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Facts
The assessee filed its return of income showing substantial income. The case was selected for scrutiny due to an abnormal increase in cash deposits during the demonetization period. The Assessing Officer (AO) treated the cash deposits as unexplained income under Section 68 of the Income Tax Act and made an addition.
Held
The Tribunal held that the AO made the addition based on presumptions and conjectures without concrete evidence. The assessee had explained the source of cash deposits as cash in hand, supported by its books of account and past practices, and the AO failed to disprove this explanation.
Key Issues
Whether the cash deposits made during the demonetization period, explained by the assessee as being from cash in hand, can be treated as unexplained income based solely on presumptions by the Assessing Officer?
Sections Cited
68, 115BBE
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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA & SHRI NIKHIL CHOUDHARY
This appeal has been preferred by the Department against the order dated 16.09.2020, passed by the ld. Commissioner of Income Tax (Appeal) – 2, Lucknow for Assessment Year 2017-18.
2. The brief facts of the case are that the return of income showing income at Rs.27,80,72,190/- was filed by the assessee for the captioned assessment year. The case was selected for scrutiny under CASS guidelines for the reason “abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period”. Subsequently, statutory notices along with questionnaires were issued from time to time, to which the assessee duly responded and furnished books of account and other documents along with various explanations called for by the Assessing Officer (AO). The Assessing Officer noticed that the assessee had made huge cash deposits during the demonetization period and prior to that, there were frequent cash withdrawals also by the assessee. The assessee was required to explain the reason behind such huge cash deposits. In response to the query by the Assessing Officer, the assessee submitted that maintaining such huge cash deposits was in line with the nature of business of the assessee and that the assessee had to maintain such huge cash balances in view of the assessee having its work spread out throughout the Country at different locations and sites and, therefore, cash was required to meet the daily expenses at those sites as well as for the purpose of making advances to various employees. It was further submitted by the assessee before the AO that these cash balances were maintained by withdrawing cash from bank as and when the need arose and that the same was evidenced by various cash withdrawals made during the year. It was further submitted that the assessee had to deposit the entire cash in the bank account in view of demonetization declared by the Government of India and thus the assessee’s cash deposit was directly related to the cash in hand in the books of account of the assessee. However, the explanation offered by the assessee did not find favour with the Assessing Officer and the Assessing Officer took the view that circumstantial evidences and preponderance of probabilities pointed out that the cash deposits were rather assessee’s income from unexplained sources which was liable to be added to the income of the assessee under section 68 of the Income Tax Act, 1961 (hereinafter called ‘the Act’) by treating the same as unexplained cash credit in the books of the assessee. The Assessing Officer also invoked the provisions of section 115BBE of the Act and completed the assessment at a total income of Rs. 30,64,05,060/- after making an addition of Rs. 2,73,98,000/- on account of cash deposit and a disallowance of Rs. 9,34,866/- claimed by the assessee as expenses towards Corporate Social Responsibility .
3. Aggrieved, the assessee approached the ld. First Appellate Authority challenging the addition. The assessee’s appeal was allowed by the ld. First Appellate Authority by making the following observations:
“5. The appellant has raised seven grounds of appeal through it has mainly objected through which addition made by the AO u/s 68 r.w.s. 115BBE of the Act.
