The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹90 lakh made under Section 69A of the Income Tax Act, 1961, holding that the assessee had satisfactorily explained the source of the cash deposited during the demonetisation period through contemporaneous cash-book entries and corresponding bank transactions.

The Bench of Beena Pillai (Judicial Member) and Ratna Dasgupta (Accountant Member) has observed that a mere earlier bank withdrawal is not automatically sufficient to explain a subsequent cash deposit. Since cash is fungible, the assessee must demonstrate a reasonable correlation between withdrawals, subsequent cash payments, cash carried forward and the eventual deposit.

The assessee was a firm engaged in construction contract works and providing labour services to builders and developers. It explained that its business involved a large number of site labourers, including migrant workers, many of whom did not maintain bank accounts. Consequently, labour payments were regularly made in cash.

Buy Now: 80+ Income Tax Judgments | E-Magazine July 2026

According to the assessee, it followed a consistent accounting practice of withdrawing cash from its bank account for making labour payments and paying wages in the succeeding month. The assessee also claimed that this practice had been followed in earlier years without the Department making any similar addition.

For AY 2017-18, the assessee filed its return declaring total income of ₹83,44,790. The return was selected for scrutiny, during which the Assessing Officer examined the cash book, audited financial statements and bank transactions.

The controversy arose from cash deposits made during November 2016, shortly after the announcement of demonetisation.

The assessee submitted that it had withdrawn substantial amounts from its bank account during October 2016 for payment of labour charges. According to its records, approximately ₹8.40 crore had been withdrawn during October, leaving a cash balance of about ₹93 lakh at the end of that month after taking account of cash payments.

Following the demonetisation announcement, the assessee claimed that the cash retained for labour payments could not be utilised in the ordinary manner because the specified banknotes were no longer accepted for such payments. It therefore deposited the available cash back into its bank account during November 2016. The assessee subsequently withdrew cash during January to March 2017 for making labour payments.

The assessee relied upon its cash book, bank statements, cash withdrawals, cash deposits and labour-payment records, including records for preceding and subsequent years, to establish the movement of the funds.

The Assessing Officer did not accept the explanation.

According to the assessment order, substantial amounts were withdrawn from the bank account in one month and corresponding or identical amounts were used towards wage payments in the succeeding month. The Assessing Officer considered the assessee’s explanation that cash had accumulated and remained available for subsequent wage payments to be implausible and treated it as an afterthought.

The Assessing Officer consequently treated ₹90 lakh as unexplained money under Section 69A of the Income Tax Act.

The assessee challenged the addition before the Commissioner of Income Tax (Appeals). However, the CIT(A) also rejected the explanation, observing that the assessee had failed to establish the source and availability of the cash deposited during the demonetisation period through cogent documentary evidence. The ₹90 lakh addition was accordingly confirmed.

Before the Tribunal, the assessee argued that the cash deposits were made only during November 2016 in the immediate backdrop of demonetisation. It reiterated that its receipts from sales were routed through banking channels and that cash withdrawals were necessitated by the requirement to pay site labourers in cash.

The assessee specifically relied on its cash book to demonstrate that approximately ₹8.40 crore had been withdrawn during October 2016, with around ₹93 lakh remaining as cash-in-hand at the end of the month.

The Revenue, however, questioned why the assessee would retain such a substantial amount of cash when it was regularly withdrawing money for labour payments. It argued that the pattern of withdrawals and wage payments did not support the claim that ₹90 lakh remained available as cash.

The Tribunal identified the central issue as whether the ₹90 lakh deposited during November 2016 could reasonably be treated as unexplained money under Section 69A, or whether the assessee had satisfactorily established that the amount represented cash available from earlier bank withdrawals.

The Bench noted that the assessee was admittedly withdrawing cash from its bank account for labour payments and had placed its cash book and bank statements on record to demonstrate the movement of cash.

Importantly, the Tribunal observed that the mere fact that the assessee had withdrawn substantial cash during October 2016 did not establish that the claimed cash balance of ₹93 lakh was unavailable.

