Cash Deposits during Demonetisation Explained by Earlier Cash Withdrawals Cannot Be Taxed Under Section 69A: ITAT Grants Relief to NRI Taxpayer
In an important ruling concerning demonetisation-related cash deposit cases, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) in Rajendra Gadhia vs. ITO has held that past cash withdrawals from bank accounts can validly explain subsequent cash deposits under Section 69A if the withdrawals are properly documented and there is no evidence that the withdrawn money was used elsewhere.
The Tribunal further reiterated an important principle laid down by the Gujarat High Court – once an assessee demonstrates availability of earlier cash withdrawals, the burden shifts upon the Income Tax Department to prove that such funds were not available for redeposit.
The judgment provides major relief in demonetisation-era scrutiny cases where additions are frequently made merely because cash deposits were made during the specified period.
Background of the Case
The assessee was a Non-Resident Indian (NRI) settled in the United States for several years.
During the demonetisation period, cash deposits were made into the assessee’s bank account. The Assessing Officer treated such deposits as unexplained money under Section 69A and made additions accordingly.
The assessee explained that substantial cash withdrawals had been made from bank accounts during the period from 2012 to 2015. According to the explanation, the withdrawn cash was retained by the assessee’s brother as custodian of family funds and was intended for social and medical requirements of family members in India.
Later, during demonetisation, those funds were returned by family members and redeposited into the assessee’s bank account.
However, both the Assessing Officer and the CIT(A) rejected the explanation and confirmed the addition under Section 69A.
ITAT Accepts Earlier Cash Withdrawals as Valid Source
The Tribunal examined the material placed on record, including:
• details of earlier bank withdrawals,
• affidavit of the assessee’s brother,
• detailed cash flow statement,
• and supporting explanations regarding family usage and custody of funds.
Importantly, the Tribunal noted that the department could not bring any evidence on record to show that the withdrawn cash had been spent or utilised elsewhere.
Under these circumstances, the ITAT held that earlier withdrawals from bank accounts should be accepted as the source of subsequent cash deposits.
This ruling is highly significant because in many demonetisation assessments, authorities often reject explanations merely on suspicion without disproving the actual availability of cash.
Burden Shifts to Department Once Withdrawals Are Established
The Tribunal relied upon the Gujarat High Court judgment in:
Shailesh Rasiklal Mehta v. ACIT
The High Court had held that once an assessee demonstrates earlier cash withdrawals, the burden shifts upon the department to establish that the cash was no longer available for redeposit.
This principle is extremely important in Section 69A cases.
The law does not require an assessee to prove the impossible – namely, to physically demonstrate where cash was stored for years. Once withdrawals are evidenced through banking records and there is no material showing alternate utilisation, the explanation cannot be rejected merely on assumptions.
Mere Suspicion Cannot Replace Evidence
One of the biggest problems during demonetisation assessments was the tendency to equate “cash deposit” with “undisclosed income”.
Many assessments proceeded on the assumption that:
“If cash was deposited during demonetisation, it must necessarily be unaccounted money.”
The ITAT’s ruling reaffirms that tax additions cannot be based merely on suspicion, probability or disbelief.
If:
• withdrawals are genuine,
• bank statements support the explanation,
• affidavits are filed,
• and no contrary evidence exists,
then Section 69A addition cannot survive merely because the department feels the explanation is “not convincing enough”.
Important Relief for NRIs and Family Fund Arrangements
The case is also important because many NRIs maintain family cash reserves in India through close relatives for:
• medical emergencies,
• marriages,
• household expenses,
• social obligations,
• or property-related dealings.
The Tribunal accepted commercial and family realities instead of adopting a purely theoretical approach.
The ruling recognizes that cash retained by family custodians does not automatically lose its identity merely because some time has passed between withdrawal and redeposit.
Practical Lessons from the Judgment
This decision offers valuable practical guidance for taxpayers facing scrutiny over cash deposits:
• Preserve old bank statements showing withdrawals.
• Maintain proper cash flow statements.
• Obtain affidavits wherever funds are handled by relatives or custodians.
• Ensure consistency in explanation at every stage.
• Demonstrate absence of alternate utilisation of funds.
• Respond to notices with documentary evidence rather than general explanations.
Why This Judgment Is Important in Demonetisation Litigation
Thousands of demonetisation-related cases are still pending at various appellate stages.
In many cases:
• cash deposits were genuine redeposits,
• but additions were made because of inadequate documentation or mechanical rejection by authorities.
This judgment strengthens the principle that:
cash withdrawals cannot simply disappear from existence merely because some time has elapsed.
Unless the department proves actual utilisation elsewhere, earlier withdrawals remain a valid source for subsequent deposits.
Conclusion
The Ahmedabad ITAT ruling in Rajendra Gadhia vs. ITO is a significant and practical judgment on Section 69A and demonetisation cash deposit disputes.
The Tribunal rightly held that:
• documented past cash withdrawals can explain later cash deposits,
• affidavits and cash flow statements carry evidentiary value,
• and the burden shifts to the department once availability of funds is demonstrated.
The decision reinforces a basic but important principle of taxation:
addition cannot be made merely because cash deposits create suspicion – they must be backed by evidence showing that the explanation is false.
The copy of the order is as under:
