A handwritten diary entry bearing a taxpayer’s name is not enough, by itself, to establish that the person incurred unexplained expenditure, the Income Tax Appellate Tribunal (ITAT), Ahmedabad bench, has ruled. The Tribunal deleted a Rs 33.50 lakh addition under Section 69C after finding that cash withdrawals made by the taxpayer’s father-in-law were sufficient to explain the entries recorded in her name.
Why did the tax department make the Rs 33.50 lakh addition?
The case relates to assessment year (AY) 2012-13. The taxpayer, a homemaker, had declared a total income of Rs 4.48 lakh in her income tax return.
During a search conducted under Section 132 of the Income-tax Act in November 2021, the tax department found handwritten diaries and loose papers at the residence of her father-in-law. The documents contained entries relating to several financial years.
Two accounts in the seized material were maintained in the taxpayer’s name. The Assessing Officer (AO) treated the net incremental negative peak balance in these accounts as unexplained expenditure and made an addition of Rs 33.50 lakh under Section 69C.
The taxpayer argued that the entries did not represent her own transactions. She said her father-in-law would sometimes give her cash for safekeeping as they lived in the same house. When the money was returned, he recorded the movement under her name in the diary.
The Commissioner of Income Tax (Appeals) rejected the explanation and upheld the addition, prompting the taxpayer to approach the ITAT.
ITAT examines father-in-law’s cash withdrawals
The Ahmedabad ITAT noted that it had already examined similar diary entries in the taxpayer’s own case for other assessment years.
In a common order dated April 29, 2026, the Tribunal had accepted the explanation that cash could be handed over to a homemaker for safekeeping in a joint-family setting. It also held that an entry recorded in a person’s name does not, by itself, establish ownership of the cash.
The taxpayer produced year-wise details of her father-in-law’s cash withdrawals recorded in the same seized material.
For FY 2012-13, his cumulative cash withdrawals stood at Rs 1.16 crore, compared with the Rs 33.50 lakh addition made in the taxpayer’s hands. From FY 2009-10 to FY 2020-21, the recorded withdrawals aggregated to around Rs 6.72 crore.
The Tribunal found that these withdrawals provided a sufficient source for the cash movements recorded in the taxpayer’s accounts.
What did the ITAT rule?
The Tribunal applied the principle of telescoping and deleted the entire Rs 33.50 lakh addition.
Telescoping essentially allows an already-established source of cash to be considered against another unexplained cash movement, where the evidence shows that the same funds could have been used. This prevents the same cash from being treated as unexplained more than once.
“An entry in a family diary cannot be viewed in isolation. What matters is whether the taxpayer can establish the actual source and movement of the cash. Here, the father-in-law’s recorded withdrawals provided supporting evidence for the explanation,” another tax expert said.
The Tribunal also noted that the Department’s representative could not distinguish the taxpayer’s case from the earlier ITAT ruling involving the same diaries and similar facts.
“The ruling also highlights why reconciliation is important in cash-related tax proceedings. A taxpayer needs to establish a clear link between the source of funds and the entries questioned by the tax department. A broad claim that the money belonged to a family member may not be sufficient without supporting records,” she said.
The ITAT therefore deleted the Rs 33.50 lakh addition made under Section 69C. The grounds challenging the reassessment were not pressed, while the remaining grounds became infructuous after the addition was deleted on merits.
What does the ruling mean for taxpayers?
The ruling does not mean that a taxpayer can automatically escape an unexplained expenditure addition simply because a diary was found at a relative’s residence.
The key factor in this case was the availability of supporting evidence showing that the relative had sufficient cash withdrawals to explain the amounts recorded in the taxpayer’s name.
For taxpayers dealing with family cash transactions, maintaining a clear trail of withdrawals, transfers and repayments can therefore become important if the source of funds is questioned during an income tax assessment.
