2026 (2) TMI 156 - AT - Income Tax

Cash deposits during demonetisation require contemporaneous, probable explanation before unexplained income additions are sustained.

Addition under section 68 challenged cash deposits made during demonetisation; the material legal point is that an assessee must provide a satisfactory, ... Addition u/s. 68 - assessee had deposited substantial cash in its bank accounts during the demonetization period - explanation to be satisfactory and acceptable on the touchstone of human probabilities. Assessee explained that these cash deposits were made out of opening cash balance and cash withdrawn earlier from its bank accounts from time to time AND due to business difficulties, disputes among partners and apprehension of heavy tax liability, the partners had withdrawn cash and kept it in hand, which was later redeposited during demonetization. HELD THAT:- As both the AO and the CIT(Appeals) have recorded concurrent findings that the assessee has failed to furnish any cogent, convincing or contemporaneous reason as to why such huge amounts of cash were required to be accumulated over a long period. The explanation that cash was kept for future tax payments or due to disputes among partners is vague and unsupported by any evidence. No details of any immediate or unavoidable cash requirement have been brought on record. We also note that the assessee continued to make further withdrawals even when, as per its own cash flow statement, substantial cash was already available in hand, which clearly weakens the explanation of mere redeposit of earlier withdrawals. The argument of assessee that once withdrawals and deposits are from the same bank account, the source automatically stands explained cannot be accepted as a universal proposition. Courts have consistently held that mere availability of withdrawals is not sufficient and the assessee must also establish that the withdrawn cash remained unutilised and was available for redeposit. In the case of CIT v. P. Mohanakala [2007 (5) TMI 192 - SUPREME COURT] Court has held that the explanation of the assessee must be satisfactory and acceptable on the touchstone of human probabilities. In the present case, the assessee has failed to demonstrate that the cash withdrawn over several months remained intact and unutilised and that there was any compelling business necessity for such accumulation of cash. The findings recorded by the lower authorities are based on appreciation of facts and probabilities and have not been controverted by any material evidence before us - Decided against assessee. Issues: Whether the addition of Rs. 1,72,83,364/- as unexplained cash credit under Section 68 of the Income-tax Act, 1961 in respect of cash deposits during the demonetisation period is justified.Analysis: Both the Assessing Officer and the Commissioner (Appeals) found that the assessee failed to provide a cogent, convincing or contemporaneous explanation for accumulation of large cash balances over an extended period; the cash flow indicated continued bank withdrawals despite claimed cash-in-hand; no specific business necessity or contemporaneous evidence supported retention of withdrawn cash for redeposit; mere existence of prior withdrawals from disclosed bank accounts does not, without proof that such withdrawn cash remained unutilised, automatically explain subsequent redeposits; the authorities' conclusions rest on appreciation of facts and probabilities consistent with established tests including the touchstone of human probabilities.Conclusion: The addition of Rs. 1,72,83,364/- under Section 68 is upheld and the assessee's appeal is dismissed (decision against the assessee).