Cash Deposit Addition Deleted Where Withdrawals Explained Source: ITAT Reiterates Principle on Cash Availability
In a significant ruling relevant for scrutiny assessments involving cash deposits, the Income Tax Appellate Tribunal has reiterated that additions cannot be sustained merely because cash is deposited in bank accounts, if the assessee can demonstrate availability of funds through earlier withdrawals and opening cash balance.
The Tribunal held that where the cash flow statement, bank records, and financial position show sufficient cash availability, the deposits cannot be treated as unexplained income. Accordingly, the addition made by the department was deleted.
Background of the Dispute
Cash deposit cases continue to be one of the most common triggers for scrutiny proceedings, particularly after demonetisation and increased data analytics by the tax department.
In the present case, the assessee had deposited cash in bank accounts during the year. The Assessing Officer treated the deposits as unexplained and made addition under the provisions dealing with unexplained money.
The assessee contended that the deposits were sourced from:
• Cash withdrawals made earlier from bank
• Opening cash balance available at the beginning of the year
• Past savings reflected in books
Despite this explanation, the addition was made on the ground that the assessee had not satisfactorily proved the source of deposits.
Tribunal’s Findings
The Tribunal examined the material on record and noted that the assessee had placed sufficient evidence demonstrating availability of cash.
The key observations included:
• Bank withdrawals preceding deposits were on record
• Opening cash balance was supported by earlier financial statements
• No evidence was brought by the department to show that the withdrawn cash was spent elsewhere
• The explanation was consistent with the assessee’s financial position
The Tribunal emphasised that once withdrawals are accepted as genuine, the department must show that the money was utilised elsewhere before treating later deposits as unexplained.
In absence of such evidence, the explanation of redeposit of cash cannot be rejected merely on suspicion.
Accordingly, the addition was deleted.
Important Legal Principle Highlighted
This decision reinforces a settled tax principle:
Availability of cash is a valid explanation for deposits if supported by records.
The burden initially lies on the assessee to demonstrate cash availability. However, once withdrawals and balances are shown, the burden shifts to the department to prove that the funds were used elsewhere.
Mere doubt or assumption cannot replace evidence.
Why This Ruling Matters in Practice
Cash deposit additions are frequently made in scrutiny assessments, often based on peak credit theory or general suspicion regarding cash transactions.
This Ruling Highlights that:
• Cash withdrawals remain available unless proved otherwise
• Opening balances cannot be ignored without contrary evidence
• Cash flow analysis is critical in defending deposit cases
• Additions cannot be made merely because deposits exist
The judgment strengthens the defence in cases where taxpayers maintain proper bank trails and financial records.
Practical Guidance for Taxpayers and Professionals
To defend cash deposit cases effectively, it is advisable to maintain:
• Year-wise cash flow statements
• Evidence of withdrawals from bank
• Copies of earlier balance sheets showing cash balance
• Explanation of household withdrawals and expenses
• Consistent books of accounts where applicable
Proper documentation can often turn what appears to be a risky case into a defensible one.
Conclusion
The Tribunal’s decision serves as an important reminder that tax additions must be based on evidence, not presumption.
Where the assessee demonstrates that cash deposits are backed by earlier withdrawals and opening balance, the deposits cannot be treated as unexplained income.
For taxpayers facing scrutiny on cash deposits, this ruling reinforces that documented financial trail remains the strongest defence.
The copy of the order is as under:
