Cash Deposits Explained by Third-Party Confirmations Cannot Be Taxed as Unexplained Income.

The Dispute: Agreement Value vs. Actual Cash Receipt

The Conflict: During the 2016 demonetisation period, the assessee deposited cash into her bank account.

The Assessee’s Stance: The cash was part of the sale proceeds of an immovable property. While the registered agreement stated ₹49 lakhs, the actual deal was for ₹74.50 lakhs, with the balance received in cash.
The AO’s Stance: The AO treated the cash portion as “Unexplained Cash Credit” (Section 68) because the formal sale deed didn’t reflect the extra cash and the purchaser initially failed to respond to a Section 133(6) notice.

The Judicial Verdict: Victory for the Taxpayer

The Tribunal/Court ruled in favour of the Assessee, deleting the addition based on a “preponderance of evidence”:

1. The Consistency of Section 54 Claim

The assessee had claimed a deduction of ₹73.06 lakhs under Section 54 (reinvestment in a new house). The court noted that if the assessee had “reported” this higher figure for the purpose of reinvestment, it proved she wasn’t hiding the transaction.

2. Third-Party Confirmation (The “Uncontroverted” Evidence)

Crucially, the assessee produced the purchaser’s reply to the Section 133(6) notice. In this reply, the purchaser categorically confirmed:

They bought the property.
They paid the extra amount in cash.
They even made direct payments to a developer on behalf of the assessee.

3. Discharge of Onus

The Court held that once the purchaser (a third party) confirms the payment of cash, the “Source” of the deposit is explained. The Revenue cannot sustain an addition under Section 68 if the evidence from the payer remains uncontroverted.

Transition to the Income-tax Act, 2025

As of April 2026, the legal landscape for “Cash in Real Estate” has become significantly more dangerous:

Section 102 (New Act): Continues the “Cash Credit” rule. However, the Department now has better digital tools to cross-verify “on-money” (cash over and above agreement value).
Section 195 (New Act): Replaces Section 115BBE. If an addition is made for unexplained cash, it is taxed at a flat 60% plus 25% surcharge, totaling effectively 78%.
Section 269SS/ST: These sections prohibit receiving more than ₹20,000 in cash for property transactions or ₹2 lakhs in total cash. While the tax addition was deleted here, such a transaction in 2026 would trigger 100% penalties under these specific penalty sections, regardless of whether the source is “explained.”

Key Takeaways for Property Transactions in 2026

The “Total Disclosure” Shield: If you receive cash (despite the legal restrictions), reporting the full amount for Capital Gains (Section 86) or Section 54 reinvestment shows “bona fide” intent.
Confirmations are Critical: Always ensure you have a written acknowledgment from the buyer if there is any deviation from the registered deed. Third-party evidence is the only way to beat a Section 102 addition.
Direct Payments: If a buyer pays your developer or a third party directly, ensure this is captured in your books as a “Tripartite” understanding. Written acknowledgments from the developer act as strong supporting evidence.
Avoid “On-Money”: In the 2026 tax regime, explaining the “Source” of cash (to avoid Section 102) is only half the battle. You will still face massive penalties for violating the Cash Transaction Limits (Sections 269SS/ST).

IN THE ITAT MUMBAI BENCH ‘SMC’

Hansa Harischandra Thakur

Income-tax Officer^*

Pawan Singh, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 36 (Mum) of 2026
[Assessment year 2017-18]

APRIL 9, 2026

Suchek Anchaliya, Ld. AR for the Appellant. Vivek Singh, Ld. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- This appeal by the assessee is directed against the order passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”], under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]dated 12.12.2025, arising out of the assessment order passed by the Assessing Officer under section 143(3) of the Act dated 10.12.2019 for the assessment year 2017-18.

Facts of the Case

2. The assessee is an individual. She filed her return of income on 27.07.2017 declaring total income at Rs. 4,73,760/-. The return was processed under section 143(1) of the Act. Subsequently, the case was selected for scrutiny through CASS and statutory notice under section 143(2) dated 09.08.2018 was issued. Thereafter, notices under section 142(1) were issued from time to time calling for details, which were complied with by the assessee through e-proceedings.

