Taxpayer gets partial relief on unexplained cash deposits under Section 69A, addition reduced from Rs. 40 lakh to Rs. 15 lakh

ITAT Pune partially allowed the assessee's appeal regarding unexplained cash deposits of Rs. 40 lakh under section 69A read with section 115BBE. The assessee claimed deposits originated from earlier bank withdrawals of Rs. 35 lakh from ICICI and other accounts. ITAT found a Rs. 5 lakh difference between withdrawals and deposits, noting the assessee took a bank loan despite having cash and failed to demonstrate expenditure sources for children's education. Taking a liberal approach, ITAT sustained addition of Rs. 15 lakh instead of Rs. 40 lakh, granting Rs. 25 lakh relief, accepting partial source explanation from December 2015 withdrawals and accumulated savings.

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1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this appeal is whether the addition of Rs. 40,00,000 made by the Assessing Officer (AO) under section 69A of the Income Tax Act, 1961 (the Act) on account of unexplained cash deposits in the assessee's Axis Bank account during the demonetization period is justified. Specifically, the Tribunal examined:

• Whether the cash deposits constituted unexplained money under section 69A of the Act.
• Whether the assessee satisfactorily explained the source and nature of the cash deposits, including the contention that the deposits originated from earlier withdrawals from another bank account.
• The relevance of the time gap between the withdrawal of cash and its subsequent deposit in the bank.
• The implications of the assessee's failure to maintain books of account and the invocation of section 115BBE.
• The applicability and sufficiency of judicial precedents cited by the assessee in support of his claim.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Legitimacy of addition under section 69A for unexplained cash deposits

Relevant legal framework and precedents: Section 69A of the Act provides that if an assessee is found to be the owner of money or valuables not recorded in books of account and fails to satisfactorily explain the source or nature of acquisition, such money may be deemed to be income of the assessee for the relevant financial year. The section is applicable even if the assessee is not engaged in business or profession and does not maintain books. The Supreme Court decisions in Sumati Dayal (214 ITR 801 SC) and Durga Prasad More ((1971) 82 ITR 540 SC) were relied upon to emphasize that the apparent facts must be considered real unless there are reasons to believe otherwise, and that taxing authorities are entitled to consider surrounding circumstances applying the test of human probabilities.

Court's interpretation and reasoning: The AO observed that the assessee had deposited Rs. 40 lakh in cash during the demonetization period in the Axis Bank NRO account, which was disproportionate to declared income of Rs. 3,26,560. The assessee claimed that the cash was withdrawn earlier (Rs. 35 lakh on 17.12.2015) from an ICICI Bank account for marriage and education expenses but was not utilized and subsequently deposited. The AO was not convinced, noting discrepancies such as the large time gap between withdrawal and deposit, the purchase of an expensive flat during the year, and the fact that the assessee took a substantial bank loan despite allegedly holding large cash balances. The AO concluded that the cash deposits were unexplained and made the addition under section 69A, also invoking section 115BBE for taxing unexplained income.

The CIT(A) affirmed the AO's findings, noting that the assessee failed to satisfactorily explain the source of the cash deposits or maintain books of account. The CIT(A) rejected the assessee's reliance on judicial precedents which were found inapplicable as they pertained to maintenance of books rather than unexplained cash deposits. The CIT(A) emphasized the inconsistency in the assessee's explanations regarding the purpose of the cash and the suspicious timing of deposits post-demonetization announcement. The CIT(A) also relied on the Supreme Court precedents cited to uphold the addition.

Key evidence and findings: The assessee's bank statements showed a withdrawal of Rs. 35 lakh on 17.12.2015 from ICICI Bank and a cash deposit of Rs. 40 lakh in Axis Bank on 16.11.2016. There was a significant time gap of almost eleven months. The assessee did not provide bank statements for the period 01.04.2016 to 31.03.2017 for the ICICI account, limiting verification of cash flows. The purchase of a flat for approximately Rs. 98 lakh, partly financed by a loan of Rs. 51.89 lakh from Bank of Oman, was also noted. The AO found it improbable that the assessee would hold large cash reserves and simultaneously take a bank loan.

Application of law to facts: The Tribunal recognized that section 69A applies where the assessee fails to satisfactorily explain the source of money not recorded in books of account. The assessee admitted non-maintenance of books and failed to produce credible documentary evidence explaining the source of cash deposits. The large time gap and inconsistent explanations weakened the assessee's claim. The Tribunal also applied the principle from Sumati Dayal and Durga Prasad More that the apparent facts are to be accepted unless disproved by cogent evidence.

Treatment of competing arguments: The assessee argued that the cash deposits were from earlier withdrawals and accumulated savings, supported by bank statements and letters to the bank branch. It was contended that holding cash for long periods was not illegal and was necessitated by the family's need for liquid funds, especially as the assessee was an NRI. The Tribunal acknowledged this argument but noted the lack of corroborative evidence for the entire amount deposited and the unexplained difference of Rs. 5 lakh between withdrawal and deposit. The Tribunal also considered the fact that the assessee took a bank loan despite allegedly holding large cash sums, which cast doubt on the genuineness of the explanation.

Conclusions: The Tribunal partially accepted the assessee's explanation, allowing Rs. 15 lakh of the Rs. 40 lakh addition to stand as unexplained cash deposit. It held that the assessee likely utilized part of the withdrawn funds for household and educational expenses, thus deserving relief of Rs. 25 lakh. The balance Rs. 15 lakh addition was sustained, reflecting the unexplained portion of the cash deposits.

3. SIGNIFICANT HOLDINGS

The Tribunal held: "Section 69A of the Act is applicable in the present case as the appellant failed to establish the source of cash deposit in the bank and also failed to show that these cash were duly recorded in the books of account."

It further observed: "The apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities."

On the assessee's explanation, the Tribunal concluded: "Taking all the above facts and circumstances of the case and also considering that assessee had not demonstrated about the source of alleged drawings and expenditure incurred for education of his children and also observing that as against the withdrawal of Rs. 35.00 lakh but the cash deposit of Rs. 40.00 lakh, so there is a clear cut difference of Rs. 5.00 lakh... we deem it proper to sustain the addition of Rs. 15.00 lakh as against Rs. 40.00 lakh made by the AO and find that the assessee must have incurred some amount of funds withdrawn by him in December 2015 for the purpose of education of his children as well as household drawings."

Core principles established include:

• The applicability of section 69A to unexplained cash deposits even in absence of business or profession and books of account.
• The importance of credible documentary evidence to explain the source and nature of cash deposits.
• The principle that apparent facts are to be accepted unless convincingly disproved.
• The Tribunal's discretionary power to partially accept explanations and grant relief accordingly.

The final determination was that the addition of Rs. 40 lakh under section 69A was excessive and was reduced to Rs. 15 lakh, with the balance Rs. 25 lakh accepted as explained by the assessee. The appeal was thus partly allowed.

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