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Demonetisation (OCM) : Explanation for Duration/ Link between Cash Deposits & Withdrawal - Part 2

Jan 15, 2020

Continuing our series relevant for first assessment after demonetisation, we look at 21 cases, of which 3 were decided in Revenue’s favour. Most cases are culled from cases arising out of earlier instances of demonetisation in India.

All cases discussed below have as an important factor the time gap between cash withdrawals and deposits in different factual circumstances where the withdrawals have been cited as source of deposits. This Taxsutra Database Insight on cases related to demonetisation also includes a recent ITAT ruling distinguishing a landmark ruling Bhaichand N. Gandhi to holds, that bank pass book could be treated as a book of the assessee; and an ITAT 5-member Special Bench ruling that held, that even if sec.  68 is not applicable, the assessee can be asked to explain cash deposit in bank account u/s 69 or sec. 69B of the Act.

Two important principles discussed are – on/to whom the onus lies/ shifts, and the test to be applied to decide whether the onus has been discharged or not.   

Important Rulings on Duration/ Link between Cash Withdrawals & Deposits

Taxsutra database Citation

Duration between Cash Deposit & Withdrawal

Observation

In Favour

[TS-8479-ITAT-2019(Delhi)-O]

Over 3 FYs - Cash in hand

Cash deposit after date of demonetization

Assessee

[TS-6606-ITAT-2015(Bangalore)-O]

Within 14 months

Addition of account cash withdrawn from a cash credit account

Revenue

[TS-5363-HC-2017(Punjab & Haryana)-O]

Within 3 Months

Addition in absence of link between cash withdrawn from bank and the cash deposit

Revenue

[TS-5175-HC-2018(Delhi)-O]

Within 8 Months

Test of preponderance of probability is to be applied and is sufficient to discharge onus

Assessee

[TS-5893-ITAT-2008(Delhi)-O]

Within 6 Months

Time gap between cash withdrawals and cash deposits, explanation of the assessee cannot be rejected

Assessee

[TS-5480-ITAT-2015(Chandigarh)-O]

Within 10 days

Onus on AO to examine and to show that explanation offered by assessee should not be accepted

Assessee

[TS-9022-ITAT-2017(Delhi)-O]

Within 12 months

Non-cooperation of assessee on submitting explanation for cash deposit

Revenue

[TS-10298-ITAT-2018(Lucknow)-O]

Within 4 months

There is no law in the country which prevents a citizen from frequently withdrawing and depositing his own money

Assessee

[TS-5908-ITAT-2011(Delhi)-O]

Within 5 months

Mere existence of a time gap between cash withdrawal & cash deposits cannot be made basis for addition u/s 68

Assessee

[TS-6605-ITAT-2015(Ahmedabad)-O]

Within 11 months

Addition on account of speculation that amount might have been utilized for any other purpose

Assessee

[TS-6767-ITAT-2014(Mumbai)-O]

Within 11 months

No provision in the Act requiring that cash once withdrawn has to be re-deposited immediately if not utilized

Assessee

[TS-6602-ITAT-2015(Delhi)-O]

Within 5 months

AO demonstrates that the amount in question has been utilized  for any other purpose

Assessee

[TS-5045-HC-1951(PATNA)-O]

Period of 7 Years

Encashment of high denomination notes

Assessee

 

 

1) [TS-8479-ITAT-2019(Delhi)-O] - Tax return filed after 07.11.2016 and cash deposit reported in Statement of Financial Transactions (SFT) – ITAT:  Provisions of section 69A can be invoked if, in any financial year, the assessee is found to be the owner of any money, etc... which has not been recorded in the books of accounts – ITAT rules in assessee’s favour, holding that mere cash deposit in bank account after the date of demonetization, i.e., 08.11.2016 does not mean that the cash-in-hand as on 31.3.2015 and 31.03.2016 duly shown in the balance sheet and disclosed to the department in the respective income tax returns filed much earlier, is unexplained. 

