Your paperwork is in order. Can the officer still look behind it?
Yes. The apparent is to be treated as real only until there is reason to believe that it is not, and the taxing authorities are entitled to look at the surrounding circumstances and to apply the test of human probabilities. Documentary form alone does not end the enquiry.
Decided by the Supreme Court (S.C. Agrawal, Sujata V. Manohar and B.L. Hansaria, JJ (judgment delivered by Agrawal J)) on 1995-03-28, reported as [1995] 214 ITR 801 (SC); [1995] 80 Taxman 89 (SC); [1995] 125 CTR 124 (SC); [1995] Supp (2) SCC 453; Civil Appeal Nos. 1344-45 of 1977. It bears on section 68 of the Income Tax Act 1961, in Evidence & Burden of Proof and Cash Credits & Unexplained Money matters.
It is the authority most often cited against taxpayers in s.68, penny stock and accommodation entry cases. Knowing it is coming changes how you build the file: documents alone will not carry the day.
Binding on every court and authority in India.
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For assessment years 1971-72 and 1972-73 the assessee, a dealer in art pieces and antiques at Bangalore, credited Rs 3,11,831 and Rs 93,500 to her capital account as winnings from horse races at the Bangalore, Madras and Hyderabad turf clubs — ten jackpots and three treble events in the first year and two jackpots in the second. She produced certificates from the race clubs showing crossed cheques against winning tickets she had presented. In a sworn statement of 6 January 1973 she said she had begun going to races only at the end of 1969, won a jackpot on the first day she attended, and worked out her combinations on her husband's advice while adding horses of her own about whose form she knew nothing. Her books recorded no drawings on race days, no cost of tickets, no travel expenses and no losses. The Income-tax Officer treated both sums as income from undisclosed sources; the Appellate Assistant Commissioner confirmed. She withdrew her Tribunal appeals under s.245M(2) and went to the Settlement Commission, where a majority of two upheld the assessments and the Chairman dissented. She appealed to the Supreme Court against the Commission's order of 24 February 1977.
The appeals were dismissed with costs. Where a sum is credited in the assessee's books and the explanation of its nature and source is, in the Assessing Officer's opinion, unsatisfactory, s.68 supplies prima facie evidence against the assessee — the receipt of the money — which, if not rebutted, may be used to hold the receipt to be of an income nature; but the department may not act unreasonably in considering the explanation (para 5). What is apparent must be treated as real until there is reason to believe otherwise, and the taxing authorities may look into the surrounding circumstances and apply the test of human probabilities (para 7). On the record — the assessee's meagre knowledge of racing, the improbability of repeated jackpot wins at three centres, the absence of any drawings, ticket costs or losses in the books, and her loss of interest in racing once winnings became taxable from 1 April 1972 — the inference that she had bought the winning tickets after the events was one that could reasonably be drawn, and the rejection of her explanation was not unreasonable (paras 9 and 13).
The Court began from the ordinary rule that the department must show a receipt falls within the charge, but held that s.68 alters the position once a credit is found in the books and the explanation is unsatisfactory: the receipt of money is itself prima facie evidence, and an unrebutted explanation may be rejected (para 5). It then treated the real question as whether the apparent could be taken as real, and answered that the authorities are entitled to look at the surrounding circumstances and apply the test of human probabilities (para 7). Against the Chairman's dissent it held that possession of the winning ticket was a neutral circumstance, since someone who buys a winning ticket after the race also holds it; that the Chairman's view that fraudulent sale of winning tickets was unusual ignored the malpractice recorded by the Direct Taxes Enquiry Committee, which led to winnings being brought to charge by the Finance Act 1972; and that requiring the department to prove the purchase directly ignored the reality that such a transaction takes place in secret, so the inference must be drawn from circumstances on the record (para 13). Because the majority of the Settlement Commission had drawn that inference on material and not on conjecture, there was no ground for interference (paras 13 and 14).
