Tax appeal allowed: cash deposits from relative's NRE account held genuine; not treated as unexplained income

ITAT (COCHIN) - AT allowed the appeal and directed the AO to delete the addition of cash deposits. The tribunal found the withdrawals from the relative's NRE account in Aug-Sept 2016 were genuine and the explanation that those funds were later deposited during the demonetisation period because they could not be used for house construction was plausible. Neither the AO nor CIT(A) disputed the withdrawals' genuineness, and there was no evidence the funds were used for another purpose. On these facts, the deposits could not be treated as unexplained income.

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ISSUES PRESENTED AND CONSIDERED

1. Whether cash deposits made in the bank account during the demonetisation period can be treated as unexplained income where the assessee claims the source as past savings and amounts kept by a relative withdrawn from an NRE account.

2. Whether a temporal gap between withdrawal from an NRE account (August-September 2016) and subsequent deposits during the demonetisation period justifies rejection of the explanation that the withdrawn funds remained available for later deposit.

3. What is the proper evidentiary standard and legal consequence when the revenue does not produce material to show that funds withdrawn earlier were utilised for other purposes.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Admissibility of explanation for cash deposits during demonetisation

Legal framework: When the revenue makes additions for unexplained cash deposits, the assessee is required to offer a plausible and verifiable explanation of the source of funds; the authorities may accept or reject such explanation based on material on record.

Precedent Treatment: The Court refers to the doctrine that a plausible explanation supported by evidence must be accepted; no contrary authority was applied to overturn that principle.

Interpretation and reasoning: The Tribunal noted that the fact of cash deposits was undisputed and that the assessee produced proof of withdrawals from the relative's NRE account and asserted personal past savings from pension. The lower authorities did not dispute the genuineness of the withdrawal evidence; they rejected the explanation only on the basis of an assumed possibility that the funds could have been utilised earlier for other purposes.

Ratio vs. Obiter: Ratio - where the assessee furnishes credible documentary proof of an earlier withdrawal and asserts preservation of funds, and revenue adduces no material showing diversion of those funds, the explanation is to be treated as reasonable.

Conclusions: The Tribunal held the explanation to be plausible and directed deletion of the addition relating to the cash deposits.

Issue 2 - Effect of temporal gap between withdrawal and deposit

Legal framework: Temporal gap between an earlier withdrawal and later deposit is a factor for consideration but not determinative; the question is whether there is evidence the withdrawn funds were expended in the intervening period.

Precedent Treatment: The Tribunal applied the settled position that mere lapse of time, without material showing diversion of funds, does not justify treating later deposits as unexplained.

Interpretation and reasoning: The Tribunal observed that withdrawals from the NRE account occurred in August-September 2016 while the deposits were during the demonetisation period; the authorities relied solely on the time gap to infer possible utilisation. The Tribunal found that such inference amounted to assumption and presumption in the absence of corroborative material.

Ratio vs. Obiter: Ratio - time gap alone, without supporting evidence of expenditure, cannot sustain an addition for unexplained cash deposits.

Conclusions: The Tribunal concluded that the time gap did not provide sufficient basis to reject the explanation and that the addition could not be sustained on that ground.

Issue 3 - Evidentiary burden and presumptions when revenue adduces no evidence of diversion

Legal framework: Where an assessee offers an explanation backed by documentary proof, the onus shifts to the revenue to produce material contradicting that explanation; absent such material, negative inferences should not be drawn merely on conjecture.

Precedent Treatment: The Tribunal endorsed the settled principle that, if there is no material to show that prior withdrawals were utilised for some other purpose, it must be deemed that the funds remained available for the later deposits.

Interpretation and reasoning: The Tribunal emphasised that both the AO and the appellate authority accepted genuineness of the asserted withdrawals but rejected the explanation based on an unsupported hypothesis. The absence of evidence demonstrating utilisation of the withdrawn funds rendered the authorities' presumption impermissible.

Ratio vs. Obiter: Ratio - where the revenue adduces no evidence of diversion, the presumption that funds were used for other purposes is impermissible and the assessee's explanation should be accepted.

Conclusions: The Tribunal directed deletion of the addition, concluding that the evidentiary burden to displace the assessee's explanation was not discharged by the revenue.

Overall Conclusion

Having regard to the undisputed withdrawals substantiated by documentary proof, the absence of material showing utilisation of those funds for other purposes, and the insufficiency of temporal gap alone to justify rejection, the Tribunal held the addition of cash deposits during the demonetisation period to be unsustainable and ordered its deletion.

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