The appellant is a company engaged in rendering services of technical nature to mainly companies in power sector. During the year under consideration ITR was filed on total income of Rs.27,80,72,190/-. During the course of assessment proceeding the AO noted that the appellant had deposited cash of Rs.3,20,98,000/- in its two bank accounts during the period of demonetization. When confronted and ask to submit the source of sale it was submitted that Rs.45,00,000/- were withdrawn just before two days of the demonetization and the same were redeposited while Rs.2,75,98,000/- was deposited out of cash in hand. It was submitted that the appellant does not realized any amount in cash from its customers and the entire funds were withdrawn from the bank during the year and the same was deposited on the announcement of demonetization. Details regarding the cash withdrawals and payments made were provided by the appellant. The AO analysed the same and has raised doubt on the purpose of keeping such high cash in hand when there was no requirement to make payments in cash. It was noted that the major cash payments were done by the appellant in the month of March every year and the appellant had never hoarded such cash. The AO noted that despite having substantial cash with it, the appellant again withdrew substantial amounts in October & November 2016. The AO noted that a very negligible part of the expense debited in the P&L accounts were paid in cash hence there was no need for withdrawing such huge amount of cash. The AO noted that despite having opening cash of Rs.1.25 cr. the appellant carried on withdrawing cash and the closing balance was Rs.2.75 crores. There was no justification for such withdrawals. The AO held that this recurrent withdrawal made by the assesse only indicate one thing that the assesse had been withdrawing cash for some expenditure or urgent purpose to tend to and had made payments towards that particular expenses. However, when demonetization came in, assesse found a way to accommodate its unaccounted cash lying with it by explaining cash withdrawals made by it during various months. The AO held that the withdrawal made for Rs.47,00,000/- in the month of November was acceptable but remaining amount of Rs.2,73,98,000/- was treated as unexplained cash credit u/s 68 of the Act. During the course of appellate proceedings it was submitted that the withdrawal was made from the bank account as per needs of business, the withdrawals were used mainly for giving advances to the employees who are located at the sites, for their day to day expenses and other expenditure related to the project under taken to the appellants. It was submitted that the books of account were subject to audit and no defect has been pointed out by the auditors or the AO. The withdrawals made by the appellant are verifiable from the bank thus, the same cannot be treated as unexplained money in the hands of the appellant. The appellant submitted that it was regular practice for last several years to withdraw cash nothing new has been done in the year under consideration. The need for withdrawal was per the business modal of the appellant in which cash was required for making payments at the far off sites operated by it. A perusal of the assessment order and the submissions made by the appellant shows that the AO has made the addition only on the basis of presumption that the cash withdrawal made by the appellant has been used for some expenditure or urgent purpose or has been used for making payments toward that particular expense. The AO has presumed that the appellant found a way to accommodate the unaccounted cash lying with it by explaining the cash withdrawals made by it during various months. The assumption of the AO is based on the premises that the appellant is making some hidden expenditure. However, the AO has not brought an iota of evidence to substantiate her presumption. The appellant has specifically stated that it does not receives cash from any of his customers as they are all government companies or large private power utilities. Thus, it is clear that the cash deposited by the appellant had to be sourced from some banking channel. The AO as overlooked the fact that substantial cash withdrawals were made during the entire period under consideration and it was a normal trend through many years. The appellant has withdrawn cash from the bank. The AO has not raised any objections on the source of the deposits made in the bank account through which the said cash was withdrawn. However, it is pertinent to note here that the appellant has already submitted that no cash payments are received by it. With regards to the purpose of the withdrawal it was stated that it was model of the business which necessitated the withdrawal. It is a settled law that the AO should not step into the shoes of the business man and beside what is correct for the business. It is not the business of the AO to raised doubt on the purpose of the withdrawal as long as the source is well substantiated. In this case the cash deposited in the bank was made out of the cash withdrawals from the bank. This facts has been accepted in the assessment order itself but the addition has been made only on presumption of the AO. The AO has not rejected the books of account of the appellant neither has she pointed out any discrepancy in the same. The AO has made the addition under the provision of section68 of the Act. A perusal of the section 68 of the Act shows that if any credit of an amount is found in the books maintain by the assesse and if the explanation offered by the assesse is not satisfactory then the same can be considered as unexplained by the AO. However, the satisfaction of the AO is not imaginary but it should be based on sound reasoning and cogent evidences. In this case the explanation regarding the source of the cash deposits has not been denied by the AO but the addition has been made only on presumption without bringing any cogent evidence on record. It is a settled law that additions made on presumption, conjectures and surmises are not sustainable if they are not supported by cogent evidences or reason. In view of the above the addition made by the AO is unsustainable, accordingly the same is directed to be deleted.”
