No addition when cash deposited in bank was available as cash in hand in the books

No addition when cash deposited in bank was out of cash in hand available with the assessee and AO could not show that cash in hand was spent otherwise

In a recent judgment, Hon’ble Allahabad High Court dismissed Revenue’s appeal confirming ITAT order that there can be no addition when cash deposited in bank was out of cash in hand available with the assessee and the Assessing Officer could not indicate anything to the contrary as to how that cash in hand was spent.

ABCAUS Case Law Citation:
5109 (2026) (04) abacus.in HC

In the instant case, the Revenue had challenged the order of ITAT allowing assessee’s appeal with regard to cash deposits made by them during the demonetization period.

The assessee was a Private Limited Company. The case was selected for scrutiny under CASS guidelines for the reason  of abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period.

The Assessing Officer noticed that the assessee had made huge cash deposits during the demonetization period and prior to that, there were frequent cash withdrawals also by the assessee.

The assessee submitted that it was in the business of rendering services to various Electricity Boards and State Power Corporations throughout the Country therefore, maintaining such huge cash deposits was in line with the nature of business of the assessee and that the assessee had to maintain such huge cash balances in view of the assessee having its work spread out throughout the Country at different locations and sites and, therefore, cash was required to meet the daily expenses at those sites as well as for the purpose of making advances to various employees.

It was further submitted by the assessee before the AO that these cash balances were maintained by withdrawing cash from bank as and when the need arose and that the same was evidenced by various cash withdrawals made during the year.  It was further submitted that the assessee had to deposit the entire cash in the bank account in view of demonetization declared by the Government of India and thus the assessee’s cash deposit was directly related to the cash in hand in the books of account of the assessee.

Assessing Officer took the view that circumstantial evidences and preponderance of probabilities pointed out that the cash deposits were rather assessee’s income from unexplained sources which was liable to be added to the income of the assessee under section 68 of the Income Tax Act, 1961 (the Act) by treating the same as unexplained cash credit in the books of the assessee.  The Assessing Officer also invoked the provisions of section 115BBE of the Act and completed the assessment.

The assessee’s appeal was allowed by the First Appellate Authority.

The Tribunal noted that cash book showed that the assessee had sufficient cash in hand in its books on 08.11.2016 which was subsequently deposited on 11.11.2016. The AO had not at all disputed the veracity of the cash book nor had doubted that cash was available in the books of the assessee on 08.11.2016.

The Tribunal also observed that the books of account had not been rejected by the AO. It is also seen that the Managing Director of the assessee company had submitted an Affidavit before the AO explaining on oath the need of the assessee company to maintain huge cash balances and also further averring on oath that the cash deposited was from the cash in hand in the books of the company. The AO had not rebutted the Affidavit also.

The Tribunal opined that without disputing the cash in hand, the AO had simply brushed aside the explanation offered by the assessee and had not even given any sound reasoning for rejecting the explanation of the assessee. This, could not be upheld.

The Tribunal added that though preponderance of probability is an accepted principle to judge reliability of evidences as held by the various Hon’ble Courts in plethora of cases but its application in judging the quality of evidences should be done in a reasonable manner. The action of the AO was not reasonable in as much as he was not able to point any defect in the books of account of the assessee. When as per the submission of the assessee, cash in hand was the source of the impugned cash deposit, then some further enquiries ought to have been made by the AO before rejecting the Assessee’s explanation outright.

The Tribunal observed that the issue of cash deposits during demonetization had come up before various Benches of this Tribunal. The Pune Bench of the ITAT noted that once the availability of cash in hand was established and it was not shown by the AO that such cash was spent elsewhere, the explanation of the assessee as to its utilization has to be accepted.

As a result, the appeal of the Department was dismissed by the Tribunal.

Not satisfied, the Revenue challenged the order of Tribunal before the Hon’ble High Court raising following substantial questions:

1. Whether, on the facts and in the circumstances of the case, the Ld. ITAT was justified in law in deleting the addition made under section 68 of the Income-tax Act, 1961, merely on the basis of availability of cash balance in the books of account, without examining whether the assessee had discharged the statutory onus of proving the genuineness and credibility of such cash balance?
2. Whether the Ld. ITAT erred in law in holding that the Assessing Officer could not make an addition under section 68 when the books of account were not rejected, ignoring the settled legai principle thatunexplained cash credits can be brought to tax independently of rejection of books?
3. Whether the Ld. ITAT was correct in law in overlooking the relevance of abnormal cash deposits during the demonetisation period and in failing to apply the test of human probabilities, surrounding circumstances, and past business trends while adjudicating the issue under section 68?
4. Whether the Ld. ITAT has misapplied the ratio of decisions relating to suspicion versus proof, by treating a case involving unexplained cash deposits during demonetisation as one of mere estimation or conjecture, rather than one involving statutory burden of proof under section 68?”

The Hon’ble High Court noted that the Tribunal after considering all the evidences came to the conclusion that books of the assessee were duly audited and the Assessing Officer had not pointed out a single defect in the said books. The Tribunal further held that the Assessing Officer had completely disregarded the voluminous evidences filed by the assessee and had proceeded to disbelieve the explanation of the assessee without bringing on record anything to the contrary. The Tribunal while setting aside the assessment order arrived at a finding that the Assessing Officer had acted on presumption and on preponderance of probability and not on the evidences available on record.

The Hon’ble High Court further observed that the availability of the cash in hand was established and the Assessing Officer could not indicate anything to the contrary as to how that cash in hand was spent, the explanation of the assessee that the cash in hand was deposited in the banks could not have been rejected by the Assessing Officer.

The Hon’ble High Court held that no substantial question of law arose in the present case, as there was no perversity in the findings of the Tribunal whatsoever.

The Hon’ble High Court added that unless there is perversity in the findings of fact, no substantial questions of law would arise. Further more, as far as the present case was concerned, findings of the Tribunal were supported by cogent evidence brought on record and they were not in any manner against law or suffered from any procedural irregularities.

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