Mumbai ITAT Deletes Demonetisation Addition of Rs. 90 Lakh: Section 69A Cannot Be Invoked Without Defects in Books

Background of the Dispute

The case of Neo Iturkaa Enterprises Vs ACIT (ITAT Mumbai) concerns the treatment of large cash deposits made during the demonetisation phase and whether such deposits can be taxed as unexplained money under Section 69A of the Income Tax Act 1961 when the assessee’s books duly record the cash withdrawals and utilisation.

The assessee, a partnership firm engaged in construction contract work and supply of labour to builders and developers, was regularly handling substantial cash for wage payments to site labourers. Many of these workers, including migrant labour from various States, did not maintain bank accounts, compelling the assessee to operate predominantly in cash for labour payments.

For the relevant Assessment Year 2017-18, the Revenue questioned a cash deposit of Rs. 90,00,000/- made during the demonetisation window and treated it as unexplained money under Section 69A. The Mumbai Bench of the ITAT ultimately deleted this addition, holding that mere doubt about the commercial prudence of retaining a high cash balance cannot replace concrete evidence, particularly when the cash book and bank statements support the assessee’s explanation.

Facts Leading to the Assessment

Business Profile and Cash Practices

  • The assessee is a construction and labour contractor.
  • Payment of wages was predominantly made in cash to site labourers, many of whom did not operate bank accounts.
  • The assessee followed a consistent practice:
    • Withdraw cash from its bank account (including loan/overdraft facilities) during a particular month.
    • Utilise this cash to pay labour charges, typically in the following month.
  • According to the assessee, this system had been consistently followed in earlier years and had never been disturbed in past assessments.

Return Filing and Scrutiny

  1. The assessee filed its return of income for A.Y. 2017-18 on 22/09/2017 declaring total income of Rs. 83,44,790/-.
  2. The case was selected for scrutiny, and notices were issued under Section 143(2) and Section 142(1).
  3. In response, the assessee uploaded details and submissions through the e-proceedings platform.

Cash Withdrawals and Demonetisation Context

  • During October 2016, the assessee withdrew cash aggregating to approximately Rs. 8.40 crores from its Axis Bank loan/overdraft account.
  • After payment of labour charges for that month, a closing cash-in-hand balance of Rs. 93 lakhs remained, as per the cash book.
  • On announcement of demonetisation in November 2016, specified bank notes ceased to be a valid medium for cash transactions, including wage payments.
  • The assessee explained that:
    • The unutilised portion of cash (forming part of the Rs. 93 lakhs closing balance) was deposited back into the bank during the demonetisation period.
    • Out of this, Rs. 90,00,000/- formed the impugned deposit.
    • Fresh cash withdrawals were then made in the period January to March 2017 for payment of labour charges.

The assessee supported this explanation with:

  • Cash book entries,
  • Audited financial statements, and
  • Corresponding bank statements, including detailed working for earlier and subsequent years to show a consistent pattern.

Findings of the Assessing Officer

AO’s Examination of Books and Cash Flow

The Assessing Officer (AO) scrutinised:

  • The cash book,
  • Audited accounts, and
  • Bank transactions.

The AO noticed a pattern where:

  • Large amounts of cash were withdrawn in one month; and
  • Equivalent or near-equivalent amounts were reflected as labour payments in the immediately following month.

From this pattern, the AO concluded that:

  • The assessee’s explanation that cash was accumulated and held as cash-in-hand for subsequent wage payments was “not plausible”.
  • The claim that the demonetisation deposit was sourced from the accumulated cash balance was treated as an afterthought.

Invoking Section 69A