Deposit of cash in the bank is out of the cash withdrawals from Bank Account earlier and validity of addition during income tax assessment
There are often additions on account of cash deposit in the bank wherein the addition is treated as unexplained deposits. The addition is done even when deposit of cash in the bank is out of the cash withdrawals from Bank Account earlier and the same is duly explained to the AO during the course of assessment.
In such cases, AO many a times don’t give the benefit of Recycling of Cash and add the whole deposit of cash in the Bank Account as unexplained Investment u/s 69.
Question arises, whether action of AO is valid under the Income Tax Act and can it be sustained?
It must be noted that AO’s action holding the entire deposit of cash in the Bank Account without giving benefit of Redeposit/ Recycling is fully incorrect.
Cash withdrawn from Bank A/c re-deposited after gap of some time, AO cannot automatically drawn the conclusions that such cash deposit as unexplained investment u/s 69 as long as AO has in his possession some tangible material to proof that Cash Withdrawn was utilised for some other purpose.
It may be noted that There is no prohibition regarding withdrawal and deposit of cash in the bank account. There is no bar to hold cash by the assessee in his own possession in any quantum. Cash withdrawn for the psychological reasons (security purpose), social needs like hand loan to family members, friends, neighbours, staff, relatives for marriage or for medical treatment etc are acceptable valid reasons from the social view point in Indian Scnerio. There is no prohibition under the law for such activity.
Under the present system of Law, even oral agreements are enforceable whereby Assessee paying advance in cash after withdrawing from the bank account for some personal or commercial dealing. It means that cash received back after a gap of some months cannot be denied and cannot be out rightly rejected even if there is no written agreement to this effect.
So long as AO is not able to estabilish that Cash Withdrawn from Bank A/C was utilised for some other purpose, redeposit of the Cash in the Bank A/c again cannot be rejected. Assessee is entitled to get the benefit of recycling and accordingly Cash deposit in the Bank A/c after gape of few months could not be brought to tax u/s 69 as unexplained Investment.
The view is affirmed by the judiciary also in favour of Assessee by following Case Laws.
Jaya Aggarwal vs. ITO { Delhi HC – ITA 315/2005 } dated 13th March, 2018
“Naturally, the huge withdrawal was for a purpose and objective. From the beginning the explanation given was that withdrawal was to pay earnest money for purchase of immovable property, which deal did not fructify. 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”
ITO vs. Deepali Sehgal { ITAT } – IndiaKanoon
“In view of above we noted that the AO, in his remand report could not bring out any fact that the cash withdrawn from Saving Bank Account and partnership overdraft account was used for other purpose anywhere else then, merely because there was a time gap between withdrawal of cash and its further deposit to the bank account, the amount can not be treated as income from undisclosed sources u/s 69 of the Act in the hands of the assessee. The AO rejected the explanation of the assessee on hyper technical basis which is not acceptable. On careful perusal of the decisions relied by the Ld. D.R. we are of the view that the facts of the present case are clearly distinguishable as in the present case the explanation offered by the assessee is reliable and acceptable on the touchstone of the prudence of an ordinary man but merely on the ground that the act of assessee created huge interest liability on partnership firm does not enable revenue authorities to consider the cash withdrawn and it deposit to same bank account after a substantial gap of time, as unexplained income u/s 69 A of the Act. Hence, we reach to a conclusion that the AO made addition without any legal and justified reason which was rightly deleted by the CIT(A). Hence, both the grounds of the assessee are being devoid of merits and dismissed.
9. In the result, appeal of the Revenue is dismissed. Order pronounced in the open Court on 05/09/2014.“
Other Cases where appellant’s explanation has been given priority above Department’s arbitraty addition are as under:-
Baljit Singh Vs. ITO.
DCIT vs. Smt. Veena Awasthi.
Author’s Note :- It can be amptly seen that in several rounds of litigation, the courts have allowed the relief to the assessee’s on genuine explanations and department must be solid in evidencing the cash deposits earlier withdrawn cash was used for any other purpose. The irony is that a lot many assessee’s are also in wrongdoing which derogates the matter for genuine cases.