As laid down by this Court, apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities
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Handle my notice → Ask a CA on WhatsAppYes. The apparent is to be treated as real only until there is reason to believe that it is not, and the taxing authorities are entitled to look at the surrounding circumstances and to apply the test of human probabilities. Documentary form alone does not end the enquiry. This was decided by the Supreme Court (S.C. Agrawal, Sujata V. Manohar and B.L. Hansaria, JJ (judgment delivered by Agrawal J)) and bears on section 68 of the Income Tax Act 1961. It is reported as [1995] 214 ITR 801 (SC); [1995] 80 Taxman 89 (SC); [1995] 125 CTR 124 (SC); [1995] Supp (2) SCC 453; Civil Appeal Nos. 1344-45 of 1977. It is the authority most often cited against taxpayers in s.68, penny stock and accommodation entry cases. Knowing it is coming changes how you build the file: documents alone will not carry the day. If it applies to you, the first step is this: Do not rest on paperwork alone; explain the commercial rationale of the transaction in plain terms.
For assessment years 1971-72 and 1972-73 the assessee, a dealer in art pieces and antiques at Bangalore, credited Rs 3,11,831 and Rs 93,500 to her capital account as winnings from horse races at the Bangalore, Madras and Hyderabad turf clubs — ten jackpots and three treble events in the first year and two jackpots in the second. She produced certificates from the race clubs showing crossed cheques against winning tickets she had presented. In a sworn statement of 6 January 1973 she said she had begun going to races only at the end of 1969, won a jackpot on the first day she attended, and worked out her combinations on her husband's advice while adding horses of her own about whose form she knew nothing. Her books recorded no drawings on race days, no cost of tickets, no travel expenses and no losses. The Income-tax Officer treated both sums as income from undisclosed sources; the Appellate Assistant Commissioner confirmed. She withdrew her Tribunal appeals under s.245M(2) and went to the Settlement Commission, where a majority of two upheld the assessments and the Chairman dissented. She appealed to the Supreme Court against the Commission's order of 24 February 1977. The matter was decided on 1995-03-28 by the Supreme Court (S.C. Agrawal, Sujata V. Manohar and B.L. Hansaria, JJ (judgment delivered by Agrawal J)). On those facts the Supreme Court held as follows. The appeals were dismissed with costs. Where a sum is credited in the assessee's books and the explanation of its nature and source is, in the Assessing Officer's opinion, unsatisfactory, s.68 supplies prima facie evidence against the assessee — the receipt of the money — which, if not rebutted, may be used to hold the receipt to be of an income nature; but the department may not act unreasonably in considering the explanation (para 5). What is apparent must be treated as real until there is reason to believe otherwise, and the taxing authorities may look into the surrounding circumstances and apply the test of human probabilities (para 7). On the record — the assessee's meagre knowledge of racing, the improbability of repeated jackpot wins at three centres, the absence of any drawings, ticket costs or losses in the books, and her loss of interest in racing once winnings became taxable from 1 April 1972 — the inference that she had bought the winning tickets after the events was one that could reasonably be drawn, and the rejection of her explanation was not unreasonable (paras 9 and 13).
The Court began from the ordinary rule that the department must show a receipt falls within the charge, but held that s.68 alters the position once a credit is found in the books and the explanation is unsatisfactory: the receipt of money is itself prima facie evidence, and an unrebutted explanation may be rejected (para 5). It then treated the real question as whether the apparent could be taken as real, and answered that the authorities are entitled to look at the surrounding circumstances and apply the test of human probabilities (para 7). Against the Chairman's dissent it held that possession of the winning ticket was a neutral circumstance, since someone who buys a winning ticket after the race also holds it; that the Chairman's view that fraudulent sale of winning tickets was unusual ignored the malpractice recorded by the Direct Taxes Enquiry Committee, which led to winnings being brought to charge by the Finance Act 1972; and that requiring the department to prove the purchase directly ignored the reality that such a transaction takes place in secret, so the inference must be drawn from circumstances on the record (para 13). Because the majority of the Settlement Commission had drawn that inference on material and not on conjecture, there was no ground for interference (paras 13 and 14). In the words reproduced by the source cited on this page: "As laid down by this Court, apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities" The decision followed or applied CIT v. Durga Prasad More [1971] 82 ITR 540 (SC); Sreelekha Banerjee v. CIT [1963] 49 ITR 112 (SC); Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC).
