The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has upheld directions requiring the Assessing Officer to examine cash withdrawals, bank transactions and supporting evidence before determining the unexplained portion of cash deposits amounting to ₹2.59 crore.

The bench of Sandeep Gosain (Judicial Member) and Jagadish (Accountant Member) affirmed the Commissioner of Income-tax (Appeals)’s direction to consider the peak credit principle after verification. It emphasised that the taxpayer’s explanation had not been accepted unconditionally, and that the addition would remain to the extent the deposits continued to be unexplained.

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The taxpayer filed his income-tax return declaring total income of ₹2,34,400. The case was selected for scrutiny because of cash deposits in his bank account.

In an assessment order dated March 28, 2016, passed under Section 143(3) of the Income-tax Act, 1961, the Assessing Officer treated deposits of ₹2,59,57,518 as unexplained income under Section 69A. The total assessed income was recorded at ₹2,61,91,920.

The taxpayer challenged the assessment before the CIT(A), National Faceless Appeal Centre, Delhi.

The CIT(A) observed that the Assessing Officer had considered the deposits without examining corresponding withdrawals. By an order dated November 17, 2025, the appellate authority directed verification of the cash flow, bank transactions and supporting evidence.

The Assessing Officer was also directed to consider the peak credit principle and restrict the addition to the amount remaining unexplained after verification.

The department argued that the taxpayer had failed to satisfactorily explain the source of the deposits or establish a direct nexus between cash withdrawals and subsequent deposits.

The department contended that the mere existence of withdrawals did not establish that the money remained available for redeposit or had not been used for other purposes.

According to the Revenue, the taxpayer had neither furnished a contemporaneous cash flow statement nor demonstrated a continuous cycle of withdrawals and deposits that would justify applying the peak credit principle.

The department also questioned the CIT(A)’s authority to direct fresh verification. It argued that the directions effectively amounted to setting aside an assessment, contrary to the restrictions on the first appellate authority’s powers under Section 251.

The taxpayer’s representative explained that the deposits arose from a business arrangement under which goods were obtained on approval from small hawkers and supplied to customers.

According to the submissions, customers deposited sale proceeds into the taxpayer’s bank accounts. Amounts were subsequently withdrawn to make payments to the hawkers.

The representative referred to deposits of ₹2,58,93,218 and withdrawals of ₹2,93,12,793. These were the figures cited in the taxpayer’s submissions, while the addition challenged in the Revenue’s appeal amounted to ₹2,59,57,518.

The taxpayer also relied on an assessment dated December 20, 2019, for Assessment Year 2017–18, submitting that similar business activity and the source of deposits had been accepted by the Assessing Officer in that year.

The representative supported the verification directed by the CIT(A) and stated that the Assessing Officer had already initiated proceedings to give effect to those directions.

The tribunal noted that the CIT(A) had identified a gap in the assessment: the deposits had been considered without examining corresponding withdrawals and cash flow.

It emphasised that the appellate authority had not accepted the taxpayer’s explanation unconditionally. Relief expressly depended on verification of bank transactions and supporting evidence.

The Assessing Officer was required to retain the addition to the extent that the deposits remained unexplained.

Consequently, the Revenue’s objection that a nexus between withdrawals and deposits had not been established was itself covered by the verification already directed.

The tribunal also considered the taxpayer’s reliance on the assessment for Assessment Year 2017–18.

It held that the subsequent assessment warranted examination of the explanation in its proper factual setting. However, acceptance of the explanation in that later year did not dispense with verification for the assessment year under consideration.

The transactions for Assessment Year 2013–14 therefore remained subject to examination on their own facts and supporting evidence.

Finding no infirmity warranting interference, the ITAT dismissed the Revenue’s grounds and its appeal.

The tribunal did not direct unconditional deletion of the ₹2.59 crore addition or automatic acceptance of the taxpayer’s business explanation. Although the Revenue raised an objection under Section 251, the tribunal upheld the appellate order without separately setting out a detailed interpretation of that provision.

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