Appellate Tribunal Overturns Deemed Dividend and Unexplained Cash Additions in Running Account Dispute
1. Introduction to the Appellate Dispute
In a comprehensive appellate decision dated 15/10/2026, the Chennai bench of the Income Tax Appellate Tribunal delivered its judgment in the case of ACIT Vs Karuppakonar Paramasivam Navaneethakrishnan. The tribunal was tasked with examining an appeal filed by the Revenue against an earlier relief order passed by the Commissioner of Income Tax (Appeals), Chennai-19, on 14 August 2024. The dispute, pertaining to the Assessment Year 2017-18, centered around three distinct additions made by the Assessing Officer: a substantial addition for seized cash, a massive deemed dividend addition under Section 2(22)(e) of the Income-tax Act, 1961, and an unexplained money addition concerning cash deposits made during the demonetisation period.
The Revenue's appeal challenged the first appellate authority's decision to delete these additions. The tribunal's exhaustive analysis provides critical insights into the evidentiary requirements for invoking deeming fictions, the treatment of running accounts in corporate entities, and the burden of proof required when explaining the source of seized currency.
2. Adjudication on Seized Currency and Bank Withdrawals
The primary ground of appeal raised by the Revenue contested the restriction of an addition related to seized cash. During the assessment proceedings, the Assessing Officer had treated a total seized amount of ₹50,00,000 as unexplained money, bringing it to tax under Section 69A of the Income-tax Act, 1961.
(i) The Assessee's Explanation of Cash Sources
The assessee consistently maintained that the seized currency was not unexplained money but was primarily sourced from recorded bank withdrawals. Out of the total ₹50,00,000, the assessee demonstrated that ₹44,00,000 was withdrawn from two specific Axis Bank accounts over a span of two weeks, specifically between 7 April 2016 and 20 April 2016.
To substantiate this claim, the assessee provided a detailed chronological breakdown of the withdrawals. A sum of ₹30,00,000 was withdrawn from the bank account of his proprietary concern, Sri Kanna Lodge. These withdrawals occurred in multiple tranches: ₹5,00,000 was withdrawn on 07.04.2016, followed by identical withdrawals of ₹5,00,000 each on 11.04.2016, 13.04.2016, 15.04.2016, 16.04.2016, and 18.04.2016.
In addition to the funds from Sri Kanna Lodge, the assessee also withdrew funds from another Axis Bank account maintained in Madurai under the name of Park Finance. These withdrawals amounted to ₹14,00,000, comprising ₹6,00,000 withdrawn on 11.04.2016, ₹5,00,000 on 18.04.2016, and a final withdrawal of ₹3,00,000 on 20.04.2016.
The assessee explained that these cumulative withdrawals of ₹44,00,000, along with a residual cash balance of ₹6,00,000 generated from internal business accruals, were aggregated to form the ₹50,00,000 corpus. This amount was personally transported by the assessee from Madurai to Chennai and subsequently sent back via an individual named Shri Radha on 26.04.2016. The stated business purpose for mobilizing these funds was to serve as margin money and to finance advance payments for the repair and renovation of Hotel Park Plaza located in Madurai.