding sustaining an addition of Rs. 36,000 as income from undisclosed sources, arising from the encashment of high denomination notes, was vitiated by reliance on suspicion and improper rejection of the assessee's explanation.

Analysis: The legal position in cases involving high denomination notes is that where the assessee shows possession of money sufficient to cover the notes, the explanation may be accepted unless it is inherently improbable; but where the assessee fails to establish a satisfactory source, the department may draw an adverse inference from the receipt itself. Applying that principle, the Tribunal's rejection of the explanation for Rs. 20,000 from the currency office and Rs. 6,000 claimed as cash was supported by the record, as no reliable proof was produced. However, in relation to the Rs. 1,26,000 loan to M/s. Singh & Co., the assessee had already established receipt of Rs. 1,53,000 in high denomination notes on sale of property, and the explanation that one note might have been exchanged was not inherently improbable; the Tribunal did not properly evaluate that aspect and wrongly rejected the explanation for Rs. 10,000.

Conclusion: The addition was valid to the extent of Rs. 26,000, but the further addition of Rs. 10,000 was not sustainable and was vitiated by improper rejection of the materials on record.

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