4. Aggrieved, the Department has now approached this Tribunal challenging the relief granted by the ld. First Appellate Authority by raising the following grounds of appeal:
1. The Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.2,73,98,000/- made by the AO on account of cash deposits during demonetisation period on account of failure on the part of the assessee to prove genuineness of the cash credits transactions in his books of account to his satisfaction.
2. The Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.2,73,98,000/- made by the AO u/s 68 of I.T. Act, 1961 on account of unexplained cash deposits during demonetisation period due to sales credited to its books of account to the extent unsupported by past trend.
The ld. Sr. D.R. submitted that the Assessing Officer had made detailed observations in the assessment order and further submitted that the assessee could not establish with evidence, the need for maintaining huge cash balance as well as its utilization. It was further submitted that the assessee had two bank accounts but even then, it maintained huge cash balance which was beyond any reason or logic. The ld. Sr. D.R. further submitted that the Assessing Officer had reproduced a chart at page 11 of the assessment order which showed that the assessee had been withdrawing huge amounts of cash right from April, 2016 and as compared to the cash withdrawals, the cash payments were very meager, which would underline the fact that the assessee was in the habit of diverting funds of the business for some undisclosed purposes. It was further submitted that the assessee had failed to establish with concrete evidence its claim that the deposit had been made out of cash in hand. The ld. Sr. D.R. prayed that the Department’s appeal deserved to be allowed.
In response, the ld. authorized representative for the assessee submitted that the ld. First Appellate Authority had allowed the assessee’s appeal after duly considering the various submissions and evidences filed by the assessee. It was submitted that the assessee is engaged in rendering services to Electricity Boards and State Power Corporations and was having site offices throughout the Country and for the purpose of carrying out the work, it was incumbent upon the assessee to maintain huge cash balances. It was further submitted that the assessee company regularly keeps on withdrawing cash from its bank accounts depending upon the nature of project and business. It was submitted that the fact of huge cash withdrawals throughout the year was also evident from the chart reproduced by the Assessing Officer at page 11 of his order and as referred to by the ld. Sr. D.R. also. It was further submitted that the assessee had been awarded several new contracts between June, 2016 and October, 2016 which led to requirement of increased amount of cash in hand during the period. It was also submitted that the assessee had in earlier assessment year, i.e., assessment year 2016-17 as well as in the subsequent assessment year, i.e., assessment year 2018-19, kept huge cash balances. It was further submitted by the ld. authorized representative for the assessee that the books of account, which were duly produced before the Assessing Officer, were neither rejected nor was any defect pointed out by the Assessing Officer in his order. The ld. authorized representative for the assessee further submitted that the books were duly audited and even the statutory Auditor had not pointed out any defect in the books of account or made any adverse comment. The ld. authorized representative for the assessee also submitted that since the assessee-company had huge volume of business, which was Pan India, the Assessing Officer cannot doubt the assessee keeping huge cash in hand without bringing on record any contrary evidence in this regard. The ld. authorized representative for the assessee also placed reliance on the following case laws:
M/s Coastal Fertilizers Ltd. vs. ITO, Ward-15(1), Kolkata, ITAT Kolkata Bench in order dated 22.06.2022.
Mr. Shanmugam Ethriaj vs. The ITO Non-Corporate Ward-1(4), Chennai, ITAT Chennai Bench in order dated 11.05.2022.
Mrs. Usha Narayan Chaware vs. ITO, Ward-4(5), Pune, ITAT Pune Bench in order dated 24.02.2023.
Shri Subodh Chandra Seth vs. ITO-1(5) Shahjahanpur, ITAT Lucknow Bench in order dated 22.08.2022.
The ld. authorized representative for the assessee, while supporting the order of the ld. CIT (A), prayed that the order of the ld. First Appellate Authority be upheld.