2) [TS-8308-ITAT-2019(AGRA)-O] - Books of Account as defined u/s. 2(12A) – ITAT: Definition of the "books of  accounts' as prescribed u/s 2(12A) inserted by the FA, 2001 w.e.f  1/6/2001 – Bank Passbook is the property of the assessee maintained by the bank, and therefore, rigors of section 68 are applicable to unexplained entries in the passbook, and will amount to credit in the books of account. Followed [TS-8309-ITAT-2019(DELHI)-O]; Distinguishes CIT v. Bhaichand N. Gandhi [1982] 141 ITR 67 (Bom) 

3) [TS-5555-ITAT-2008(Delhi)-O]: ITAT 5-member Special Bench - Even if sec.  68 is not applicable, the assessee can be asked to explain cash deposit in bank account u/s 69 or sec. 69B of the Act - ITAT SB, placing reliance on SC ruling [TS-5011-SC-1958-O], rejects assessee’s argument, holding that though sec. 68 may not be strictly applicable as assessee wasn’t maintaining books of account and bank statement cannot be considered as assessee’s books of account, the onus is on assessee to explain cash received by him and in absence of explanation or acceptable evidence to prove nature & source of receipt, amount may be added as the assessee’s income on general principles and it is not necessary to invoke s. 68, nor is it necessary for IT authorities to point out source of monies. ITAT notes that assessee had filed additional evidence before CIT (A) in form of confirmation letters and IT returns, but CIT(A) did not admit these, & no reasons have been shown as to why they should have been admitted. In absence of clinching evidence to show nature & source of deposits, AO was justified in adding amount as assessee’s unexplained income. 

4) [TS-9022-ITAT-2017(Delhi)-O] - Non-cooperation of assessee on cash deposit submission explanation - ITAT dismisses appeal, holding that assessee failed to produce any relevant or cogent evidence before the lower authorities to explain the source of cash deposits/ withdrawals from the bank account for the purpose of redeposit in the same account; No independent evidence in support of cash flow statement was produced during appeal before CIT(A); ITAT notes that, no evidence of any amount is received on occasion of marriage and birthday have been filed. Even during the course of arguments, the assessee was not able to produce any evidence to prove that in fact marriage of the assessee had been performed; Ld CIT(A) after examining the bank account, noted that withdrawals have been made in small amounts very frequently, therefore it could not be considered as re-deposit in the assessee’s bank account. ITAT further notes that that the assessee’s conduct before the AO was wholly non-cooperative; The assessee, despite statutory notice issued about the source of the cash deposit, the assessee failed to respond to these notices and did not file any explanation or produce any evidence to explain the source of the cash deposits in his bank account. ITAT rejects assessee’s reliance on co-ordinate bench ruling [TS-8115-ITAT-2017(Delhi)-O] and SC ruling [TS-5006-SC-1961-O]. 

5) [TS-10298-ITAT-2018(Lucknow)-O] ITAT: there is no law in the country which prevents citizens from frequently withdrawing and depositing his own money – ITAT dismisses revenue’s appeal, notes that entire transaction of withdrawals and deposits are duly reflected in the assessee’s bank account and even documentary evidences furnished before the Revenue clearly clarify that on each occasion at the time of deposit in her bank account, assessee had sufficient availability of cash, which is also not disputed by the Revenue; ITAT upholds Ld. CIT(A)’s order that the AO was not justified in treating the deposits as unexplained deposits, and the AO’s addition is unjustified and contrary to the provisions of the IT Act and was liable to be deleted. 

6) [TS-6606-ITAT-2015(Bangalore)-O] - Addition of cash withdrawn from a cash credit account – ITAT : No one with reasonable prudence would have taken an interest-bearing loan and kept it with him/ her as cash without utilising for a period of one year;  ITAT dismisses assessee’s appeal, notes that cash withdrawn from cash credit account was in August and September 2005, and the purchase of the property was in December, 2006 after a gap of about 14 months. Assessee had to pay interest on the cash credit account; therefore preponderance of probability is that the amount withdrawn in August and September 2005 would have been used by her for some other purpose. 

7) [TS-6737-ITAT-2014(Delhi)-O] -  Addition u/s 69A - Cash deposited out of cash withdrawn from account in firm - Merely because there was a time gap between withdrawal of cash from partnership firm account and further deposit into the firm’s bank account, the amount cannot be treated as income from undisclosed sources u/s 69; ITAT upholds Ld. CIT(A)’s order that there is no negative cash balance at any point of time, and furthermore, It is not the AO’s case that the amounts withdrawn were utilized anywhere else. Also, no material was placed on record against the assessee for explanation that cash withdrawn from the bank and the capital account of her partnership firm was deposited in bank. Ld. CIT(A) notes that it is not mandatory under any law of the land that an individual has to keep his/ her savings in the bank account only and not as cash in hand; ITAT distinguished SC ruling [TS-5013-SC-1995-O] relied on by Ld. DR and notes that the explanation offered by the assessee is reliable and acceptable on the touchstone of the prudence of an ordinary man, but the mere ground that the act of assessee created huge interest liability on partnership firm does not enable revenue authorities to consider the cash withdrawn and its deposit into the same bank account after a substantial gap of time, as unexplained income u/s 69A of the Act. 

