Woman Deposited Rs. 10 Lakh During Demonetisation After Withdrawing Rs. 11.55 Lakh Earlier; ITAT Deletes Unexplained Money Addition

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that cash deposits made during the demonetisation period cannot be treated as unexplained under Section 69A merely because the earlier withdrawals were not in round figures, especially when the Revenue fails to establish that the withdrawn cash had been utilised elsewhere. The Tribunal accordingly deleted a Rs.10 lakh addition made against the assessee while restoring the issue relating to cost of improvement claimed against long-term capital gains to the Assessing Officer for fresh verification.

The assessee, Smt. Pathan Shahazadibegum, had filed her return for AY 2017-18 declaring income of Rs.4.34 lakh. The case was initially selected for limited scrutiny to verify cash deposits made during the demonetisation period. However, the scrutiny proceedings were later dropped pursuant to CBDT instructions relating to invalid returns, and reassessment proceedings under Section 147 were initiated.

During reassessment, the Assessing Officer noticed cash deposits of Rs.10.35 lakh made during demonetisation and another cash deposit of Rs.3.04 lakh made earlier in June 2016. The assessee explained that the demonetisation-period deposits were sourced from cash withdrawals of Rs.2 lakh and Rs.9.55 lakh made from the same bank account shortly before the deposits. The AO rejected the explanation and treated Rs.10 lakh as unexplained money under Section 69A. A separate addition of Rs.3.04 lakh was also made under Section 69A.

The AO further disallowed the assessee’s claim of cost of improvement while computing long-term capital gains on sale of a house property, resulting in an addition of Rs.5.76 lakh. Penalties under Sections 270A and 271AAC(1) were also imposed.

The Tribunal rejected the assessee’s challenge to the validity of reassessment proceedings. It observed that the earlier scrutiny proceedings had already been dropped in accordance with CBDT directions before issuance of the notice under Section 148. It also held that the assessee had participated in the reassessment proceedings and, therefore, by virtue of Section 292BB, could not subsequently dispute service of notice under Section 148.

On the merits of the Rs.10 lakh addition, the Tribunal found that the assessee had withdrawn Rs.2 lakh and Rs.9.55 lakh from the same bank account shortly before depositing ₹10 lakh during the demonetisation period. The time gap between withdrawals and redeposit ranged from 17 to 25 days.

The Bench observed that the Revenue had not brought any material on record to prove that the withdrawn cash had been spent, invested or otherwise utilised elsewhere. It held that the AO’s conclusion that the withdrawal of ₹9.55 lakh must have been made for a specific purpose merely because it was not a round figure was based on conjecture and could not displace the assessee’s explanation.

The Tribunal dismissed the challenge relating to the separate addition of Rs.3.04 lakh under Section 69A as the assessee did not press that ground.

The ITAT deleted the Rs.10 lakh addition made under Section 69A in respect of demonetisation cash deposits, holding that prior cash withdrawals sufficiently explained the source of deposits and that the Revenue had failed to prove utilisation of the withdrawn funds elsewhere. The issue relating to deduction of cost of improvement while computing long-term capital gains was remanded to the Assessing Officer for fresh examination. Consequently, the penalty under Section 271AAC linked to the deleted addition was cancelled, while the penalty relating to the sustained Section 69A addition remained intact.

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