No Bar on Retaining Cash for Reasonable Period if Source Traceable: ITAT Quashes Cash Deposit Addition During Demonetisation in absence of Corroborative Evidence [Read Order]

The case involved Ganapathy Panneerselvam, who had deposited ₹15.10 lakh in his bank account during the 2016 demonetisation window. The Assessing Officer treated the cash deposits as unexplained income under Section 69 of the IncomeTax Act, rejecting the assessee’s explanation that the cash represented surplus from earlier withdrawals made for family functions, including his children’s marriages, medical expenses, and household needs.

The Tribunal noted that the assessee had furnished detailed evidence including bank statements, cash flow statements, cash books, and bills to substantiate the claim that the cash deposits were redeposits of unspent funds withdrawn over 2015-16.

Despite this, the AO and CIT(A) disallowed the explanation mainly due to the time gap between withdrawal and redeposit, doubting why a senior citizen dependent on interest income would retain large sums in cash.

However, the ITAT rejected this reasoning, observing that the entire withdrawal trail was undisputed, the cash flow was supported by documentary proof, and the Revenue failed to bring any contrary evidence to suggest that the withdrawn amounts were utilised elsewhere.

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The Tribunal held that merely because there was a gap between withdrawal and redeposit, it could not be presumed that the funds had vanished or were spent otherwise, especially when no evidence to the contrary was produced.

The bench of George George K. ( Vice President ) S.R. Raghunatha (Accountant member) observed that “We note that the only basis for the AO’s rejection of the assessee’s explanation is the time gap between the withdrawal and the subsequent re-deposit of cash. However, it is to be noted that there is no statutory or judicially prescribed time limit within which cash must be re-deposited to be considered explained. The mere existence of a time gap, without any corroborative evidence of alternate use of funds, cannot be a valid ground to disbelieve the assessee’s explanation. Furthermore, there is no legal bar on an assessee retaining cash in hand for a reasonable period, particularly when the source of such cash is accounted for and traceable through bank withdrawals. The AO’s inference that no prudent person would hold cash and forego interest is speculative and not based on any evidence specific to the assessee's financial conduct or circumstances.”

Accordingly, the Tribunal deleted the entire addition of ₹15.10 lakh, stating that the taxpayer had successfully discharged the burden of proof by demonstrating that the cash deposits were from earlier bank withdrawals, for which the Revenue had failed to provide any rebuttal.

The order sends a clear signal that genuine explanations backed by evidence must be given due weight, and that retaining cash for a reasonable period cannot, by itself, be equated with unaccounted income.

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