Availability of Prior Cash Withdrawals Negates Unexplained Money Addition During Demonetization

Availability of Prior Cash Withdrawals Negates Unexplained Money Addition During Demonetization

The Issue

Whether the Assessing Officer (AO) is justified in treating a portion of cash deposits (₹10 lakhs out of ₹15 lakhs) made during the 2016 demonetization period as unexplained income under Section 69A/68, even when the assessee demonstrated a clear trail of prior withdrawals from his bank account originating from a property sale.

The Facts

• The Deposits: The assessee, a salaried employee at TCS, deposited ₹15 lakhs in two installments (₹8.5 lakhs and ₹6.5 lakhs) in November 2016 following the discontinuation of high-denomination notes.

• The Source: The assessee explained that the funds came from the sale of a house in Jagadhri in June 2015 for ₹52.88 lakhs. Out of the sale proceeds deposited in his bank, he had withdrawn ₹20 lakhs in cash.

• The Addition: The AO and CIT(Appeals) accepted the source for ₹5 lakhs (withdrawn shortly before demonetization) but rejected the source for the remaining ₹10 lakhs. They argued it was “humanly improbable” for an individual to keep such a large amount of cash idle for over a year (from June 2015 to November 2016).

• Tax Rate: The AO further applied the punitive tax rate of 60% (plus surcharge and cess) as prescribed under Section 115BBE.

The Decision

The ITAT Chandigarh Bench (Vice President Rajpal Yadav) allowed the appeal and deleted the addition of ₹10 lakhs based on the following legal principles:

1. Possibility vs. Mathematical Precision: The Tribunal held that Revenue authorities cannot dictate how an individual should manage their cash. An individual is not expected to behave in a “mathematically precise manner” that suits the Department’s assumptions.

2. Onus of Proof: Once the assessee demonstrated that he had withdrawn cash from his bank account and that funds were legally available, the burden of proof shifted to the AO. To sustain an addition, the AO had to prove that the withdrawn cash was spent or utilized elsewhere.

3. Credence to Banking Details: The Tribunal emphasized that the claim was supported by solid banking evidence (the property sale and subsequent withdrawals). Mere suspicion or “human probability” cannot override documented financial trails.

4. Outcome: Since the availability of cash was proven and its utilization elsewhere was not shown by the Revenue, the addition of ₹10 lakhs was deleted. Consequently, the application of Section 115BBE became redundant. In favour of assessee.

Key Takeaways for Taxpayers

• Cash Flow Statements: In demonetization cases, maintaining a “Cash Book” or “Cash Flow Statement” that reconciles bank withdrawals with subsequent deposits is the most effective defense.

• The “Time Gap” Myth: There is no law that mandates cash must be deposited within a specific timeframe after withdrawal. As long as you can show the source of the withdrawal and the absence of other expenditures, the “time gap” argument used by the AO is legally weak.

• Section 115BBE Shield: Punitive tax rates apply only if the income is “unexplained.” Once you prove the source (even if it’s a past withdrawal), the income is “explained,” and the 60% tax rate cannot be applied.