Decisions of withdrawal & redeposit of cash fall within domain of commercial expediency

Business decisions such as withdrawal and redeposit of cash fall within the domain of commercial expediency and AO cannot substitute his own business judgment

In A Recent judgment, ITAT Agra has held that business decisions such as withdrawal and redeposit of cash, timing of payments to creditors, or suspension or resumption of business activities fall within the domain of commercial expediency and in such matters, the Assessing Officer cannot substitute his own business judgment unless the transactions are proved to be sham or non-genuine.

ABCAUS Case Law Citation:
5016 (2026) (01) abcaus.in ITAT

The assessee was an individual, engaged in the business of manufacturing and trading of Pan Masala and Zarda as proprietor. The assessee e-filed his return of income for the relevant assessment year, declaring nil income. The case was selected for complete scrutiny under CASS on account of cash deposits during demonetization period and abnormal increase in such cash deposits as compared to pre-demonetization period.

During the demonetization period (09.11.2016 to 31.12.2016), the assessee had deposited large amount of cash in his current account. This amount was withdrawn in the earlier months and was re-deposited in the same account upon declaration of demonetization period.

The assessee explained that cash amount was deposited in the bank account on account of business exigencies and uncertainty arising out of demonetisation. It was further explained that the appellant assessee had realized the amounts from his sundry debtors through banking channels and the business of the assessee was in financial stress. Creditors and other parties were making undue pressure for recovery of their funds, hence, he decided to withdraw the amount from bank and later on deposited again in the month of November, 2016 due to demonetization and made payments to the creditors of assessee.

The assessee had furnished cash book, bank statements, and details of sundry debtors and sundry creditors along with the copy of application submitted before the Commercial Tax Department, wherein it was stated that the assessee’s business was closed on 31.10.2016.

The Assessing Officer rejected the explanation of the assessee and treated the entire cash deposit as unexplained cash credit under section 68 r.w.s. 115BBE of the Act, and made addition u/s 68 of the Act, vide assessment order passed u/s 143(3) of the Act.

The assessee preferred first appeal before the CIT(Appeals), who dismissed the appeal with the observations that the assessee could not explain the source of cash deposit in the bank account satisfactorily.

The Tribunal opined that assessee filed the return of income along with audited books of account, including the balance sheet, profit and loss account, tax audit report, bank statements, and a cash book maintained on a day-to-day basis. The Assessing Officer had neither rejected the books of account nor pointed out any defect therein.

The Tribunal further noted that the cash deposits were made in the assessee’s Bank current account during November 2016. The assessee consistently explained that these deposits were made out of cash withdrawn earlier from the same bank account during July and August 2016. These withdrawals were duly reflected in the bank statements as well as in the cash book. The availability of cash on the respective dates of deposit is clearly borne out from the cash book and had not been controverted by the Assessing Officer by bringing any adverse material on record

The Tribunal further noted that the assessee’s sales had been duly disclosed and not doubted by the Assessing Officer. Once the sales are accepted and the books of account were not rejected, the corresponding entries in the cash book cannot be disbelieved in the absence of any adverse material.

The Tribunal further noted that Assessing Officer had not brought any evidence to establish that the cash withdrawn during July and August 2016 was utilized for any non-business purpose, nor had it been shown that the cash was not available with the assessee at the time of redeposit or that the amount represented income from any undisclosed source.

The Tribunal observed that legal position is well settled that section 68 of the Act cannot be invoked where the assessee has satisfactorily explained the source of cash deposits and such explanation remains uncontroverted by material evidence. Merely because the assessee carried out business transactions before and after the demonetization period does not go to negate the explanation of cash re-deposit. The coordinate Bench of ITAT Mumbai found no reason to sustain the addition made by the lower authorities, particularly when both cash withdrawal and deposit are duly substantiated from the bank statement of the very same branch. Similarly, ITAT Bangalore Bench had observed that once the assessee has explained the source of deposit as having been sourced from the withdrawls from the bank account, it was not open to the revenue to examine as to what assessee did with that money and cannot chose to disbelieve the plea of the assessee merely on surmises. 

The Tribunal opined that the business decisions such as withdrawal and redeposit of cash, timing of payments to creditors, or suspension or resumption of business activities fall within the domain of commercial expediency and in such matters, the Assessing Officer cannot substitute his own business judgment unless the transactions are proved to be sham or non-genuine, which was not the case here.

The Tribunal stated that in the absence of any incriminating material once the source of cash deposits stands satisfactorily explained, the addition made under section 68 was not sustainable.

Accordingly, the Tribunal deleted the addition made by the Assessing Officer under section 68 read with section 115BBE of the Act.

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