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Facts
Ohm Developers, a construction firm, deposited Rs. 1.93 crore cash during demonetization (AY 2017-18), claiming it originated from prior withdrawals due to business issues and partner disputes. The AO rejected this explanation, noting continuous cash withdrawals even when funds were available, and added Rs. 1.72 crore as unexplained cash credits under Section 68. The CIT(A) subsequently upheld the AO's decision.
Held
The Tribunal concurred with the lower authorities, finding the assessee failed to provide a convincing reason for accumulating and re-depositing such large cash amounts, especially when further withdrawals were made. It emphasized that mere prior withdrawals are insufficient; the assessee must prove the cash remained unutilized, and their explanation did not meet the test of human probabilities as held by the Supreme Court in CIT v. P. Mohanakala.
Key Issues
Whether cash deposits made during demonetization, claimed to be from prior bank withdrawals, can be treated as unexplained cash credits under Section 68, given the assessee's inability to prove the source and retention of cash for a prolonged period.
Sections Cited
Section 143(3), Section 68, Section 69A, Sections 234A/B/C/D, Section 271AAC
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
PER SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:
The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “the CIT(A)”] dated 09/06/2025 passed for Assessment Year (AY) 2017-18.
The Assessee has raised the following ground of appeal: “That the Ld. CIT(A) erred in law and in the facts of the case in confirming the order of the AO in making addition of Rs.1,72,83,364/- u/s.68 of the Act.”
The brief facts of the case are that the assessee is a partnership firm engaged in the business of construction activity. For Assessment Year 2017–18, the assessee filed its return of income on 10.03.2018 declaring a total loss of Rs.47,73,261/-. The case was selected for scrutiny and the assessment was completed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (“the Act”) on 27.12.2019, determining the total income at Rs.1,25,10,103/-.
During the course of assessment proceedings, the Assessing Officer noticed that the assessee had deposited substantial cash amounting to Rs.1,93,77,989/- in its bank accounts during the demonetization period from 9th November 2016 to 30th December 2016. The assessee explained that these cash deposits were made out of opening cash balance and cash withdrawn earlier from its bank accounts from time to time. It was submitted that due to business difficulties, disputes among partners and apprehension of heavy tax liability, the partners had withdrawn cash and kept it in hand, which was later redeposited during demonetization.
4.1. The Assessing Officer examined the bank statements and cash flow statement furnished by the assessee. However, he was not satisfied with the explanation. The Assessing Officer observed that the assessee had been withdrawing cash continuously from April 2016 onwards and, at the same time, was bearing interest and other banking costs. According to the Assessing Officer, no prudent businessman would withdraw cash, keep it idle for long periods without any demonstrated business requirement, and simultaneously incur interest costs. The assessee also failed to establish any specific need for accumulation of such huge cash balances. The Assessing Officer further observed that there was no direct nexus shown between the cash withdrawals and subsequent cash deposits during the demonetization period. On these facts, the Assessing Officer treated the cash deposits to the extent of Rs.1,72,83,364/- as unexplained cash credits under section 68 of the Act and added the same to the total income.
Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). In the appeal, the assessee raised several grounds. The primary grounds were that the Assessing Officer erred in computing the total income by making an addition of Rs.1,72,83,364/- as unexplained cash credit, that the addition was wrongly made under section 68 instead of section 69A of the Act, that interest under sections 234A/B/C/D was wrongly charged, and that initiation of penalty proceedings under section 271AAC was unjustified. Before the CIT(Appeals), the assessee reiterated that the source of cash deposits was fully explained by earlier withdrawals from disclosed bank accounts and cash received from customers. It was contended that withdrawal of cash is not prohibited by law, that business prudence cannot be judged by the Assessing Officer, and that the Department cannot step into the shoes of a businessman. The assessee relied upon cash flow statements, bank certificates and judicial precedents to argue that once sufficient cash balance is available, redeposit of cash cannot be treated as unexplained merely because of a time gap.
The CIT(Appeals) examined the assessment order, the submissions of the assessee and the material on record. The CIT(Appeals) noted that the sole explanation of the assessee was that the cash deposits were made out of earlier withdrawals. However, from the cash flow statements, it was observed that even when the assessee claimed to have sufficient cash in hand, further withdrawals were made from the bank, which indicated that the earlier withdrawn cash had already been exhausted or utilised. The CIT(Appeals) held that no convincing or cogent reason was furnished by the assessee for accumulating large amounts of cash over a long period instead of utilising it for business purposes or keeping it in the bank. The explanation that cash was accumulated for future tax payments or due to disputes among partners was found to be general and unsupported by any concurrent evidence. The CIT(Appeals) further observed that it is not normal business practice to keep huge cash balances idle and, at the same time, continue withdrawing further cash from bank accounts. In the absence of any satisfactory explanation regarding the necessity and purpose of such accumulation of cash, the contention of the assessee that the cash deposits during demonetization were sourced from earlier withdrawals was not found to be convincing. Accordingly, the CIT(Appeals) confirmed the addition of Rs.1,72,83,364/- made by the Assessing Officer and dismissed the grounds of appeal relating to the addition. The other grounds relating to interest and penalty were also dismissed. In the result, the appeal of the assessee was dismissed by the CIT(Appeals).
The assessee is in appeal before us against the order passed by the CIT(Appeals) dismissing the appeal of the assessee.
We have heard the rival contentions and perused the material on record.
8.1. The issue before us relates to the addition made on account of cash deposits during the demonetization period, which the assessee claims to have been sourced from earlier cash withdrawals from the same bank accounts. The consistent stand of the assessee is that since withdrawals and deposits are from the same disclosed bank accounts, the source of cash deposits stands explained.
8.2. On careful consideration of the facts, we find that both the Assessing Officer and the CIT(Appeals) have recorded concurrent findings that the assessee has failed to furnish any cogent, convincing or contemporaneous reason as to why such huge amounts of cash were required to be accumulated over a long period. The explanation that cash was kept for future tax payments or due to disputes among partners is vague and unsupported by any evidence. No details of any immediate or unavoidable cash requirement have been brought on record. We also note that the assessee continued to make further withdrawals even when, as per its own cash flow statement, substantial cash was already available in hand, which clearly weakens the explanation of mere redeposit of earlier withdrawals.
8.3. The argument of the learned counsel for the assessee that once withdrawals and deposits are from the same bank account, the source automatically stands explained cannot be accepted as a universal proposition. Courts have consistently held that mere availability of withdrawals is not sufficient and the assessee must also establish that the withdrawn cash remained unutilised and was available for redeposit. In the case of CIT v. P. Mohanakala (291 ITR 278) (SC), the Hon’ble Supreme Court has held that the explanation of the assessee must be satisfactory and acceptable on the touchstone of human probabilities.
8.4. In the present case, the assessee has failed to demonstrate that the cash withdrawn over several months remained intact and unutilised and that there was any compelling business necessity for such accumulation of cash. The findings recorded by the lower authorities are based on appreciation of facts and probabilities and have not been controverted by any material evidence before us. We, therefore, find no infirmity in the order of the CIT(Appeals) confirming the addition made by the Assessing Officer.
8.5. In view of the above discussion, we uphold the order of the CIT(Appeals) and dismiss the appeal of the assessee.
In the result, the appeal of the assessee is dismissed.