2025 (6) TMI 55 - AT - Income Tax

Addition u/s 68 - unexplained cash deposits during the demonetization period - HELD THAT - Assessee has submitted that the cash withdrawal from the bank accounts were duly recorded in the books of account maintained in regular course of business and it was lying with the assessee himself and as per the cash book the assessee has an opening cash balance of Rs. 24, 40, 000/- as on 08.11.2016 which was duly deposited in the bank accounts by the assessee. Assessee submitted relevant extract of cash book kept - there are enough cash withdrawals made by the assessee during the year and there are re-deposits traceable like cash withdrawn on different dates as shown in the aforesaid chart and re-deposited the same. Therefore there are sufficient cash withdrawals to support the submissions of the assessee it is settled position of law that the deposits are traceable to the recent withdrawals the same cannot be rejected. Accordingly inclined to allow the grounds raised by the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this appeal are:

• Whether the addition of Rs. 2,68,000/- to the assessee's income on account of difference in opening cash balance as on 09.11.2016 is justified under the Income-tax Act, 1961, particularly under section 68.
• Whether the addition of Rs. 24,40,000/- representing cash deposits during the demonetization period, which the Assessing Officer (AO) treated as unexplained income under section 68, is sustainable.
• Whether the assessee's explanation that the cash deposits were made out of earlier cash withdrawals is acceptable and supported by adequate evidence.
• Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) (CIT(A)) violated principles of natural justice by not providing a fair and meaningful opportunity of hearing.
• Whether interest under sections 234A, 234B, and 234D of the Act is leviable on the disputed additions.
• Whether penalty proceedings initiated under section 271AAC(1) are justified in the facts and circumstances of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 2,68,000/- on account of difference in opening cash balance

Relevant legal framework and precedents: Section 68 of the Income-tax Act, 1961, places the burden on the assessee to satisfactorily explain the nature and source of any unexplained cash credits or deposits. The courts have consistently held that if the assessee satisfactorily explains the source of cash deposits and the explanation is supported by credible evidence, the addition under section 68 cannot be sustained.

Court's interpretation and reasoning: The AO noted a discrepancy between the declared opening cash balance of Rs. 25,88,730/- and cash withdrawn during demonetization of Rs. 24,000/-, totaling Rs. 26,12,730/-, and the cash deposited of Rs. 28,80,730/-, resulting in an unexplained difference of Rs. 2,68,000/-. The AO treated this difference as unexplained income and added it to the returned income under section 68.

The assessee contended that the actual cash balance was Rs. 2,92,000/-, which was out of earlier income, savings, and gifts, duly reported in the Cash Transaction Declaration, 2016. The CIT(A) upheld the AO's addition due to lack of plausible explanation and proper records.

Key evidence and findings: The assessee submitted the Cash Transaction Declaration, 2016, and contended that the cash balance included legitimate sources such as gifts and prior savings. However, the lower authorities did not accept this explanation.

Application of law to facts: The Tribunal observed that the assessee's explanation regarding the cash balance was supported by documentary evidence in the form of the Cash Transaction Declaration, and the cash balance was traceable to earlier income or savings. The Tribunal found the addition arbitrary in the absence of any conclusive evidence from the AO disproving the assessee's claim.

Treatment of competing arguments: While the Revenue relied on the discrepancy in cash figures and the absence of documentary proof, the assessee's reliance on the Cash Transaction Declaration and explanation of sources was found credible by the Tribunal.

Conclusion: The addition of Rs. 2,68,000/- on account of difference in opening cash balance was not justified and was liable to be deleted.

Issue 2: Addition of Rs. 24,40,000/- on account of unexplained cash deposits during demonetization period

Relevant legal framework and precedents: Under section 68 of the Act, any unexplained cash deposits are liable to be treated as income unless the assessee satisfactorily explains the source. The principle of tracing deposits to prior withdrawals or legitimate sources is well established in judicial precedents.

Court's interpretation and reasoning: The AO disbelieved the assessee's claim that the cash deposits of Rs. 24,40,000/- during the demonetization period were out of earlier cash withdrawals. The CIT(A) affirmed the addition, citing lack of proper records and plausible explanation.

Key evidence and findings: The assessee produced detailed bank withdrawal records showing cash withdrawals aggregating Rs. 24,40,000/- from May 2016 to October 2016. The withdrawals were supported by cash ledger, cash vouchers, bank statements, and profit and loss account entries audited in the regular course of business. The assessee also submitted the Cash Transaction Declaration, 2016, with acknowledgement number.

Application of law to facts: The Tribunal noted that the cash withdrawals were duly recorded and traceable in the books of account. The cash withdrawn was held by the assessee and subsequently redeposited in the bank accounts during the demonetization period. The Tribunal applied the settled legal principle that where deposits are traceable to recent withdrawals, such deposits cannot be treated as unexplained income.

Treatment of competing arguments: The Revenue's argument rested on the absence of documentary proof directly linking the deposits to withdrawals. However, the Tribunal found the detailed withdrawal chart and supporting accounting records sufficient to establish the source of deposits.

Conclusion: The addition of Rs. 24,40,000/- as unexplained income was not sustainable and was liable to be deleted.

Issue 3: Alleged violation of principles of natural justice

Relevant legal framework: Principles of natural justice require that an assessee is given a fair and meaningful opportunity of being heard before adverse orders are passed.

Court's interpretation and reasoning: The assessee contended that the CIT(A) framed the assessment without providing a proper hearing, rendering the order vitiated. However, the Tribunal did not find any material on record or submissions indicating denial of opportunity or procedural irregularity.

Conclusion: No violation of natural justice principles was found.

Issue 4: Levy of interest under sections 234A, 234B, and 234D

Relevant legal framework: Interest under these sections is leviable for delay in filing returns, non-payment of advance tax, and deferment of tax liability respectively.

Court's interpretation and reasoning: The assessee challenged the levy of interest on the disputed additions. The Tribunal did not specifically address this issue in detail, implying acceptance of the statutory provisions for interest levy unless the additions themselves are deleted.

Conclusion: Since the additions were deleted, interest on such additions would not be leviable; however, no explicit direction was recorded.

Issue 5: Initiation of penalty proceedings under section 271AAC(1)

Relevant legal framework: Section 271AAC(1) provides for penalty for concealment of income or furnishing inaccurate particulars.

Court's interpretation and reasoning: The assessee challenged the penalty initiation. The Tribunal did not specifically adjudicate on penalty in this order, likely deferring to the fact that since additions were deleted, penalty proceedings based on those additions would not sustain.

Conclusion: No penalty was imposed in this order; the issue remains open or is rendered infructuous.

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"In my considered view, there are enough cash withdrawals made by the assessee during the year and there are re-deposits traceable like cash withdrawn on different dates as shown in the aforesaid chart and re-deposited the same. Therefore, there are sufficient cash withdrawals to support the submissions of the assessee, it is settled position of law that the deposits are traceable to the recent withdrawals, the same cannot be rejected."

The Tribunal established the core principle that cash deposits in bank accounts which are traceable to prior cash withdrawals duly recorded in the books of account cannot be treated as unexplained income under section 68 of the Income-tax Act.

Accordingly, the Tribunal allowed the appeal, deleted the additions of Rs. 2,68,000/- and Rs. 24,40,000/-, and restored the returned income declared by the assessee.