ACIT, RANGE-1, LUCKNOW vs. MEDHRAJ TECHNO CONCEPT PVT. LTD., LUCKNOW

PER SUDHANSHU SRIVASTAVA, J.M.:

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

ITA No.429/LKW/2020 Page 2 of 17

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

ITA No.429/LKW/2020 Page 3 of 17

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.

ITA No.429/LKW/2020 Page 4 of 17

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

ITA No.429/LKW/2020 Page 5 of 17

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 ITA No.429/LKW/2020 Page 6 of 17

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 ITA No.429/LKW/2020 Page 7 of 17

unsustainable, accordingly the same is directed to be deleted.”

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.
6. 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 ITA No.429/LKW/2020 Page 9 of 17

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:

ITA No.429/LKW/2020 Page 10 of 17

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. 9. 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:

ITA No.429/LKW/2020 Page 12 of 17

For the Financial year 2015-16:

Month wise
Opening cash in Hand
Cash receipts
Cash withdrawals
Cash depositCash payments
Closing cash in hand
15-Apr
151487
262445
350000
0628494
135438
15-May 135438
291043
2100000
750000594990
1181491
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
15-Nov
1749186
1998000 4750000
0'2979235
5517951
15-Dec
5517951
853000
3100000
03029798
6441153
16-Jan
6441153
353805
19100000
02625478
23269480
16-Feb
23269480 1669671 500000
04823764
20615387
16-Mar
20615387 4537909 1850000
026920375
82921

For the Financial year 2016-17:

Month wise
Opening cash in Hand
Cash receipts
Cash withdrawals
Cash deposit Cash payments
Closing cash in hand
16-Apr
82921
306400
2031000
0‘307386
2112935
16-May 2112935
880000
2750000
0•,411519
5331416
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;

Month wise
Opening cash in Hand
Cash receipts
Cash withdrawals
Cash deposit Cash payments
Closing cash in hand
17-Apr
874260
418000
300000
0466392
1125868
17-May 1125868
666549
300000
01136641
955776
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
17-Nov
620183
734500
2800000
0' 2537553
1617130
17-Dec
1617130
405000
2000000
01767810
2254320
18-Jan
2254320
325740
600000
01675660
1504400
18-Feb
1504400
154000
4700000
04882231
1476169
18-Mar
1476169
352000
21900000
023673894
54275

ITA No.429/LKW/2020 Page 13 of 17

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.
11. 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.
12. 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 ITA No.429/LKW/2020 Page 15 of 17

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 ITA No.429/LKW/2020 Page 16 of 17

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 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. [NIKHIL CHOUDHARY]
[SUDHANSHU SRIVASTAVA]
ACCOUNTANT MEMBER
JUDICIAL MEMBER

DATED:22/08/2025
JJ: