2025 (7) TMI 98 - AT - Income Tax

Cash deposit made during the demonetization period - addition u/s 69A - whether no valid and sufficient explanation for the cash deposits given? - HELD THAT - Assessee is a salaried employee earns the income from teaching services. As per the facts available on record assessee habitually withdraws all the cash out of salary credited in his bank account. He maintained withdrawals with himself due to his religious belief. As observed that CIT(A) has considered the facts available on record and he has given relief only to the extent of cash withdrawals of last three assessment years. Also observed that there is no other source of income unearthed by the tax authorities. Therefore whatever the cash withdrawals by the assessee is only out of salary income and it is also observed that assessee has only withdrawn from the bank out of the salary income and made the deposit only during demonetization period due to declaration of demonetization during current assessment year. That being the case the cash deposit made by the assessee only from his declared source of income i.e. salary income. Since there is no other source of income brought on record therefore there is no other source for the assessee to earn to deposit the said cash. Therefore to allow the claim of the assessee considering the religious belief and also there is no other source of income or ability to make additional income brought on record by the tax authorities. Accordingly grounds raised by the assessee are allowed and addition made by the AO is also deleted.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the cash deposits made by the assessee during the demonetization period can be treated as unexplained money under section 69A of the Income-tax Act, 1961, warranting addition to income?

- Whether the cash withdrawals from salary income over multiple years, maintained as cash by the assessee due to religious beliefs, constitute a valid and sufficient explanation for the cash deposits made during demonetization?

- Whether the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] correctly evaluated the evidence, including bank statements and cash flow statements, in determining the legitimacy of the cash deposits?

- Whether the CIT(A) erred in partially accepting only three years' cash withdrawals as source of deposits and rejecting withdrawals from earlier years?

- Whether the addition made by the AO and upheld by the CIT(A) was justified in the absence of evidence of any other source of income?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Cash Deposits During Demonetization under Section 69A

Relevant legal framework and precedents: Section 69A of the Income-tax Act empowers the AO to make additions to the income of an assessee if any money is found deposited in a bank account and the assessee fails to satisfactorily explain the source of such money. The burden lies on the assessee to prove the source of cash deposits.

Court's interpretation and reasoning: The AO initiated scrutiny due to large cash deposits during demonetization and issued notices under sections 143(2) and 142(1). The AO observed cash deposits amounting to Rs. 23,22,500/- and issued a show cause notice. The assessee claimed these deposits were accumulated cash from salary withdrawals over three financial years. However, the AO rejected this claim citing insufficient evidence and noted only Rs. 24,000/- withdrawals during the demonetization period itself. Consequently, the AO made an addition of Rs. 21,22,000/- under section 69A, allowing Rs. 2,00,000/- for household expenses.

Key evidence and findings: The AO relied on bank statements and cash withdrawal records. The assessee submitted bank statements and cash flow statements covering five years, asserting habitual cash withdrawals of salary income due to religious beliefs.

Application of law to facts: The AO found the explanation unsatisfactory as the withdrawals during demonetization were minimal, and no other source was established. However, the CIT(A) reviewed the bank statements and accepted the pattern of salary withdrawals followed by cash deposits as prima facie valid.

Treatment of competing arguments: The AO emphasized lack of evidence for withdrawals and source of deposits; the assessee argued habitual cash withdrawals over multiple years and religious reasons for holding cash. The CIT(A) partially accepted the assessee's argument, allowing withdrawals from three assessment years as source.

Conclusions: The Tribunal ultimately found that the cash deposits were from declared salary income, held in cash due to religious beliefs, and made during demonetization as necessitated by circumstances. Since no other source of income was found, the deposits were genuine.

Issue 2: Validity and Sufficiency of Cash Flow Statements and Bank Statements as Proof of Source

Relevant legal framework and precedents: The assessee's burden is to provide cogent evidence to explain cash deposits. Bank statements and cash flow statements are relevant documentary evidence. Courts have held that consistent patterns of withdrawals and deposits linked to declared income can establish source.

Court's interpretation and reasoning: The CIT(A) accepted the pattern of salary credited followed by cash withdrawals as prima facie valid but rejected cash flow statements from older years as not fully credible. The CIT(A) allowed withdrawals during the three recent assessment years as proof of source.

Key evidence and findings: The assessee submitted bank statements and cash flow statements spanning five years, but the CIT(A) selectively accepted only three years. The AO did not dispute the authenticity of bank statements but questioned the overall sufficiency of evidence.

