Frequent or high-value credit card usage can bring you under the tax department’s radar through Statement of Financial Transactions (SFT) / Annual Information Return (AIR) reporting. But can these payments be directly treated as your undisclosed income?
A recent ruling by the Income Tax Appellate Tribunal (ITAT), Delhi Bench in the case of Krishna Gopal Saraf vs ACIT provides important clarity and relief for taxpayers facing such scrutiny.
Case: Krishna Gopal Saraf vs ACIT
Forum: ITAT Delhi (Assessment Years: 2013-14 and 2014-15)
A salaried employee working with a company (SVIL group) had income from salary, capital gains and other sources.
Search operation (Section 132) conducted in the group and taxpayer’s case gets covered in the search. The tax department issued him a notice under Section 153A (post-search assessment). Subsequently, fresh returns filed by the taxpayer.
During assessment, the assessment officer (AO) analyses the Annual Information Return (AIR) and Statement of Financial Transactions (SFT). The AO found credit card payments of Rs 4.55 lakh (AY 2013-14) and Rs 7.28 lakh (AY 2014-15).
Tax department’s action
The department treated the entire amount as unexplained expenditure (Section 69C) and added it to the taxpayer’s income.
The taxpayer made the first appeal with the Commissioner of Income Tax (Appeals) — CIT(A), which largely upheld the addition.
ITAT (final stage) – February 2025
At the final stage, the ITAT in its order dated February 12, 2025, undertook a detailed review of the entire case, including both the credit card payment additions and the separate Rs 18 lakh addition arising from seized material.
After examining the facts and arguments from both sides, the tribunal observed that while the AO was justified in relying on AIR/SFT data to flag high-value credit card transactions, the authorities had not properly verified the taxpayer’s explanations.
The assessee had claimed that the payments were made out of salary, cash in hand, borrowings and other explained sources, but these claims were rejected without adequate examination of supporting records such as bank statements or income details.
Fresh verification at the assessment level
Considering this, the ITAT held that the matter required fresh verification at the assessment level and therefore remanded the issue of credit card payments back to the AO for a proper and thorough examination of the source of funds.
At the same time, the tribunal took a different view on the separate addition of Rs 18 lakh, which was made based on a loose paper found during the search. The ITAT noted that the document merely mentioned a withdrawal in another person’s name and there was no corroborative evidence linking the amount to the assessee.
It further emphasised that the presumption under Section 292C is rebuttable and limited, and cannot be used mechanically to treat such entries as undisclosed income without proper investigation.
Since the AO had failed to verify the contents of the document or examine the person named in it, the tribunal held that the addition was unsustainable in law and accordingly deleted the entire Rs 18 lakh addition.
What triggered the dispute?
The tax officer relied on SFT/AIR data, which tracks high-value financial transactions. Since the taxpayer could not fully support the source of credit card payments with documents like bank statements or confirmations, the AO assumed:
If payments were made through your card, the money must be yours. Accordingly, the entire amount was added as income under Section 69C.
Taxpayer’s explanation
The taxpayer argued that payments were made from legitimate sources such as salary income, cash in hand, borrowings from friends and family, fixed deposit maturity.
He also highlighted that as a salaried person, he did not maintain books of accounts or detailed fund flow statements.
What ITAT said on credit card payments
The ITAT made a balanced observation: Tax officers can rely on AIR/SFT data but they cannot make additions without proper verification
The tribunal noted that the taxpayer had provided explanations. Authorities did not properly examine bank records or salary details. Explanations were rejected without adequate verification, it said.
Final ruling on this issue:
The matter was sent back to the AO to re-examine bank statements, source of funds (salary, borrowings, cash), supporting evidence.
Another major issue in the case involved a Rs 18 lakh addition.
A loose paper was found in a “red bag” during the search and it mentioned withdrawal of Rs 18 lakh in another person’s name.
AO’s action: Treated it as taxpayer’s income under Section 292C (presumption rule)
The ITAT in its ruling said that mere possession of a document does not mean proof of income. The AO failed to verify with the person named, conduct proper investigation and as a result the entire Rs 18 lakh addition deleted.
What this means for taxpayers
Credit card spends are tracked and high-value transactions are reported automatically. You may receive a tax notice and even genuine transactions can trigger scrutiny. You must explain the source, especially if payments are large or frequent.
But tax officers must verify. They cannot make assumptions, ignore explanations, and skip investigation.
Credit card payments may put you on the tax radar—but unless the tax department proves they are from undisclosed sources, they cannot be treated as income.
It is important to note that ITAT decisions can be challenged before the High Court and, thereafter, the Supreme Court. Therefore, legal positions may evolve depending on further appeals.