It was decided by the Supreme Court on 1995-03-28 and is reported as [1995] 214 ITR 801 (SC); [1995] 80 Taxman 89 (SC); [1995] 125 CTR 124 (SC); [1995] Supp (2) SCC 453; Civil Appeal Nos. 1344-45 of 1977. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 68, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with costs. Where a sum is credited in the assessee's books and the explanation of its nature and source is, in the Assessing Officer's opinion, unsatisfactory, s.68 supplies prima facie evidence against the assessee — the receipt of the money — which, if not rebutted, may be used to hold the receipt to be of an income nature; but the department may not act unreasonably in considering the explanation (para 5). What is apparent must be treated as real until there is reason to believe otherwise, and the taxing authorities may look into the surrounding circumstances and apply the test of human probabilities (para 7). On the record — the assessee's meagre knowledge of racing, the improbability of repeated jackpot wins at three centres, the absence of any drawings, ticket costs or losses in the books, and her loss of interest in racing once winnings became taxable from 1 April 1972 — the inference that she had bought the winning tickets after the events was one that could reasonably be drawn, and the rejection of her explanation was not unreasonable (paras 9 and 13). It arises in Evidence & Burden of Proof and Cash Credits & Unexplained Money matters, on section 68 of the Income Tax Act 1961, and was decided by S.C. Agrawal, Sujata V. Manohar and B.L. Hansaria, JJ (judgment delivered by Agrawal J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Address the surrounding circumstances the officer will point to — timing, price movement, source of funds — before he does. Where the transaction is a genuine business transaction supported by cogent material, say so; some benches limit the human-probabilities test in that situation.
Still good law. Applied by the Supreme Court in CIT v. P. Mohanakala [2007] 291 ITR 278/161 Taxman 169 (SC), decided 15 May 2007, which called it an authoritative pronouncement that was a complete answer to the assessees' argument and directed that the other s.68 authorities be understood in the light of the law declared in it (paras 15 and 21). No decision doubting or overruling it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two things to keep straight when citing this case. First, the appeal was against an order of the Settlement Commission, not against an ordinary assessment order, and the Court was reviewing a majority finding of fact on which the Chairman had dissented — its language about non-interference reflects that posture. Second, the apparent-versus-real and human-probabilities formulation at para 7 is the Court restating CIT v. Durga Prasad More [1971] 82 ITR 540 (SC); cite both where the point matters. The often-quoted line that income-tax proceedings are civil proceedings decided on a preponderance of probabilities is not in this judgment. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with costs. Where a sum is credited in the assessee's books and the explanation of its nature and source is, in the Assessing Officer's opinion, unsatisfactory, s.68 supplies prima facie evidence against the assessee — the receipt of the money — which, if not rebutted, may be used to hold the receipt to be of an income nature; but the department may not act unreasonably in considering the explanation (para 5). What is apparent must be treated as real until there is reason to believe otherwise, and the taxing authorities may look into the surrounding circumstances and apply the test of human probabilities (para 7). On the record — the assessee's meagre knowledge of racing, the improbability of repeated jackpot wins at three centres, the absence of any drawings, ticket costs or losses in the books, and her loss of interest in racing once winnings became taxable from 1 April 1972 — the inference that she had bought the winning tickets after the events was one that could reasonably be drawn, and the rejection of her explanation was not unreasonable (paras 9 and 13).
TaxSphere, “Sumati Dayal v CIT”, https://taxnotice.vittsphere.com/caselaw/case/sumati-dayal-v-cit/ (validity last checked 2026-08-19)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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