3. The case was selected for limited scrutiny on the issues of (i) cash deposits and transaction in property, (ii) capital gain or loss on sale of property, and (iii) cash deposits during the demonetization period. During the course of assessment proceedings, the Assessing Officer observed that the assessee had deposited cash amounting to Rs. 20,36,500/- in her bank account and called upon her to explain the source thereof. A show cause notice dated 14.06.2019 was issued in this regard.

4. In response, the assessee submitted that she had sold a property situated in J.K. Tower to Shri Sanjay B. Devrukhkar and had received total sale consideration of Rs. 74,50,000/-, comprising Rs. 49,00,000/- through cheque and Rs. 25,50,000/-in cash. The assessee also furnished a promissory note purportedly executed by the purchaser acknowledging payment of cash in instalments. However, the Assessing Officer noted that notice issued under section 133(6) to the purchaser remained uncomplied with and that the assessee failed to furnish the complete sale deed. It was further observed that the agreement value of the property was Rs. 49,00,000/- as against the alleged receipt of Rs. 74,50,000/-, and that the claim of receipt of additional cash was not reflected in the agreement. On the basis of these observations, the Assessing Officer held that the assessee failed to establish the genuineness of the transaction and treated the amount of Rs. 25,50,000/- as unexplained cash credit under section 68 of the Act. The total income of the assessee was accordingly determined at Rs. 30,23,760/-.

5. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). During the appellate proceedings, the assessee filed written submissions in response to the show cause notice issued by the learned CIT(A). The grievance of the assessee was against the addition of Rs. 25,50,000/- made under section 68 of the Act. The learned CIT(A), after considering the submissions of the assessee and the material on record, concurred with the findings of the Assessing Officer. The learned CIT(A) observed that the purchaser did not respond to notice under section 133(6), the assessee failed to furnish complete documentary evidence including sale deed, and the claim of receipt of cash was not substantiated. The learned CIT(A) also reiterated the observations of the Assessing Officer regarding mismatch between agreement value and alleged receipt and held that the explanation of the assessee was not satisfactory. Accordingly, the addition of Rs. 25,50,000/- made under section 68 of the Act was confirmed and the appeal of the assessee was dismissed.

6. Being aggrieved, the assessee is in appeal before us and has raised the following grounds of appeal:

On facts, in circumstances of the case and in law, the learned CITA NFAC, ought to have deleted the interest of Rs.19,110/- u/s 244A of the Income Tax Act, 1961.

The appellant craves leave to add, alter, modify 0R DLEETE above Ground of Appeal.

On facts, in circumstances of the case and in law, the learned CITA NFAC, erred in confirming addition by A.O. of Rs.25,50,000/- as unexplained cash credit u/s 68 r w s 115BBE of the Income Tax Act, 1961.

On facts, in circumstances of the case and in law, the learned CITA NFAC, ought to have deleted the interest of Rs.2,580/- u/s 234D of the Income Tax Act, 1961.”

7. During the course of hearing before us, the learned Authorised Representative (AR) submitted that the cash deposits made in the bank account were duly explained and were sourced out of the sale consideration received on transfer of immovable property. It was contended that the said transaction was fully disclosed by the assessee in the return of income filed for the year under consideration.

8. Inviting our attention to the relevant pages of the return of income placed in the paper book, the learned AR that the total sale consideration of the property was disclosed at Rs. 74,50,000/-. It was further pointed out that the assessee had also claimed deduction under section 54 of the Act amounting to Rs. 73,06,564/-, thereby evidencing that the transaction of sale of property and the consequential utilisation of funds had been duly reported in the return of income itself. The learned AR further explained that a part of the sale consideration was received in cash, which was subsequently deposited in the bank account during the period of demonetization. It was submitted that out of the said sale proceeds, the assessee had made a fixed deposit of Rs. 69,00,000/-, which remained invested and was stated to have matured on 31.03.2017.

