Sumati Dayal v. CIT: The Test of Human Probabilities, and Its Limits

Sumati Dayal v. CIT, (1995) 214 ITR 801 (SC), also reported at 80 Taxmann 89 and 125 CTR 124, decides that the Revenue is entitled to look behind the apparent form of a transaction to find its true nature. An apparent transaction is tested against human probabilities and the surrounding circumstances, and one that is unnatural may be treated as bogus notwithstanding documents supporting it.

Is it still good law

Yes, and it is not a dormant authority. An analysis of the judgments on BharatTax.net shows it relied on in 1,964 of them, the most recent on 17 April 2026.

It sits in an area that later Supreme Court decisions have developed, and any current advice has to be read with them: CIT v. Lovely Exports (P) Ltd., 216 CTR 195 (SC 2008), CIT v. P. Mohanakala, (2007) 291 ITR 278 (SC), and PCIT v. NRA Iron & Steel Pvt. Ltd., (2019) 412 ITR 161 (SC). Which of them governs a given addition depends on what is being explained, and by whom.

The problem it addressed

Before it, an assessee who produced documents for a transaction could argue that the department was bound by them unless it proved fraud. Sumati Dayal confirms that the enquiry is not limited to the face of the record, and that an explanation may be rejected as improbable on the surrounding circumstances even where nothing in the paperwork is shown to be forged.

How the Tribunal applies it

Most often in two settings.

The first is capital gains on thinly traded scrips. Orders in this line reason that where a share price rises far beyond anything the company's net worth or activity supports, the documents establish that shares and money moved but not the genuineness of the intention, and the transaction may be treated as an accommodation arrangement.

The second is cash and bank deposits. Here the case is cited for the proposition that the authorities may weigh the surrounding circumstances rather than accept an explanation at face value.

When it will not help the department

This is the half of the case that assessment orders most often overstate. Sumati Dayal licenses an inference drawn from circumstances; it does not license an addition resting on suspicion alone, and the Tribunal says so on the facts.

• Where the assessee produced audited books and bank statements showing the deposits as business receipts reflected in the balance sheet, a Delhi bench held on 20 March 2026 that the addition lacked cogent material.
• Where share transactions were supported by allotment letters, demat statements and contract notes and the Revenue produced nothing tying the assessee to price manipulation, a Nagpur bench deleted the addition on 10 April 2026.
• Where the explanation was genuinely deficient but the addition was largely based on suspicion, a Nagpur bench on 26 March 2026 deleted half of it rather than sustaining it whole.

The distinction the orders draw is between an inference from proved circumstances and a conclusion from the officer's disbelief. The first survives appeal; the second does not.

Related provisions and authorities

Additions of this kind are made under section 68 or section 69A. The companion authority, cited with it almost as a matter of routine, is CIT v. Durga Prasad More, considered separately here.

Citation figures in this note come from an analysis of 292,668 judgments on BharatTax.net; Sumati Dayal v. CIT is relied on in 1,964 of them.

General information from reported decisions, not advice on a particular matter.