Cash Deposits out of the cash withdrawn earlier – Whether can be treated as Income?
With the flow of data from multiple sources, Income Tax Department is able to generate the 360 degree profile of taxpayers. Information so generated is matched with other information of the taxpayers & thoroughly used to check the possible tax evasions. One such information is with regard to cash deposits in the bank account. With “Operation Clean Money (OCM)” launched by the Government, an in-depth & intensive verification of cash deposits during demonetisation was carried out in the case of taxpayers who have deposited heavy cash during demonetisation period. Almost in all such cases, taxpayers were asked to prove the source of such cash deposit with past history, sales figures, earlier withdrawals from bank, Opening balance, etc & its genuineness. Justification offered in most of the cases is out rightly rejected by the Income Tax Authorities & sizeable part of such amount is treated as unexplained Cash Credit or unexplained money u/s 68 or 69A. Such amount is made liable to taxation, not at regular rate of income tax, but at a special higher rate of 77.25% u/s 115BBE. One of the key reasons for making additions was by relying on Human Probability Test or Prudent Man’s Behaviour Test.
The theory of Human probability is well accepted by Apex court in the case of CIT Vs. Durga Prasad More (1971) 82 ITR 540 (SC), Sumati Dayal Vs. CIT (1995) 214 TR 801 (SC). Addition in all such cases has been done by making following assumptions:
- In the ordinary course, the person will not keep cash ideal with him without any logic and purpose.
- The person will deposit the cash immediately on a single day in one stroke after it ceased to be the valid legal tender and not in piece meal at different occasions.
Addition is done in most of the cases though taxpayers were able to establish that the cash deposit was out of the earlier cash withdrawn. Question arises, whether the addition is sustainable in such cases?
It may be worthwhile here to note the observation of Delhi High Court in the case of Jaya Aggarwal vs Income Tax Officer (2018) 92 taxmann 108 wherein assessee has deposited cash of Rs. 1,60,000/- on 30.1.98 in its bank account. It was explained that the amount deposited was out the withdrawals of Rs. 2 Lakh earlier on 2.5.97. The purpose of retaining this huge amount was stated to be for buying the property. The explanation was rejected by the ITO, saying that no prudent man would keep a huge amount of Rs. 2 Lakh at residence to negotiate a property deal. Court deleted the additions after noting that withdrawal of Rs. 2 Lakh is undisputable & backed by logical reasoning. It made following key observations:
“Explanation given was not fanciful and sham story. It was perfectly plausible and should be accepted, unless there was justification and ground to hold to the contrary. Delay of some months in redeposit of part amount is the sole and only reason to disbelieve the appellant. Persons can behave differently even when placed in similar situations. Due regard and latitude to human conduct and behaviour has to be given and accepted when we consider validity and truthfulness of an explanation. One should not consider and reject an explanation as concocted and contrived by applying prudent man’s behaviour test. Principle of preponderance of probability as a test is to be applied and is sufficient to discharge onus. Probability means likelihood of anything to be true. Probability refers to appearance of truth or likelihood of being realised which any statement or event bears in light of the present evidence (Murray’s English Dictionary). Evidence can be oral and cannot be discarded on this ground. Assessment order and the appellate orders fall foul and have disregarded the preponderance of probability test”.
Almost similar views were expressed in S.R. Venkata Ratnam vs CIT (1981) 127 ITR 807 (Kar) wherein following notable observation was made:
“Withdrawals of cash in the past as a source of deposit at a later point of time in the bank account cannot be disbelieved merely on the surmise that it was improbable for an assessee to keep cash withdrawn for two years. Revenue authorities were not competent to dictate as to what the assessee should do with the money withdrawn from the bank. The court held that as long as the source is explained and established and if money is withdrawn from SB account, it is not possible to hold that the source is not explained”.
Facts of each & every case would be different. But, above observation can certainly help the taxpayers where the cash deposits can genuinely be explained out of cash withdrawn earlier.
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