Application of law to facts: The Tribunal noted the CIT(A)'s partial acceptance but observed that the assessee habitually withdrew entire salary amounts in cash due to religious beliefs and maintained cash holdings over years. The Tribunal found no justification for excluding earlier years' withdrawals, as they formed part of the accumulated cash deposited during demonetization.

Treatment of competing arguments: The assessee argued for acceptance of all cash flow statements as evidence of accumulated cash; the Revenue contended that only recent years were relevant and accepted by CIT(A). The Tribunal sided with the assessee, emphasizing the consistency of withdrawals and absence of other income sources.

Conclusions: The Tribunal concluded that all cash withdrawals from salary income over the relevant years constituted a legitimate source of the cash deposits, and the selective rejection of earlier years' statements was unjustified.

Issue 3: Consideration of Religious Beliefs and Habitual Cash Withdrawals in Assessing Source of Deposits

Relevant legal framework and precedents: While the Income-tax Act does not explicitly deal with religious beliefs, courts have recognized personal circumstances and habitual practices in evaluating explanations for cash holdings.

Court's interpretation and reasoning: The assessee submitted that as a follower of Muslim faith, he withdrew salary income in cash and did not maintain bank balances due to religious reasons. The Tribunal accepted this as a credible explanation for the pattern of withdrawals and cash holdings.

Key evidence and findings: The consistent bank statements showing salary credits followed by withdrawals, and the absence of any other source of income or bank balances, supported the assessee's claim.

Application of law to facts: The Tribunal considered the religious belief as a contextual factor supporting the habitual cash withdrawal practice, which explained the accumulation of cash deposited during demonetization.

Treatment of competing arguments: The Revenue did not dispute the religious belief but relied on the lack of evidence for withdrawals during demonetization period. The Tribunal found the explanation reasonable and consistent with the facts.

Conclusions: The Tribunal held that the religious belief and habitual cash withdrawals provided a valid and sufficient explanation for the source of cash deposits.

Issue 4: Correctness of Addition Made by AO and Upheld by CIT(A)

Relevant legal framework and precedents: Additions under section 69A require failure to satisfactorily explain source. Partial acceptance of explanation may reduce addition.

Court's interpretation and reasoning: The AO made addition of Rs. 21,22,000/- after allowing Rs. 2,00,000/- for household expenses. The CIT(A) reduced the addition by allowing withdrawals from three assessment years as source. The assessee challenged the partial acceptance and sought deletion of entire addition.

Key evidence and findings: No other source of income was discovered by AO or CIT(A). The Tribunal observed that the entire cash deposits were from salary withdrawals accumulated over years.

Application of law to facts: The Tribunal found that since the deposits were explained by the declared salary income and no other source was found, the addition was unjustified.

Treatment of competing arguments: The Revenue supported the CIT(A)'s partial relief; the assessee argued for full relief. The Tribunal favored the assessee's position.

Conclusions: The Tribunal deleted the addition made by AO and confirmed by CIT(A).

3. SIGNIFICANT HOLDINGS

"The contention of the appellant prima facie appears to be valid but the appellant has submitted cash flow statement of some quite old years as well and hence all the cash flow statements cannot be accepted in toto."

"It would be reasonable to allow the cash withdrawal made by the appellant during the A.Y. 2017-18 till 07.11.2016, A.Y. 2016-17 and A.Y. 2015-16 after considering household expenses as acceptable source of cash deposits to that extent."

"I observed that assessee is a salaried employee earns the income from teaching services. As per the facts available on record, assessee habitually withdraws all the cash out of salary credited in his bank account. He maintained withdrawals with himself due to his religious belief."

"Since there is no other source of income brought on record, therefore, there is no other source for the assessee to earn to deposit the said cash. Therefore, I am inclined to allow the claim of the assessee considering the religious belief and also there is no other source of income or ability to make additional income brought on record by the tax authorities."

Core principles established include:

- Cash deposits during demonetization can be explained by habitual cash withdrawals from declared salary income, supported by bank statements and cash flow statements.

- Religious beliefs and personal practices affecting financial transactions are relevant contextual factors in assessing genuineness of cash holdings.

- Absence of any other source of income or evidence to the contrary strengthens the assessee's claim of legitimate source.

- Partial acceptance of evidence by lower authorities may be reviewed to consider the entire pattern of transactions over relevant years.

Final determinations:

- The addition under section 69A was deleted as the cash deposits were satisfactorily explained by salary withdrawals held in cash.

- The assessee's explanation based on religious belief and habitual practice was accepted as valid and sufficient.

- The appeal was allowed in favor of the assessee with deletion of additions.

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