Section 69A IT Act | Cash Withdrawals from Disclosed Accounts Cannot Be Taxed as Unexplained Money Without Evidence of Undisclosed Income: ITAT Surat

The Income Tax Appellate Tribunal (ITAT), Surat, has delivered a significant ruling clarifying that cash withdrawals from disclosed bank accounts cannot be taxed as unexplained money under Section 69A of the Income Tax Act, 1961 unless there is evidence suggesting the cash represents undisclosed income. The judgment underscores the importance of adhering to principles of natural justice and rejects mechanical assessments under Section 144 of the Act, particularly when the assessee has furnished explanations and evidence.

Background & Facts

The Dispute

The appellant, Mrs. Noorjahan Salim Patel, a resident of Bharuch, Gujarat, was subjected to an assessment order for Assessment Year (AY) 2019-20. The Assessing Officer (AO) made an addition of Rs. 21,27,000 under Section 69A of the Income Tax Act, treating cash withdrawals from her bank accounts as unexplained money. The AO also added Rs. 1,60,265 as interest income from State Bank of India and Bank of Baroda.

Key Facts

• The assessee did not file a return of income for AY 2019-20 initially.
• The AO issued a notice under Section 148 of the Act on 23.03.2023, to which the assessee responded by filing a return of income on 15.12.2023, declaring an income of Rs. 1,60,270 and claiming a refund of Rs. 60,820.
• The assessee made cash withdrawals totaling Rs. 21,27,000 and received interest of Rs. 1,60,265 during the relevant year.
• The assessee claimed that the cash withdrawals were from disclosed sources, including agricultural income and loan proceeds, but failed to respond to subsequent notices from the AO.
• The AO proceeded under Section 144 of the Act (best judgment assessment) and made the impugned additions.

Procedural History

• 23.03.2023: Notice under Section 148 issued by the AO.
• 15.12.2023: Assessee filed return of income in response to the notice.
• Subsequent Notices: AO issued multiple notices seeking documentary evidence regarding cash deposits and withdrawals, but the assessee did not respond.
• Assessment Order: AO completed assessment under Section 144 and made additions of Rs. 21,27,000 under Section 69A and Rs. 1,60,265 as interest income.
• 13.10.2025: CIT(A) dismissed the assessee’s appeal ex-parte, without adjudicating on merits.
• Appeal Before ITAT: Assessee filed the present appeal before ITAT, Surat, challenging the additions and the ex-parte disposal of the appeal by CIT(A).

The Parties' Positions

Assessee’s Contentions

• Cash withdrawals from disclosed bank accounts cannot be treated as unexplained money under Section 69A in the absence of evidence suggesting undisclosed income.
• The assessee had sufficient cash in hand from agricultural income and loan proceeds, which were duly disclosed.
• The CIT(A) erred in dismissing the appeal ex-parte, violating principles of natural justice, as the assessee had requested physical service of notices due to limited access to emails.

Revenue’s Contentions

• The AO relied on the assessment order and the CIT(A)’s order, contending that the assessee failed to substantiate the source of cash withdrawals.

Relief Sought

The assessee prayed for:

1. Deletion of the addition of Rs. 21,27,000 made under Section 69A.
2. Quashing of the application of Section 115BBE of the Act.
3. Setting aside the order passed by the CIT(A).
4. Remand of the matter to the AO or CIT(A) for fresh adjudication after providing an opportunity to submit evidence.

The Legal Issue

The central legal question was whether cash withdrawals from disclosed bank accounts, in the absence of evidence suggesting undisclosed income, can be taxed as unexplained money under Section 69A of the Income Tax Act. Additionally, the case raised issues regarding the validity of a best judgment assessment under Section 144 and the adherence to principles of natural justice in ex-parte proceedings.

Arguments Presented

For the Appellant

• Section 69A Requires Proof of Undisclosed Income: The assessee argued that Section 69A cannot be invoked merely on the basis of cash withdrawals from disclosed bank accounts. There must be evidence to show that the cash represents undisclosed income.
• Agricultural Income: The assessee contended that her agricultural income, including proceeds from cotton sales, was sufficient to explain the cash withdrawals. The lack of formal documentation should not negate the reality of agricultural activities, especially in rural contexts.
• Violation of Natural Justice: The assessee highlighted that the CIT(A) dismissed the appeal ex-parte despite her request for physical service of notices, as she had limited access to emails. This violated principles of natural justice.
• Mechanical Assessment: The assessee argued that the AO completed the assessment under Section 144 mechanically, ignoring the explanations and evidence furnished by the assessee.