8) [TS-5480-ITAT-2015(Chandigarh)-O]  - Cash deposit and withdrawals from bank account – ITAT: Onus is on AO to examine and show that the explanation offered by the assessee should not be accepted; ITAT notes that nothing is brought on record that the amount was utilized by the assessee on withdrawal from the bank account. Relied on jurisdictional HC decision reported in [TS-12-HC-1980(Punjab & Haryana)-O] and set aside the lower authorities’ orders and restored the issue to the AO’s file with directions to re-decide this issue by giving the assessee a reasonable and sufficient opportunity of being heard and to pass a reasoned order on the assessee’s submissions. 

9) [TS-5893-ITAT-2008(DELHI)-O] : ITAT - Merely because there was a time gap between the withdrawals and corresponding cash deposits, the assessee’s explanation cannot be rejected, and hence the addition confirmed by the learned CIT(A) is not correct. 

10) [TS-6605-ITAT-2015(Ahmedabad)-O] - Cash withdrawn during the years 2006 & 2007 and deposited in the years 2007 & 2008 – ITAT: Merely on the basis of speculation that the amount might have been utilized for any other purpose and was not available with the assessee for making the deposits, it is not open to the lower authority to make the addition on the basis that the assessee failed to explain the source of deposits. 

11) [TS-5908-ITAT-2011(Delhi)-O] – Mere existence of a time gap between cash withdrawal and cash deposits cannot be made a basis for addition u/s 68 – ITAT rules in assessee’s favour and notes that assessee has to maintain margins with NSE at short notice and for that, ready cash in hand has to be maintained and the deposits are from the cash balance available to the assessee in its books of account, no addition is called for. The addition cannot be made or sustained on the basis that there was a time gap between withdrawal and deposits. When cash balance is available in cash book maintained, no addition can be made. In view of this factual position, the orders of the authorities below were set aside. 

12) [TS-5363-HC-2017(Punjab & Haryana)-O] – Addition on account of undisclosed sources u/s 68/ 69A – HC: Cash deposits shall be treated as unexplained income u/s 68 / 69A in absence of linkage between cash withdrawn from the bank and cash deposited; HC upholds ITAT order that the deposits in Bank were made after a gap of two-three instances of withdrawals for the purpose of business, and not available for re-deposit; Furthermore, the withdrawals were re-deposited after a gap of two or three months, which was not probable. Thus, the assessee was not able to link the cash withdrawn from the bank with the cash deposit. Consequently, the CIT(A)’s finding with regard to treating the cash deposit of Rs. 14,20,212/- as unexplained income of the assessee was upheld. 

13) [TS-5175-HC-2018(Delhi)-O] - Addition u/s 68 for cash withdrawn and cash deposited - Assessee withdrew Rs.2 lakhs to buy immovable property in cash from bank account and re-deposited cash of Rs. 1,60,000/- from the amount withdrawn after more than 7 months as the deal could not be finalized. HC held that addition u/s 68 of amount re-deposited was unjustified, noting that one should not consider and reject an explanation as concocted and contrived by applying the prudent man's behaviour test; Principle of preponderance of probability as a test is to be applied and is sufficient to discharge the onus. Probability here means likelihood of anything to be true. 

14) [TS-8323-ITAT-2019(Agra)-O] –  ITAT: As cash deposit into and withdrawal from the bank account was made regularly by the assessee during the year, it is very reasonable to say that the same was business turnover and therefore only gross profit addition was held to be justified on facts

15) [TS-5403-ITAT-2011(Delhi)-O] - Assessee has to maintain margins with NSE at short notice and for that, ready cash in hand has to be maintained. Since the deposits are from the cash balance available to the assessee in its books of account, therefore, in ITAT’s considered view, no addition is called for. The addition cannot be made or sustained merely on the basis that there was a time gap between withdrawal and deposits. When cash balance is available in cash book maintained, no addition can be made. 

