The Income Tax Appellate Tribunal, Delhi, has clarified that cash deposits made during the demonetization period, sourced from prior lawful withdrawals and supported by salaried income, cannot be treated as unexplained income under Section 69A of the Income-tax Act merely due to a time gap or absence of a cash book. This ruling reinforces the principle that the burden shifts to the Revenue to prove diversion of funds once the assessee establishes a credible source.
Background & Facts
The Dispute
The appellant, Vinita Nitin Chaudhary, a Scientist 'E' in the Department of Biotechnology, Government of India, filed her return of income for Assessment Year 2017-18 declaring total income of Rs. 8,01,480. Her case was selected for scrutiny under the Computer Assisted Selection System (CASS) due to substantial cash deposits made during the demonetization period (November 2016), which were significantly higher than her declared income.
Key Facts
- The appellant is a salaried government employee with no business or professional income.
- During FY 2016-17, she deposited Rs. 12,08,000 in cash into her State Bank of India account between November and December 2016.
- The source of these deposits was earlier cash withdrawals from the same account between July and August 2016, totaling Rs. 22,10,000.
- The bank statement reflected these withdrawals and subsequent redeposits.
- The appellant explained that she retained cash at home from her regular salary savings and redeposited it during demonetization due to liquidity constraints and banking disruptions.
- No cash book or household withdrawal records were maintained, as she was not a business entity.
- The Assessing Officer (AO) added Rs. 10,43,000 under Section 69A as unexplained income, applying Section 115BBE.
- The AO also initially added Rs. 58,00,000 as long-term capital gains from a property sale, but this was rectified under Section 154 on 13.01.2020 after the appellant demonstrated no such sale occurred.
- The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the Section 69A addition, citing lack of contemporaneous records, time gap between withdrawal and deposit, and small pre-demonetization withdrawals.
Procedural History
- 01.06.2016 to 30.11.2016: Period of cash withdrawals and redeposits.
- 31.07.2017: Due date for filing return of income for A.Y. 2017-18.
- 15.08.2017: Return filed electronically declaring income of Rs. 8,01,480 with deductions under Chapter VI-A.
- 20.10.2017: Notice under Section 143(2) issued for scrutiny.
- 05.11.2017: Notice under Section 142(1) issued seeking details of source of cash deposits.
- No reply filed to Section 142(1) notice initially.
- 12.12.2017: Penalty notice under Section 272A(1)(d) issued for non-compliance.
- 28.12.2017: Assessee filed reply with bank statement explaining source as prior withdrawals.
- 25.12.2019: Original assessment order passed under Section 144, adding Rs. 10,43,000 under Section 69A.
- 13.01.2020: Rectification order under Section 154 deleted LTCG addition of Rs. 58,00,000.
- 01.08.2025: Order of the Ld. JCIT (A) confirming the Section 69A addition.
- 10.03.2026: Hearing before ITAT Delhi.
- 06.05.2026: Judgment pronounced.
Relief Sought
The appellant sought deletion of the addition of Rs. 10,43,000 under Section 69A, arguing that the source of cash was fully explained through prior withdrawals and salary income, and that the Revenue had failed to discharge its burden of proving diversion of funds.
The Legal Issue
The central question was whether Section 69A of the Income-tax Act permits the addition of cash deposits as unexplained income when the assessee demonstrates that the funds originated from prior lawful withdrawals from the same account, supported by salaried income, and the Revenue fails to establish that the cash was diverted to undisclosed purposes.
Arguments Presented
For the Appellant
The appellant’s counsel argued that the cash deposits were not unexplained but were redeposits of funds previously withdrawn from her own bank account. She submitted that as a salaried government employee, she was not required to maintain a cash book or household withdrawal records. The bank statement clearly showed withdrawals of Rs. 22,10,000 prior to demonetization, exceeding the deposit of Rs. 12,08,000. She relied on multiple ITAT judgments, including CIT v. Baldevraj Charla, DCIT v. Veena Awasthi, and Gordhan v. ITO, which held that a time gap between withdrawal and redeposit does not invalidate the source explanation. The burden, she argued, shifted to the Revenue to prove that the withdrawn cash had been utilized elsewhere, which it failed to do.
