ITAT Mumbai Deletes Cash Deposit Additions — Rules Redeposits of Earlier Withdrawals Not "Unexplained"

Background — The Search & Assessment

The assessee, Shri Nitinkumar Pravinchandra Kacharia, is an individual deriving salary income as a Director of M/s Anuj Electricals Pvt. Ltd., based at One Lodha Place Commercial, Lower Parel, Mumbai. He came under assessment following a search action under Section 132 of the Income Tax Act in the case of M/s Polycab India Ltd.

Pursuant to the search, assessments under Section 147 read with Section 143(3) were framed for AY 2022-23 and AY 2023-24.

The Additions — What the AO Found

During the assessment proceedings, the AO observed cash deposits in the assessee's bank accounts:

The AO summarily rejected the assessee's explanations and treated the deposits as unexplained money, concluding that the assessee "failed to explain satisfactorily as how much year-wise savings was done… and how much gift was received from particular relative."

The Assessee's Defence — A Detailed Explanation

Before both the AO and CIT(A), the assessee advanced a comprehensive explanation:

1. Substantial Disclosed Income in Prior Years

The assessee demonstrated a robust financial profile with declared income across preceding years:

2. Cash Withdrawals During COVID-19

In FY 2019-20 and FY 2020-21, the assessee and his son Shri Anuj Kacharia had made cash withdrawals aggregating to ₹26,80,600 due to the ongoing uncertainty of COVID-19, to meet any medical emergency in the family. Detailed year-wise charts of deposits and withdrawals were filed.

3. Opening Cash Balance

At the beginning of AY 2022-23, the assessee had a sufficient cash balance comprising:

• ₹10,00,000 — past family savings
• ₹24,49,600 — bank withdrawals in the preceding two years
• Total opening balance: ₹34,96,600

Additionally, ₹10,94,000 was withdrawn during the year itself.

4. Gifts on Occasions

Certain amounts were received as gifts on occasions such as birthdays and anniversaries.

CIT(A)'s Approach — Partial Relief, Flawed Reasoning

The CIT(A) adopted a restrictive approach:

• For AY 2022-23: Allowed only ₹7,34,000 (current year withdrawals) and sustained ₹23,99,900
• For AY 2023-24: Verified bank statements and accepted only ₹90,000 of claimed withdrawals as verifiable, sustaining ₹14,69,391

ITAT's Analysis — A Masterclass in Burden of Proof

The Tribunal, in a detailed and methodical order by AM Shri Om Prakash Kant, made five critical findings:

1. Robust Financial Profile Established

"The Assessee has demonstrated a robust financial profile, reporting substantial returns in preceding years. The quantum of deposits is not disproportionate to the Assessee's documented standard of living and earnings."

With income ranging from ₹94 lakh to ₹2.54 crore in prior years, the quantum of deposits (₹31 lakh and ₹15 lakh) was well within the assessee's known means.

2. COVID-19 Cash Retention — "Inherently Probable"

The Tribunal went beyond merely accepting the COVID explanation as "plausible" — it held it to be inherently probable. This is significant because it elevates the COVID cash retention defence from a weak argument to a strong presumption in favour of the assessee.

3. Burden of Proof Shifts to Revenue

"It is a settled principle of law that once a withdrawal from a known source (bank account) is established, the burden shifts to the Revenue to prove that such funds were utilized elsewhere. The Revenue cannot proceed on a purely suspicious footing or the presumption that cash withdrawn must be spent immediately."

This is the core legal principle of the order. The Tribunal unequivocally holds that:

• Withdrawal from bank = known source = prima facie explanation
• Revenue must then affirmatively prove the cash was spent/diverted
• There is no presumption that cash withdrawn must be immediately spent
• The assessee is NOT required to maintain a day-to-day cash flow statement

4. Revenue Failed to Discharge Its Burden

"The Revenue authorities have not been able to point out that said money withdrawn was used for any other purposes. Unless the Revenue is able to establish that those withdrawals were used anywhere else, the contention of the assessee cannot be rejected merely on the basis of presumption."

No evidence of diversion. No evidence of spending. No adverse material. Just presumption — which the Tribunal held cannot sustain additions.