16) [TS-6767-ITAT-2014(Mumbai)-O] - No provision in the Act requiring that cash once withdrawn has to be re-deposited immediately if not utilized - ITAT dismisses revenue’s appeal, upheld the order passed by Ld. CIT(A) that once the source of these cash deposits is not in doubt, the same cannot be termed as unexplained - Assessee has maintained regular cash book and all its accounts are audited. Ld.CIT(A) has analyzed each and every deposit made by the assessee in the bank account from the withdrawals made by the assessee from the bank, and the cash available in the cash book. The assessee has also shown sufficient cash in hand in the balance sheet of the earlier years and explains source of cash available with the assessee. 

17) [TS-6602-ITAT-2015(Delhi)-O] – ITAT: No addition can be made u/s 68 of the IT Act on the sole reason that there is a time gap of 5 months between the date of cash withdrawal and re-deposit of the same in the Bank Account, unless the AO demonstrates that the amount in question has been utilized  for any other purpose

18) [TS-5029-ITAT-2017(Chandigarh)-O]- ITAT: Addition of amounts as unexplained expenditure restricted to only amounts ‘paid’ and not to amounts ‘payable’; Credit purchase cannot be treated as unexplained income u/s. 69A in absence of payment proved by the AO against the same; No addition u/s. 69C on basis of ‘dumb documents’ consisting of incomplete numbers - ITAT rules partly in favour of assessee; Holds that addition of amounts from seized paper during search should be restricted to only those amounts against which “amount jama” was written, as it shows that assessee has ‘paid’ those amounts to the third party; Payable amount could not be added against assessee since it itself shows that no amount has been paid by assessee against these amounts. ITAT clarifies that addition u/s 69A could be made of unexplained income not recorded in books of account of which source is not explained; In the present case, it was a credit purchase from a sister concern which was rejected ... ...... 

19) [TS-5045-HC-1951(PATNA)-O] - Encashment of high denomination notes – HC: Assessee produced details of withdrawals for the past 7 years, & claimed the amount encashed on demonetization as out of savings from such withdrawals - AO cannot reject such an explanation; Account books were accepted by ITAT as genuine and there was no material upon which ITAT could reach the inference that the high denomination notes were not saving out of the personal allowance he had drawn. HC notes that assessee actually showed three such receipts, the first dt. 15th March, 1943, the second dt. 10th Feb., 1945 and the third dt. 24th Sept., 1945 and ITAT remarked that there was no evidence that there was a Rs. 10,000 note in any of these receipts, and that the assessee and his employees had not disclosed from whom each Rs.10,000 note was obtained. HC opined that there is no onus thrown upon assessee to indicate from whom each note of Rs. 10,000 was received, and no adverse inference ought to have been drawn by ITAT against assessee. 

20) [TS-5013-SC-1995-O] - Test of human probabilities – SC: Explanation offered by assessee as income from race winnings has been rejected unreasonably and the finding that those amounts are the assessee’s income from other sources is not based on evidence. SC relied on co-ordinate bench ruling in Durga Prasad More  [TS-5156-SC-1971-O] that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real, and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality. The matter has to be considered by applying test of human probabilities. 

21) [TS-5011-SC-1956-O] : Assessee firm encashed 61 high denomination notes of Rs 1,000 each relating to AY 1947-48, on promulgation of high denomination notes demonetisation in 1946. When asked to prove, the assessee-firm submitted account books showing entries showing payment being made to them which resulted in the said cash in their hand. It also submitted affidavit of the payers. Even then, the Revenue authorities held that it was not possible that all payments after a particular date were being made in multiples of Rs. 1,000, and thus held part of assessee’s income to be undisclosed income. On further appeal, HC confirmed additions made. SC however, reversed HC judgment and held that it was not enough without further scrutiny to dislodge assessee’s position, which was supported by entries in cash books and affidavits submitted. Ruling in the assessee’s favour, SC held that assessee’s income from undisclosed sources was based on pure surmises, and since there was no evidence, the addition had to be quashed.

Click here to read Part 1 - Taxsutra Database Insight : Demonetisation (OCM) Cases- Unexplained Cash Credits and "GP-Rate additions”

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