The Income Tax Appellate Tribunal, Surat Bench, has reaffirmed that unexplained cash deposits during the demonetisation period, lacking corroborative documentation, cannot be accepted as legitimate income. The ruling underscores the statutory burden on taxpayers to prove the nature and source of cash credits and rejects explanations that contravene statutory prohibitions or human probabilities.
Background & Facts
The Dispute
The appellant, Sumeru Textiles Pvt. Ltd., a company engaged in building and construction, filed its income tax return for Assessment Year 2017-18 on 23.10.2017, declaring a total income of Rs. 12,65,560. During scrutiny assessment, the Assessing Officer noticed cash deposits of Rs. 80,00,000 in the company’s bank account during the demonetisation period (November 2016 to March 2017). The Officer treated this amount as unexplained cash credit under Section 68 of the Income-tax Act, 1961, and taxed it at the penal rate of 77.25% under Section 115BBE. The total assessed income was raised to Rs. 92,65,562.
Key Facts
- The assessee claimed the Rs. 80,00,000 originated from cash withdrawals made from its bank account over nine occasions between June and October 2016
- These withdrawals were funded by short-term loans from the company’s Director, taken approximately every fifteen days
- The cash was held in physical form for nearly five months before being re-deposited during demonetisation
- The sole explanation offered was that the cash was intended for purchase of immovable property, but the transaction did not materialise
- No documentary evidence was produced to substantiate the proposed property purchase, including:
- Agreement to sell or Memorandum of Understanding
- Registered sale deed
- Advance receipt
- Proof of stamp duty or registration charges
- The company’s books of account were audited and not rejected under Section 145
- The demonetisation period coincided with the re-deposit of funds (November 2016 to March 2017)
Procedural History
- 23.10.2017: Assessee filed return of income for AY 2017-18
- 2018-19: Scrutiny assessment initiated by ITO, Ward 2(1)(3), Surat
- 11.03.2025: Order passed by Ld. Commissioner of Income-tax (National Faceless Appeal Centre), Delhi, confirming the addition under Section 68 and taxation under Section 115BBE
- 26.03.2026: Appeal heard before ITAT Surat Bench
The Parties' Positions
For the Appellant
- Contended that the cash was withdrawn for investment in immovable property, which failed to materialise
- Argued that the books were audited and not rejected under Section 145, so Section 68 could not apply
- Asserted that the amendment to Section 115BBE (increasing rate to 77.25%) could not be applied retrospectively
- Claimed the explanation was credible and should be accepted in absence of evidence of fraud
For the Respondent
- Argued that the explanation was entirely unsupported by documents
- Highlighted that the pattern of transactions - repeated loans, cash withdrawals, idle holding, and re-deposit - was commercially implausible
- Emphasised that Section 269SS and 269ST prohibit cash transactions in immovable property above prescribed limits
- Stated that an explanation rooted in illegality cannot be accepted under law
Relief Sought
The appellant sought deletion of the addition of Rs. 80,00,000 under Section 68, and alternatively, taxation at the pre-amendment rate of 35.54% under Section 115BBE instead of 77.25%.
The Legal Issue
The central questions were: (1) Whether the assessee discharged the burden under Section 68 to prove the nature and source of cash credits, and (2) Whether the higher rate under the amended Section 115BBE could be applied retrospectively to income assessed for AY 2017-18.
Arguments Presented
For the Appellant
The learned Authorized Representative contended that the cash deposits were not unexplained but originated from legitimate loans from the Director, withdrawn for a bona fide purpose. He relied on the fact that the books were audited and not rejected under Section 145, arguing that Section 68 could not be invoked in the absence of book rejection. He further argued that the amendment to Section 115BBE, which increased the rate from 30% to 77.25%, was introduced with effect from 01.04.2017, and since the income pertained to AY 2017-18, the old rate of 35.54% should apply.
For the Respondent
The Departmental Representative countered that the explanation was purely self-serving and devoid of any documentary corroboration. He cited CIT v. Durga Prasad More and Sumati Dayal v. CIT to argue that the Tribunal must apply the test of human probabilities. He emphasized that Sections 269SS and 269ST explicitly prohibit cash payments for immovable property above Rs. 2 lakh, making the assessee’s explanation not just unproven but illegal. He further argued that Section 115BBE, as amended, applies to income assessed for AY 2017-18 because the amendment was clarificatory and retrospective in nature.
The Court's Analysis
The Tribunal conducted a meticulous review of the transactional pattern and the legal framework governing cash transactions. It observed that the assessee’s explanation - that cash was withdrawn for property purchase and later re-deposited - was not merely unproven, but inherently improbable.
"No prudent person would withdraw borrowed funds in cash, keep such a huge amount idle for nearly five months; and thereafter re-deposit the identical cash into the banking channel. Such conduct is wholly unnatural and commercially imprudent."
The Tribunal noted that the absence of any document - no agreement, no receipt, no cancellation notice - rendered the explanation legally unsustainable. It further held that Section 269SS prohibits cash payments exceeding Rs. 2 lakh for immovable property, and Section 269ST prohibits receipt of cash exceeding Rs. 2 lakh in aggregate from any person in a day. An explanation premised on violation of these statutory prohibitions cannot be accepted.
"Law does not permit an assessee to derive benefit from an explanation rooted in illegality."
The Tribunal also rejected the argument that Section 68 could not apply because the books were not rejected under Section 145. It clarified that Section 68 operates independently of book rejection and places the burden on the assessee to prove the source of any sum credited. The pattern of repeated loans, cash withdrawals, and re-deposits indicated a colourable device to launder unexplained funds.
Regarding the rate under Section 115BBE, the Tribunal held that the amendment introduced by the Finance Act, 2017, with effect from 01.04.2017, was applicable to AY 2017-18. The Tribunal did not entertain the argument on retrospective application, as the amendment was deemed clarificatory and not substantive, and the rate applicable at the time of assessment governed the outcome.
The Verdict
The appeal was dismissed. The Tribunal upheld the addition of Rs. 80,00,000 as unexplained cash credit under Section 68 of the Income-tax Act, 1961, and confirmed its taxation at the rate of 77.25% under Section 115BBE. The order of the Ld. CIT(A) was affirmed. No relief was granted on any ground.
What This Means For Similar Cases
Documentary Evidence Is Non-Negotiable
- Practitioners must advise clients to maintain complete documentation for all large cash transactions, especially during demonetisation
- Oral explanations without supporting documents (agreements, receipts, bank transfers) will be rejected outright
- Even if books are audited, failure to produce evidence for cash credits invites addition under Section 68
Statutory Prohibitions Override Claimed Intent
- Any explanation involving cash payments for immovable property above Rs. 2 lakh is legally invalid under Sections 269SS and 269ST
- Taxpayers cannot claim legitimacy for transactions that violate these provisions, regardless of intent
- The Tribunal will treat such explanations as colourable and reject them summarily
Pattern of Transactions Matters More Than Claims
- Repeated cash withdrawals followed by re-deposits, especially during demonetisation, raise red flags
- The Tribunal will infer laundering or concealment from transactional patterns, even without direct evidence of fraud
- Practitioners must proactively document the origin and purpose of all cash movements, particularly those involving directors or related parties
