Demonetization Cash Deposits from Prior Withdrawals Can’t Be Taxed Just for Time Gap: ITAT

An assessee with only interest income reported Rs. 9.94 lakh on his AY 2017-18 return. The case was chosen for examination in order to confirm Rs. 15.10 lakh in cash deposits made between November 8, 2016, and December 31, 2016. The assessee responded by stating that the money was taken out of Rs. 42.50 lakh in previous withdrawals made between May 2015 and May 2016 for family expenses and possible marriage-related costs.

The assessee provided a thorough cash flow statement and supporting documentation, such as bills for furniture, jewellery, and LIC premiums, to support the explanation. Citing the interval between the withdrawals and the re-deposit, the AO, however, dismissed the explanation and deemed the deposits unexplained under Section 69. The CIT(A) upheld this addition.

Issue Raised: Whether cash deposits made during demonetization, claimed to be out of earlier bank withdrawals, can be treated as unexplained income under Section 69 solely due to the time gap.

ITAT’s Ruling: The ITAT allowed the appeal and deleted the addition. It held that the assessee had successfully explained the source of the cash deposits through documentary evidence, and the Revenue had failed to disprove the claim or demonstrate an alternate use of the funds. The Tribunal clarified that a mere time gap cannot be the sole ground for rejecting an otherwise substantiated explanation.

Relying on rulings of various High Courts, including those of S.R. Venkata Ratnam, K. Sreedharan, and Jaya Aggarwal, the Tribunal emphasized that individuals manage funds differently and personal conduct cannot be judged against rigid standards of financial prudence. With no evidence of unaccounted income or diversion of funds, the Tribunal concluded that the conditions for invoking Section 69 were not met. Thus, the addition was deleted.

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