Prior-Year Cash Withdrawals Can Explain Subsequent Bank Deposits, Subject to Household Expense Deduction: Delhi ITAT

Overview of the Ruling

The Income Tax Appellate Tribunal, Delhi Bench, delivered a noteworthy ruling in Kavita Vs ITO (ITA No. 4477/Del/2026) concerning Assessment Year 2009–10, with the order pronounced on 29 September 2026. The Tribunal held that cash withdrawn from a bank account in a preceding financial year can legitimately serve as a source for bank deposits made in a subsequent year — provided the assessee can demonstrate that the cash was actually retained and remained available. However, the Tribunal simultaneously clarified that any such cash-flow analysis must realistically account for ordinary household expenditure incurred during the intervening period.

Applying both these principles in tandem, the ITAT partially allowed the appeal, reducing the addition made on account of unexplained cash deposits from ₹5,47,165 to ₹2 lakh, thereby deleting ₹3,47,165 from the impugned addition.

Background and Genesis of the Dispute

The Assessee's Profile and Initial Filings

The assessee filed her return of income under Section 139(1) of the Income Tax Act, 1961, declaring a total income of ₹1,44,000, comprising business income from an in-house boutique and ₹6,120 as interest on a savings bank account. During the financial year 2008–09 (relevant to AY 2009–10), she made total cash deposits of ₹25,38,900 into her bank account.

To explain the source of these deposits, she submitted that:

  • The deposits were funded through cash withdrawals made from her bank account during FY 2008–09 as well as in the preceding financial year FY 2007–08.
  • An additional sum of ₹3 lakh was received from the sale of eucalyptus trees.

First Round of Assessment and Appeal

During the original scrutiny assessment proceedings completed under Section 143(3) of the Income Tax Act, 1961 vide order dated 20.03.2015, the Assessing Officer (ITO, Ward-1(3), Muzaffarnagar) granted credit only for cash withdrawals made during FY 2008–09, amounting to ₹16,91,735. The AO declined to accept the explanation for the remaining deposits and framed an addition of ₹8,47,165.

The Commissioner of Income Tax (Appeals) upheld this addition in the first round of appellate proceedings.

Remand and Second Round of Assessment

The matter then came before the ITAT in the first round, and the Tribunal remanded it back to the AO for fresh adjudication. In the second round of remand proceedings, the AO accepted the ₹3 lakh received from the sale of eucalyptus trees as a valid source, thereby reducing the outstanding disputed addition to ₹5,47,165. The appellate authority — the Joint Commissioner of Income Tax (Appeals)-3, Mumbai — again confirmed this remaining addition vide order dated 27.02.2026.

The assessee thereafter approached the Tribunal once more, giving rise to the present appeal.

The central issue before the Tribunal, as framed in paragraph 2 of the order, was:

"Whether the ld NFAC was justified in confirming the addition made in the sum of Rs. 5,47,165 on account of cash deposits in the bank account in the facts and circumstances of the instant case."