9. The learned AR further invited our attention to the documentary evidences placed in the paper book, particularly page no. 38, wherein acknowledgements evidencing receipt of cash were placed on record. It was submitted that the assessee had received cash amounts of Rs. 5,00,000/- on 13.09.2016, Rs. 13,00,000/- on 13.09.2016 and Rs. 11,50,000/- on 22.09.2016 from the purchaser of the property. The learned AR explained that these receipts were duly acknowledged in writing and formed part of the overall sale consideration received by the assessee. It was further submitted that as per the understanding between the parties, a sum of Rs. 5,00,000/- out of the aforesaid cash was directly paid by the purchaser to the developer on behalf of the assessee, and the said payment was also acknowledged in writing on 13.09.2016.The learned AR further invited our attention to the notice issued under section 133(6) of the Act by the Income Tax Department in the case of the purchaser dated 31.01.2023, along with the reply furnished by the said purchaser on 03.02.2023 (paper book at page nos. 64 to 72). It was submitted that in response to the aforesaid notice, the purchaser had duly acknowledged the transaction and confirmed the payment of cash made towards purchase of the property from the assessee. On the strength of the above material, it was argued that the primary objection raised by the Assessing Officer regarding nonverification of the purchaser and absence of confirmation under section 133(6) stands duly addressed. Accordingly, it was submitted that the evidences now placed on record conclusively establish the genuineness of the transaction as well as the source of cash deposits, and therefore, the addition made under section 68 of the Act deserves to be deleted.

10. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the Assessing Officer as well as the learned CIT(A). It was submitted that the explanation offered by the assessee lacks credibility inasmuch as there exists a time gap of approximately three months between the date of alleged receipt of cash on sale of property and the subsequent deposit of cash into the bank account during the demonetisation period. It was contended that such delay in depositing the cash casts serious doubt on the genuineness of the assessee’s explanation and supports the findings of the lower authorities.

11. In rejoinder, the learned AR submitted that the addition made by the Assessing Officer is factually incorrect and excessive. It was contended that the total cash deposit in the bank account was only to the extent of Rs. 20,00,000/-, whereas the Assessing Officer has made an addition of Rs. 25,50,000/- under section 68 of the Act without proper correlation. The learned AR further submitted that the assessee has no other source of income except interest income, which is duly reflected in the return of income. It was argued that in absence of any other source, the explanation of receipt of cash from sale of property remains the only plausible and substantiated source. It was further explained that the cash received on sale of property was kept by the assessee at home and, in view of the demonetisation announcement, the same was subsequently deposited in the bank account.

12. On the basis of the above submissions, the learned Authorised Representative contended that the source of cash deposits stands duly explained and the addition made under section 68 of the Act is liable to be deleted.

13. We have carefully considered the rival submissions, perused the orders of the lower authorities and the material placed on record including the paper book filed by the assessee.

14. The sole substantive issue arising for our consideration is whether the addition of Rs. 25,50,000/- made by the Assessing Officer under section 68 of the Act and confirmed by the learned CIT(A) is sustainable in the facts and circumstances of the case.

15. From the material placed on record, it is an undisputed position that the assessee had sold immovable property during the year under consideration and the total sale consideration of Rs. 74,50,000/- has been disclosed in the return of income. The assessee has also claimed deduction under section 54 of the Act amounting to Rs. 73,06,564/-, which clearly establishes that the transaction of sale of property was duly reported and accepted by the Department. The explanation of the assessee before the lower authorities as well as before us has consistently been that a part of the sale consideration amounting to Rs. 25,50,000/- was received in cash and the same constituted the source of cash deposits made in the bank account during the demonetisation period.

16. On perusal of the evidences placed on record, we find that the assessee has furnished acknowledgements evidencing receipt of cash on different dates, namely Rs. 5,00,000/- and Rs. 13,00,000/- on 13.09.2016 and Rs. 11,50,000/- on 22.09.2016. It is also brought on record that part of the payment was made directly by the purchaser to the developer on behalf of the assessee, which has been acknowledged in writing. These documents, placed in the paper book, constitute contemporaneous evidence supporting the claim of the assessee. Further, the assessee has placed on record the notice issued under section 133(6) in the case of the purchaser dated 31.01.2023 along with the reply furnished by the purchaser on 03.02.2023, wherein the purchaser has categorically confirmed the transaction and acknowledged payment of cash towards purchase of the property. This constitutes an independent third-party confirmation supporting the explanation of the assessee.