For the Respondent

• The Departmental Representative relied on the assessment order and the CIT(A)’s order, contending that the assessee failed to substantiate the source of the cash withdrawals during the assessment proceedings.

The Court's Analysis

The ITAT examined the evidence furnished by the assessee, including details of cash withdrawals, agricultural income, and loan proceeds. The Tribunal noted the following key points:

1. Cash Withdrawals From Disclosed Sources: The assessee provided details of cash withdrawals from her own funds, including loan proceeds of Rs. 11,90,000 and agricultural income from cotton sales. These details were part of the submissions before the AO and CIT(A).

   • For Account No. 02250100026599:
     • 09.01.2019: Receipt of loan proceeds: Rs. 11,90,000
     • 15.02.2019: Receipt of loan proceeds: Rs. 11,90,000
     • Sale proceeds from agriculture: Rs. 39,000
     • Interest income: Rs. 83,698
     • Total: Rs. 25,02,698
   • For Account No. 02250100009676:
     • Sale proceeds from agriculture on various dates totaling Rs. 3,35,789.

2. Agricultural Income: The assessee demonstrated that she derived income from agricultural activities, specifically cotton sales, which explained the cash in hand. The Tribunal observed that the AO and CIT(A) failed to consider these details.

3. Principles of Natural Justice: The Tribunal noted that the CIT(A) dismissed the appeal ex-parte without ensuring effective service of notice, despite the assessee’s request for physical service. This was held to be a violation of natural justice.

4. Section 69A Not Applicable: The Tribunal held that Section 69A cannot be invoked merely because cash withdrawals were made from disclosed bank accounts. There must be evidence to suggest that the cash represents undisclosed income. Since the assessee had furnished details of the source of cash withdrawals, the addition under Section 69A was unsustainable.

The Tribunal observed: "The addition made by the AO in respect of Section 69A of the Act, treating cash withdrawals as unexplained money, is not justified. The assessee had provided details of cash withdrawals from her own funds, including agricultural income and loan proceeds, which were very much before the AO and CIT(A)."

The Verdict

The ITAT allowed the assessee’s appeal and deleted the addition of Rs. 21,27,000 made under Section 69A of the Income Tax Act. The Tribunal held that cash withdrawals from disclosed bank accounts cannot be taxed as unexplained money in the absence of evidence suggesting undisclosed income. The order of the CIT(A) was set aside, and the matter was remanded for fresh adjudication if necessary.

What This Means For Similar Cases

Cash Withdrawals Cannot Be Taxed Without Evidence of Undisclosed Income

• Section 69A requires the Revenue to establish that cash represents undisclosed income. Mere cash withdrawals from disclosed bank accounts are insufficient to invoke this provision.
• Practitioners must ensure that the AO and appellate authorities consider all evidence furnished by the assessee, including details of agricultural income, loan proceeds, and other disclosed sources.

Agricultural Income Must Be Given Due Consideration

• The judgment reinforces that agricultural income, even if not formally documented, cannot be disregarded outright. Rural realities and past conduct of the assessee must be considered.
• Assessees engaged in agricultural activities should maintain records of sales, receipts, and bank transactions to substantiate their income.

Principles of Natural Justice Are Non-Negotiable

• The Tribunal’s decision underscores the importance of adhering to principles of natural justice. Ex-parte disposal of appeals, especially when the assessee has requested alternative modes of service, is impermissible.
• Assessees must ensure that requests for physical service of notices or personal hearings are documented and pursued vigorously.

Best Judgment Assessments Must Be Reasoned and Evidence-Based

• Assessments under Section 144 must not be mechanical. The AO must consider all explanations and evidence furnished by the assessee before making additions.
• Practitioners should challenge arbitrary assessments and highlight instances where the AO has ignored material evidence.