5. CIT(A) Erred in Ignoring Prior Year Withdrawals & Family Pool

"The Ld. CIT(A) erred in adopting a restrictive approach by ignoring the availability of cash from prior years and the cumulative family pool."

The Tribunal specifically criticised the CIT(A) for:

• Accepting only current-year withdrawals while ignoring FY 2019-20 and 2020-21 withdrawals
• Refusing to link the son's withdrawals to the family pool
• Not considering the cumulative opening cash balance of ₹34.96 lakh

Precedent Relied Upon

The Tribunal relied on the decision of the Bangalore Bench in Suthakar Selvaraj v. ITO (ITA No. 1656/Bang/2025), where:

• Similar facts — cash deposits from earlier withdrawals
• Tribunal observed there was no reason to disbelieve that a salaried person would withdraw and later redeposit
• Without evidence that withdrawn cash was used for other purposes, the deposit was accepted
• Addition based on assumption and presumption could not be sustained

The Order

"We find no legal or factual justification for sustaining additions of ₹23,99,900/- (A.Y. 2022-23) and ₹14,69,391/- (A.Y. 2023-24). The orders of the Ld. CIT(A) on these counts are set aside, and the additions are hereby deleted."

Both appeals were allowed partly (the grounds challenging validity of assessment were not pressed and dismissed as infructuous).

Key Takeaways for Practitioners & Taxpayers

1. Maintain detailed withdrawal records: Bank statements showing cash withdrawals in prior years are your strongest evidence. The Tribunal accepted withdrawals going back two financial years as a valid source for subsequent deposits.
2. "Inherently probable" — COVID defence elevated: The Tribunal didn't just accept COVID-era cash retention as plausible — it called it "inherently probable" in the Indian socio-economic context. This is a stronger standard and a powerful precedent for similar cases.
3. Burden shift is real and enforceable: Once you show bank withdrawals → the Revenue MUST prove the money was spent elsewhere. No proof of diversion = no addition. This isn't just theoretical — the Tribunal enforced it here.
4. Family pool of cash is valid: The CIT(A)'s refusal to link the son's withdrawals was overturned. The Tribunal recognised the "cumulative family pool" concept — cash available with the family unit, not just the individual.
5. No one-to-one cash trail required: The Revenue demanded a one-to-one nexus between each withdrawal and each deposit. The Tribunal rejected this, holding that the overall cash position (opening balance + withdrawals) explains the deposits.
6. Additions on presumption are indefensible: The AO and CIT(A) both proceeded on suspicion — the cash "must have been spent." Without affirmative evidence, this is a presumption, and presumptions cannot sustain additions under Section 69A.
7. Search connection ≠ automatic guilt: The assessee was covered because of a search on Polycab India Ltd. But the additions were not based on any incriminating material found during the search — only routine cash deposit observations. The search connection alone doesn't justify additions.

Revenue Perspective — Where the Department Went Wrong

From the Revenue's standpoint, the department's case collapsed because:

• No investigation into cash utilisation: The AO did not make any inquiry into whether the withdrawn cash was spent — on property, investments, expenses, or otherwise. The addition was made purely on the basis that the assessee "failed to explain satisfactorily."
• Failure to examine surrounding circumstances: No evidence from the search that the assessee had undisclosed assets or investments that could explain where the withdrawn cash went.
• CIT(A)'s selective approach: Accepting current-year withdrawals but ignoring prior-year withdrawals without any basis was internally inconsistent and unsustainable on appeal.

Broader Implications

This order is particularly significant in the post-demonetisation and post-COVID era, where the Revenue has aggressively pursued cash deposit additions across the country. The ruling reinforces that:

• The taxing authority cannot treat every cash deposit as unexplained income merely because it involves cash
• The COVID-19 pandemic created legitimate reasons for holding excess cash, and the Tribunal will take judicial notice of this
• Section 69A requires the Revenue to first establish that the assessee was the owner of money not recorded in the books — not simply that cash was deposited
• The Suthakar Selvaraj precedent (Bangalore Bench) is now reinforced by the Mumbai Bench, creating a stronger multi-bench consensus