17. However, we find that neither the Assessing Officer nor the learned CIT(A) has made any effort to verify or examine the said reply filed before the Assessing Officer having jurisdiction over the purchaser. There is nothing on record to suggest that the contents of such confirmation were confronted, rebutted or subjected to any independent enquiry. In absence of any such verification or adverse material brought on record, the primary objection of the Assessing Officer regarding non-compliance to notice under section 133(6) cannot be sustained, particularly when subsequent confirmation from the purchaser was available and remained uncontroverted.

18. The Assessing Officer has rejected the explanation of the assessee primarily on the grounds that (i) the agreement value did not reflect the alleged cash component, (ii) the purchaser did not respond to notice under section 133(6), and (iii) the claim of receipt of cash was an afterthought. In our considered view, these findings cannot be sustained in light of the evidences placed on record and the manner in which such evidences have remained unexamined by the lower authorities.

19. Firstly, once the transaction of sale of property stands accepted and the entire sale consideration of Rs. 74,50,000/- has been duly disclosed in the return of income, coupled with the claim of deduction under section 54 of the Act, the mere absence of reference to a cash component in the agreement cannot, by itself, lead to an adverse inference. This is particularly so when the assessee has placed on record contemporaneous acknowledgements evidencing receipt of cash and the same form part of the overall disclosed transaction.

20. Secondly, the objection of the Assessing Officer regarding non-response to notice under section 133(6) is rendered unsustainable in view of the subsequent material brought on record, wherein the purchaser has, in response to notice issued by the Department, confirmed the transaction and the payment of cash. More importantly, neither the Assessing Officer nor the learned CIT(A) has undertaken any verification of such confirmation or examined the reply filed before the Assessing Officer having jurisdiction over the purchaser. The said confirmation has neither been rebutted nor disproved by bringing any adverse material on record. In absence of such exercise, the earlier objection of non-compliance under section 133(6) loses its very foundation.

21. Thirdly, the allegation that the explanation of the assessee is an afterthought is not borne out from the record. The assessee has disclosed the full sale consideration in the return of income and claimed deduction under section 54 of the Act. Thus, the primary transaction itself stands disclosed and accepted, and there is no material to indicate any suppression of income or fabrication of explanation at a later stage.

22. We further note that the addition has been made under section 68 of the Act. It is well settled that the provisions of section 68 apply where any sum is found credited in the books of account of the assessee and the assessee fails to offer a satisfactory explanation regarding the nature and source thereof. In the present case, the addition pertains to cash deposits in the bank account and not to any unexplained credit found recorded in the books of account. Even otherwise, the assessee has furnished a plausible and consistent explanation supported by documentary evidences as well as third-party confirmation, which has not been effectively controverted by the Revenue.

23. We also find substance in the contention of the assessee that the actual cash deposits in the bank account were to the extent of approximately Rs. 20,00,000/-, whereas the addition has been made for Rs. 25,50,000/- without establishing any direct nexus between the alleged unexplained amount and the actual deposits made. This discrepancy further demonstrates that the addition has been made on presumptive basis without proper correlation of facts.

24. As regards the contention of the learned DR that there exists a time gap between the receipt of cash and its deposit in the bank account, we find that the explanation offered by the assessee that the cash was retained and subsequently deposited during the demonetisation period cannot be rejected in absence of any contrary evidence. The assessee is an individual deriving only interest income, as borne out from the return of income, and no material has been brought on record to suggest existence of any alternate source of cash. In such circumstances, the explanation that the cash emanated from the disclosed sale transaction carries due evidentiary value.

25. In view of the totality of the facts and circumstances of the case, and considering that the evidences furnished by the assessee including third-party confirmation have remained uncontroverted, we are of the considered opinion that the assessee has satisfactorily explained the source of cash deposits and discharged the onus cast upon her under the provisions of the Act. The addition of Rs. 25,50,000/- made under section 68 of the Act and sustained by the learned CIT(A) is therefore unsustainable and liable to be deleted. Accordingly, we direct the Assessing Officer to delete the addition of Rs. 25,50,000/-.

26. Since the addition itself is deleted, the consequential levy of tax under section 115BBE and interest charged under sections 234A, 234B, 234C and 234D shall stand recomputed in accordance with law.

27. In the result, the appeal of the assessee is allowed.