Cash Deposits During Demonetisation Backed by Prior Bank Withdrawals Not Taxable as Unexplained Money: ITAT Mumbai in Jagdish Naraindas Chandan Vs ITO

Background and Core Issue

The decision in Jagdish Naraindas Chandan Vs ITO (ITAT Mumbai) addresses a recurring controversy from the demonetisation phase: whether cash deposited into bank accounts during November–December 2016 can be automatically treated as unexplained money under Section 69A merely because the tax authorities doubt the assessee’s practice of holding large sums in cash.

For Assessment Year 2017–18, the assessee, engaged in manufacturing activities through his sole proprietorship M/s Chandan Enterprises, had deposited cash aggregating to ₹73,70,300 in his bank accounts during the relevant year, including the demonetisation period. The Assessing Officer (AO) treated the entire amount as unexplained under Section 69A, taxed it under Section 115BBE, and initiated penalty proceedings under Section 271AAC.

Both the AO and the Commissioner (Appeals) doubted that the assessee would have practically held substantial cash for several months when banking channels were readily available, and relied heavily on the low volume of cash sales.

The ITAT Mumbai examined whether such suspicion, unbacked by contrary evidence, is sufficient to invoke Section 69A where:

  • The assessee has clearly explained that the deposits came from earlier withdrawals from disclosed bank accounts;
  • The movement of cash is recorded in the regular books of account and cash book; and
  • No defect is found in those books, nor is there any proof that the withdrawn cash was used elsewhere.

The Tribunal ultimately deleted the addition of ₹73,70,300 and laid down important principles regarding the treatment of cash redeposits during demonetisation.

Facts of the Case

Nature of Business and Return Filing

  • The assessee is an individual running a proprietary concern, M/s Chandan Enterprises, engaged in manufacturing activities.
  • For Assessment Year 2017–18, the assessee filed a return of income on 07.11.2017 declaring total income of ₹5,58,750 after claiming deductions of ₹1,60,000 under Chapter VI-A of the Income Tax Act 1961.
  • The return was processed under Section 143(1) and subsequently picked up for scrutiny under CASS specifically on the issue of cash deposits during the demonetisation window.

Cash Deposits Identified by the AO

During scrutiny, the AO noted that the assessee had deposited:

  • ₹71,17,365 in an account with Central Bank of India; and
  • ₹2,52,935 in an account with Corporation Bank.

The total cash deposits considered by the AO for the year stood at ₹73,70,300.

The AO called upon the assessee to explain the nature and source of these deposits.

Assessee’s Explanation Before AO

In response, the assessee submitted detailed workings and documents showing:

  • Month-wise cash withdrawals and deposits;
  • Details of creditors, debtors, loans and advances;
  • Month-wise sales and purchases.

The core explanation was:

  1. Source of Deposits

    • Significant withdrawals were made from disclosed bank accounts between April 2016 and October 2016.
    • These withdrawals were primarily made to maintain liquidity for business purposes and to meet immediate manufacturing and operational requirements.

  2. Impact of Demonetisation

    • After the declaration of demonetisation on 08.11.2016, the cash that remained available from these earlier withdrawals was redeposited into bank accounts.

  3. Accounting Treatment

    • The assessee stated that these withdrawals and subsequent deposits were recorded as contra entries in the regular books of account, duly reflected in the cash book, and did not represent any fresh or unaccounted income.

Assessment Order and AO’s Reasoning

The AO was not convinced by the explanation and proceeded as follows:

  • He observed that the assessee did not provide a cash book with detailed narration for each transaction and did not demonstrate the specific business purpose of each cash withdrawal.
  • He highlighted that cash sales for the year were only ₹84,176 and concluded that such limited cash turnover could not justify deposits of ₹73,70,300.
  • On this basis, he rejected the assessee’s explanation and treated the entire cash deposits as unexplained money under Section 69A.
  • The AO applied the special tax rate under Section 115BBE and initiated penalty proceedings under Section 271AAC.
  • The assessment under Section 143(3) was completed on 25.12.2019 with total income computed at ₹79,29,050.