We have heard the rival submissions and have also perused the record. We have also given a thoughtful consideration to the orders of both the lower authorities. The facts in this case are undisputed. The Assessing Officer (AO) has made an addition of Rs. 2,73,98,000/- being cash deposited in its bank account with ICICI Bank Ltd., Hazratganj, Lucknow during the demonetization period. The Ld. AR has submitted that the cash was deposited out of the cash available in the cash book of the assessee as on 08.11.2016. It has been explained by the Ld. AR that since the assessee is in the business of rendering services to various Electricity Boards and State Power Corporations throughout the Country, the assessee has to maintain cash in hand at various locations and sites throughout the country for the purpose of maintaining liquidity for routine expenditure as well as for the purpose of advances to various employees and that for this purpose the assessee regularly withdraws cash from the Bank account. It has also been urged that the assessee has been regularly following this practice in earlier assessment year (AY) i.e. AY 2016-2017 as well as in subsequent assessment year AY 2018-2019. It has been argued that the nature of business of the assessee makes it imperative that huge cash balances are maintained to meet the daily requirement as well as for meeting any other exigency. It has been further argued that the impugned cash deposit on 11.11.2016 had become a necessity in view of the demonetization announced by the Government of India on 08.11.2016.
We have seen that the assessee had offered a similar explanation before the AO vide explanation dated 19.12.2019 wherein the assessee had duly explained its business model and had also submitted month-wise details of opening cash in hand and cash withdrawals as well as closing balance of cash (as available on Pages 88-89 of the paper book). The same are being reproduced herein under for a ready reference:
For the Financial year 2015-16: Opening Closing cash cash in in hand Cash Cash Cash deposit Cash payments Hand Month wise receipts withdrawals
15-Apr 151487 262445 350000 0628494 135438 135438 291043 2100000 750000594990 1181491 15-May 15-Jun 1181491 367000 1300000 01548572 1299919 15-Jul 1299919 320910 3960000 03604285 1976544 15-Aug 197G544 195000 5000000 02950872 4220672 15-Sep 4220672 316140 400000 02869101 2067711 15-Oct 2067711 218000 2050000 . 02586525 1749186 1749186 1998000 4750000 0'2979235 5517951 15-Nov 15-Dec 5517951 853000 3100000 03029798 6441153 16-Jan 6441153 353805 19100000 02625478 23269480 16-Feb 23269480 1669671 500000 04823764 20615387 20615387 4537909 1850000 026920375 82921 16-Mar For the Financial year 2016-17:
Month Cash Cash Cash deposit Cash wise receipts withdrawals payments Opening cash Closing cash in Hand in hand 16-Apr 82921 306400 2031000 0‘307386 2112935 2112935 880000 2750000 0•,411519 5331416 16-May 16-Jun 5331416 422872 5440000 0671807 10522481 16-Jul 10522481 816000 1330000 0466714 12201767 16-Aug 12201767 1039000 250000 0404998 13085769 16-Sep 13085769 2081700 13250000 0348207 28069262 16-Oct 28069262 449400 250000 0’ 317062 28451600 16-Nov 28451600 4000 4700000 32098000.256495 801105 16-Dec 801105 292000 450000 0662762 880343 17-Jan 880343 90000 600000 0764156 806187 17-Feb 806187 • 281547 9500000 09460874 1126860 17-Mar 1126860 549413 17720000 018522013 874260
For the Financial year 2017-18;
Opening cash Closing cash in Hand in hand Month Cash Cash Cash deposit Cash wise receipts withdrawals payments
17-Apr 874260 418000 300000 0466392 1125868 1125868 666549 300000 01136641 955776 17-May 17-Jun 955776 1108000 200000 0833465 1430311 17-Jul 1430311 383000 2000000 01461982 2351329 17-Aug 2351329 618000 600000 02663522 905807 17-Sep 905807 537000 1600000 0'2418045 624762 17-Oct 624762 780000 2800000 03584579 620183 620183 734500 2800000 0' 2537553 1617130 17-Nov 17-Dec 1617130 405000 2000000 01767810 2254320 18-Jan 2254320 325740 600000 01675660 1504400 18-Feb 1504400 154000 4700000 04882231 1476169 1476169 352000 21900000 023673894 54275 18-Mar
