The assessee filed its return of income for Assessment Year 2007-08 declaring a total income of ₹28,71,047. The return was selected for scrutiny. During the assessment proceedings, the Assessing Officer observed that the assessee had reflected outstanding liabilities aggregating to ₹4,45,99,625 as payable to Bank of Baroda, Indian Overseas Bank, and Punjab National Bank in its books of account.

However, these liabilities were not supported by confirmations or statements from the respective banks. Accordingly, the Assessing Officer issued notices under section 133(6) of the Income-tax Act, 1961, seeking confirmation of the balances. Out of the three banks, only Indian Overseas Bank confirmed an outstanding liability of ₹1.87 lakhs. In the absence of confirmations from the other banks, the Assessing Officer concluded that the remaining balances represented bogus credits and made an addition of approximately ₹4.44 crores to the income of the assessee.

In appeal, the Commissioner (Appeals) deleted the addition relating to unexplained liabilities. However, the Income-tax Appellate Tribunal reversed the said finding and upheld the addition made by the Assessing Officer, holding that the assessee had failed to substantiate the liabilities reflected as payable to Bank of Baroda and Punjab National Bank.

Before the High Court, the dispute was confined to the amounts shown as payable to Bank of Baroda (₹67.43 lakhs) and Punjab National Bank (₹3.71 crores). These balances were reflected in the books as on 31.03.2007. It was noted that the bank statements did not show corresponding outstanding amounts and that the accounts were not overdrawn to such an extent. It was also an admitted position that the said amounts were not actually payable to the banks.

The assessee contended that the liabilities represented “book overdrafts” and not bank overdrafts. According to the assessee, the balances arose due to cheques issued to suppliers that were not presented for payment as on the balance-sheet date. Consequently, while the books showed higher liabilities, the bank statements did not reflect corresponding debits.

It was further found that the cheques claimed to have been issued were not presented even in the subsequent financial year, indicating that such cheques were never encashed. In particular, the Punjab National Bank account was an escrow account, which could be operated only for specified purposes and could not have a negative balance. Therefore, the liability reflected in the books in respect of the escrow account was factually incorrect and non-existent.

The assessee, engaged in the real estate business, argued that it was required to deposit a portion of customer receipts into the escrow account for project development and that cheques were issued to vendors for procurement of materials. Due to a downturn in the real estate market, the assessee claimed it could not fund the escrow account, returned the materials, and retrieved the cheques issued to vendors. On this basis, it was argued that, if at all, the vendors should have been reflected as creditors and not the banks.

The Tribunal rejected these submissions on the ground that the assessee failed to produce any documentary evidence to substantiate the alleged purchase, receipt, and return of goods or retrieval of cheques. There was no material on record to establish the genuineness of the transactions as claimed.

The High Court held that the existence and genuineness of the transactions were pure questions of fact. In the absence of supporting evidence and in view of the findings recorded by the Tribunal, no perversity or patent illegality could be found in the Tribunal’s order. Consequently, the appeal was dismissed.

The Supreme Court, finding no merit in the challenge and no valid ground to interfere with the judgment of the High Court, dismissed the Special Leave Petition, thereby upholding the addition of unproved bank liabilities as taxable income in favour of the Revenue.