AO was not justified in questioning cash withdrawals from bank account – ITAT

AO is not justified in questioning the cash withdrawals from bank account on the ground that the assessee had sufficient cash-in-hand in the books – ITAT

In a recent judgment, ITAT Chandigarh has held that AO was not justified in questioning the cash withdrawals from the bank account on the ground that the assessee had sufficient cash-in-hand in the books since AO could not dictate how the business was to be conducted by the assessee.

ABCAUS Case Law Citation:
5101(2026) (04) abacus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming additions of cash deposit in bank during demonetization period.

The assessee was engaged in wholesale and retail trade of readymade garments. To return of the assessee was selected for scrutiny to verify the sources of cash deposits made during demonetization period. The assessee explained that it had opened two new retail stores. The cash sales as made in these stores was partly deposited in the bank account and partly retained as cash-in-hand which was evident from the cash book as furnished by the assessee.

Further it was submitted that during October, 2016 some outdated stock was liquidated at a heavy discount. To demonstrate the same, quantitative details was furnished by the assessee. It was accordingly stated that the cash deposits were out of cash sales made by the assessee which were evidenced by its cash book.

The AO disbelieved the explanation of the assessee on the ground that it was having a large amount of cash as opening balance as on 01-06-2016 whereas the assessee was still withdrawing cash from the bank which was not convincing.

According to the AO, the assessee failed to substantiate his claim for keeping large cash when it was paying interest on unsecured loans as no businessman would keep such huge cash specifically when the banking facilities were available.

Therefore, the claim of the assessee was doubted by AO. It was further observed that out of the total sales for the year 49% of the sales happened in the month of October and November, 2016 which was not normal. This was in contrast to the fact that the assessee was having normal sales till September, 2016.

On these facts, the AO computed average sales for the months of May to September, 2016 and accordingly computed the average sale from 01-11-2016 to 08-11-2016 against the sales as shown by the assessee and the remaining sales was held to be unexplained sales.

As a result, the remaining sales was added back to the income of the assessee as explained sales.

Also, the AO observed that the assessee reduced fixed assets on account of sale of various assets but did not submit any bills to substantiate the same. In the result, the said amount was further added to assessee’s income.

The Tribunal noted that during this year, the assessee has opened two new retail outlets and accordingly, the figures of earlier years could not be compared with the figures of this year. Also, the conclusion of AO that the sales in October, 2016 would not exceed average sales of previous month was a fallacious assumption.

The Tribunal further observed that the undisputed position was that the assessee had furnished cash book as well as quantitative details of stock in support of its sales. The cash book had sufficient balance out of which impugned deposits had been sourced. The books had not been rejected and no defect has been found by AO in the quantitative details. The cash sales as carried out by the assessee had been offered as sales turnover and adding the same amount again would amount to double taxation which was impermissible.

The AO is also not justified in questioning the withdrawals on the ground that the assessee had sufficient cash-inhand in the books since Ld. AO could not dictate how the business was to be conducted by the assessee. The Ld. AO has no role to step into the shoes of the businessman to make ssumptions. The only onus of the assessee was to establish the sources of cash deposits and this onus stood discharged by the assessee by furnishing the cash books and quantitative details. On these facts, the impugned addition of Rs.36.99 Lacs could not be sustained in law. We order so

The Tribunal further observed that AO was also not justified in questioning the withdrawals on the ground that the assessee had sufficient cash-in-hand in the books since AO could not dictate how the business was to be conducted by the assessee. The AO has no role to step into the shoes of the businessman to make assumptions. The only onus of the assessee was to establish the sources of cash deposits and this onus stood discharged by the assessee by furnishing the cash books and quantitative details.

The Tribunal held that in view of the facts, the impugned addition could not be sustained in law. With respect to the addition on account of sale of fixed assets, the Tribunal observed that the same represented sale proceeds of small fixed assets items viz. hot-case, refrigerator, AC, cell phone, generator, TV, water purifier etc. These amounts were quite petty in nature and had been reduced from the schedule of fixed asset and no depreciation had been claimed on such items. Therefore, this addition also did not have much substance.

Accordingly, the appeal was allowed.

Download Full Judgment Click Here >>

• Related party transaction u/s 40A(2) shall be treated as bona fide, unless evading tax
• ‘Transfer of property’ not include ‘acquiring’ of property or ‘purchasing’ of property – ITAT
• AO was not justified in questioning cash withdrawals from bank account – ITAT
• Return/Balance sheet filed within limitation extended by SC to be considered within time
• Satisfaction Note u/s 153C – term immediate cannot be extended to unreasonable delay