The Tribunal held that the Revenue’s objection regarding the commercial necessity of retaining such a large cash balance had to be considered in the context of the assessee’s actual business practices. The relevant question was not whether retaining such cash appeared commercially prudent with the benefit of hindsight, but whether the assessee could establish the availability and subsequent movement of the particular cash amount.

The Tribunal found significance in the fact that the assessee had identified the source of the ₹90 lakh deposit as the cash balance arising from earlier bank withdrawals.

The withdrawals had been made through banking channels and were recorded in the cash book. The assessee had also furnished details of subsequent cash payments towards labour charges. The ₹90 lakh deposit was made during November 2016, immediately after the demonetisation announcement, while further cash withdrawals were made during January to March 2017 for labour payments.

The Bench stated that such correlation should be examined by considering the cash book as a whole, rather than merely matching individual withdrawals with individual labour payments.

The Tribunal noted that the Assessing Officer and CIT(A) had rejected the explanation principally because they considered it commercially implausible for the assessee to retain such a substantial cash balance while regularly withdrawing cash for labour payments.

However, the authorities had not identified any specific defect in the cash book, any expenditure recorded despite insufficient cash availability, or any evidence showing that the withdrawals had actually been used for another purpose. There was also no material establishing that the ₹90 lakh deposited during November 2016 represented an undisclosed receipt or money from an independent unexplained source.

The Tribunal also attached significance to the timing of the deposit.

The ₹90 lakh was deposited in November 2016, during the demonetisation period. The assessee’s explanation that cash retained for labour payments could not be used in the ordinary manner following the demonetisation announcement was therefore considered a relevant circumstance.

The Bench held that, in the peculiar facts of the case, the explanation could not be dismissed merely as an afterthought, particularly when contemporaneous books and bank records were available to demonstrate the movement of cash.

The Tribunal emphasised that the assessee’s burden was not discharged merely by demonstrating that an equivalent amount had been withdrawn from the bank at some earlier point.

However, the assessee in the present case had gone further by producing a cash book reflecting the opening balance, withdrawals, utilisation of cash and subsequent deposit. These entries could be verified against the corresponding bank transactions.

The Tribunal found that the Revenue had not brought any material on record to show that the assessee possessed cash from a source other than the withdrawals and cash balance disclosed in its books.

There was no evidence that the withdrawals were fictitious, that the corresponding cash had been utilised for an undisclosed purpose, or that the assessee had received undisclosed cash from an independent source. The Revenue had essentially proceeded on the basis that it was commercially improbable for the assessee to retain ₹93 lakh in cash.

The Tribunal held that such an inference, without contrary material, could not by itself establish that the cash deposit was unexplained.

The Bench further examined the statutory requirement under Section 69A.

Section 69A applies where an assessee is found to be the owner of money which is not recorded in the books of account and the assessee offers no satisfactory explanation regarding its nature and source.

In the present case, the Tribunal noted that the assessee had not merely asserted that cash was available. It had specifically identified relevant cash-book entries and corresponding bank transactions.

Once an explanation is furnished and supported by books maintained in the ordinary course, the Revenue cannot reject it merely on the basis of an assumption regarding how much cash the assessee ought to have retained. There must be some material or circumstance showing that the claimed cash was actually unavailable or that the deposit had a different and unexplained source.

Considering the totality of the circumstances—including the substantial cash withdrawals during October 2016, the cash balance reflected in the contemporaneous cash book, the ₹90 lakh deposit during the demonetisation period and the absence of material establishing a different source—the Tribunal concluded that the assessee had satisfactorily explained the nature and source of the cash deposit.

The ITAT therefore deleted the ₹90 lakh addition made under Section 69A of the Income Tax Act. The grounds raised by the assessee were allowed and the appeal was allowed in full.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Notice Issued After April 1, 2021 Without Jurisdiction: ITAT Quashes S. 153C Assessment