A perusal of the above would show that the assessee had sufficient cash in hand in its books on 08.11.2016 which was subsequently deposited on 11.11.2016. As records show, the AO has not at all disputed the veracity of the cash book nor has doubted that cash was available in the books of the assessee on 08.11.2016. It is also noteworthy that the books of account have not been rejected by the AO. It is also seen that the Managing Director of the assessee company had submitted an Affidavit before the AO explaining on oath the need of the assessee company to maintain huge cash balances and also further averring on oath that the cash deposited was from the cash in hand in the books of the company. The AO has not rebutted this Affidavit also. However, without disputing the cash in hand, the AO has simply brushed aside the explanation offered by the assessee and has not even given any sound reasoning for rejecting the explanation of the assessee. This, in our considered view, cannot be upheld. On a factual matrix, we are of the considered view that the assessee has duly explained the source of cash before the AO and it is evident that the AO has just proceeded to make the impugned addition only on surmises and conjectures. The books of account of the assessee are duly audited and the AO has not pointed out a single defect in the said books. Thus, the AO has completely disregarded the voluminous evidences filed by the assessee and has proceeded to disbelieve the explanation of the assessee without bringing on record anything to the contrary. Thus, the entire addition has been made by the AO on presumption and on 'preponderance of probability' and not on evidence.
Though preponderance of probability is an accepted principle to judge reliability of evidences as held by the various Hon'ble Courts in plethora of cases but its application in judging the quality of evidences should be done in a reasonable manner. The action of the AO is not reasonable in as much as he was not able to point any defect in the books of account of the assessee. When as per the submission of the assessee, cash in hand was the source of the impugned cash deposit, then some further enquiries ought to have been made by the AO before rejecting the Assessee’s explanation outright.
It will not be out of place at this juncture to refer to the judgment of the Hon’ble Apex Court in the case of Dhakeshwari Cotton Mills Ltd vs. CIT (1954) 26 ITR 775 (SC) on the issue of suspicion vs. proof. The Hon’ble Apex Court held as under:
“As regards the second contention, although ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there the agreement ends; because it is equally clear that in making the assessment under section 23(3) he is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all and there must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. CIT [1944] 12 393. In the instant case, the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the assessee to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result was that the assessee had not had a fair hearing. The estimate of the gross rate of profit on sales, both by the ITO and the Tribunal, was based on surmises, suspicions and conjectures. The Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills but did not show that statement to the assessee did not give him a opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It was not known whether the mills which had disclosed these rates were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the department to the assessee, but it refused even to look at books and papers which assessee's representative produced before the Accountant Member in his chamber. The assessment in this case and in the connected appeal, was above the figure of Rs. 55 lakhs and it was just and proper when dealing with a matter of this magnitude not to employ unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of the Sub-Divisional Officer. Thus both the ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It was thus a fit case for the exercise of power under Article 136. In the result, the appeal was to be allowed and the order of the Tribunal was to be set aside and the case was to be remanded to it with direction that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the ITO if it is intended to make the estimate on the foot of those enquiries.”
The issue of cash deposits during demonetization has come up before various Benches of this Tribunal. The Ld. AR has also referred to many such cases during the course of his arguments. The Pune Bench of the ITAT has recently, vide order dated 24.04.2023, in Usha Nararayan Chaware vs. ITO deleted the addition of cash deposits during demonetization on proper explanation as to utilization of the cash deposit. The Bench noted that “Once the availability of cash in hand was established and it was not shown by the AO that such cash was spent elsewhere, the explanation of the assessee as to its utilization has to be accepted”
Keeping the above cited judicial precedents in mind and also on the facts of this case, we are of the considered view that the AO was not legally correct in making the impugned addition that that the Ld. First Appellate Authority has rightly deleted the said addition. Accordingly, the grounds raised
by the Department are dismissed.
15. In the final result the appeal of the Department is dismissed. Order pronounced in the open Court on 22/08/2025.