For the Respondent
The Revenue’s counsel relied on the orders of the AO and CIT(A), contending that the absence of a cash book, the time gap of four months between withdrawal and deposit, and the small size of some pre-demonetization withdrawals rendered the explanation unsatisfactory. The Revenue argued that the mere production of bank statements was insufficient without corroborative evidence of cash retention and that the appellant’s explanation was speculative.
The Court's Analysis
The Tribunal emphasized that Section 69A applies only when two conditions are met: (1) the assessee is found to be the owner of money, and (2) the assessee fails to offer a satisfactory explanation regarding its source. The Tribunal held that the appellant had discharged her initial burden by providing bank statements showing withdrawals exceeding the deposits, coupled with her salaried income profile.
"It is settled law that addition u/s 69A can be made only when the assessee is found to be the owner of unexplained money and fails to offer a satisfactory explanation."
The Tribunal rejected the CIT(A)’s reasoning that the time gap of four months between withdrawal and deposit invalidated the explanation. It cited CIT v. Baldevraj Charla and DCIT v. Veena Awasthi to affirm that no statutory provision mandates immediate redeposit of withdrawn cash. The Tribunal noted that individuals are legally entitled to retain cash at home for personal contingencies.
The Tribunal further observed that the Revenue had not produced any evidence to show that the withdrawn cash had been spent on unexplained transactions, invested in undisclosed assets, or otherwise diverted. The mere suspicion of unexplained origin, without concrete proof, cannot sustain an addition under Section 69A.
"Suspicion, however strong, cannot replace evidence. Unless Revenue proves diversion of cash, addition cannot survive."
The Tribunal also rejected the argument that small withdrawals (e.g., Rs. 3,000 or Rs. 10,000) indicated absence of cash balance, calling it a flawed inference based on conjecture. It highlighted that the total withdrawals (Rs. 22,10,000) substantially exceeded the deposit in question (Rs. 12,08,000), making the addition mathematically unsustainable.
The Tribunal noted that the AO’s initial erroneous addition of Rs. 58,00,000 under LTCG, later rectified under Section 154, indicated a pattern of non-application of mind, further undermining the credibility of the Section 69A addition.
The Verdict
The appeal was allowed. The Tribunal deleted the addition of Rs. 10,43,000 under Section 69A. The order of the CIT(A) dated 01.08.2025 was set aside. The assessment was directed to be recomputed by the AO in accordance with this order, excluding the unexplained income addition. No interest or penalty was imposed on the appellant.
What This Means For Similar Cases
Source Proven by Bank Records Is Sufficient
- Practitioners can now confidently argue that bank statements showing prior withdrawals exceeding cash deposits constitute prima facie proof of source under Section 69A.
- No requirement exists for salaried individuals to maintain cash books or household withdrawal logs.
Burden Shifts to Revenue After Source Disclosure
- Once the assessee establishes a credible source through bank records and income profile, the onus shifts to the Revenue to prove diversion or utilization elsewhere.
- Mere time gaps, absence of contemporaneous records, or small withdrawals cannot be used to reject explanations without independent evidence.
Time Gap Is Not a Ground for Addition
- ITAT has reaffirmed that a gap of several months between withdrawal and redeposit does not, by itself, justify an addition under Section 69A.
- This precedent applies to all cases involving demonetization-era deposits and similar cash flow patterns.
Rectification Orders Highlight Assessment Errors
- Erroneous additions later rectified under Section 154 can be cited to demonstrate lack of application of mind in other additions, supporting appeals.
- Practitioners should cross-reference rectification orders when challenging other disputed additions in the same assessment.
