Father-in-law's diary showing cash movements in a homemaker's name led to ₹33.50L tax addition; ITAT grants relief

A taxpayers faced a ₹ 33.50 lakh tax addition years after filing her return, as the income tax department found diary entries recording cash transactions in her name at her father-in-law’s residence during a search.

Income Tax Appellate Tribunal (ITAT), Ahmedabad, later deleted the addition after considering that it is a normal practice in the joint family system, where cash brought into the home is handed over to the home-maker of the family.

This case concerns a homemaker, who had declared a total income of ₹ 4.48 lakh in her income tax return (ITR) filed on July 26, 2012.

Later a search and seizure action under Section 132 of the Income-tax Act was conduced on November 23, 2021, in the case of a Gujarat-based steel manufacturing company, its key associates and their family members which included the homemaker.

The search operation was carried out at the residential premises of the assessee's father-in-law, during which income tax officials found and seized several handwritten diaries, as well as loose papers containing entries pertaining to assessment years 2010-11 to 2021-22.

Two accounts recorded in the seized material were maintained in the taxpayer's name. The income tax assessing officer (AO) treated the net incremental negative peak balance in these accounts as unexplained expenditure and made an addition of ₹ 33.50 lakh under Section 69C.

However, the taxpayer argued that the entries did not represent her personal transactions. She noted that sometimes, her father-in-law would give her cash for safekeeping as they lived in the same house. When the money was taken back, he recorded the cash movement under her name in the diary.

The Commissioner of Income Tax (Appeals) rejected the taxpayer's explanation and upheld the addition. Aggrieved by the decision, she decided to approach the ITAT and seek relief in the matter.

The Ahmedabad ITAT noted that it had already examined similar diary entries in the taxpayer’s own case for other assessment years.

The tribunal said that it is an undisputed fact that the assessee is residing in the same bungalow as her father-in-law and it is normal practice in the joint family system, wherein cash brought into the home is handed over to the homemaker of the family for the purpose of safekeeping.

“It may be noted that the assessee does not have any independent source of income and is a housewife. Thus, the only source for amount returned to PMS (the taxpayer's father-in-law) is the amounts given by PMS to the assessee at home for safe keeping,” the ruling read.

As per ITAT submissions, 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 ₹ 1.16 crore, compared with the ₹ 33.50 lakh addition made in the taxpayer’s hands. From FY 2009-10 to FY 2020-21, the recorded withdrawals aggregated to around ₹ 6.72 crore.

The tribunal found that these withdrawals provided a sufficient source for the cash transactions recorded in the taxpayer’s name.