ITAT Delhi Deletes Addition on Closing Cash-in-Hand Backed by Bank Withdrawals

Muon Computing Private Limited Vs ITO (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, adjudicated an appeal filed by the assessee, Muon Computing Private Limited, against the order dated July 9, 2018, passed by the Commissioner of Income Tax (Appeals)-6, Delhi [CIT(A)] for Assessment Year 2016–17.

Material Facts & Procedural History

• The assessee e-filed its return of income on December 15, 2016, declaring an income of ₹2,34,780.
• The case was selected for limited scrutiny through CASS due to high cash-in-hand disclosed in the balance sheet as of March 31, 2016 (₹27,60,573) compared to preceding years (₹1,44,019 as of March 31, 2014, and ₹44,367 as of March 31, 2015) and because the return was filed after November 7, 2016.
• During assessment, the Assessing Officer (AO) required the assessee to explain the source and reason for holding cash-in-hand of ₹27,60,573. The assessee explained that it had withdrawn ₹28,08,036 in cash from its bank account during the financial year.
• The AO rejected the explanation, alleging that the assessee deliberately suppressed cash payments and non-disclosed them in books to build up cash-in-hand for subsequent deposits during the demonetisation period (November 9, 2016 to December 30, 2016). The AO made an addition of ₹26,66,380.
• On first appeal, the CIT(A) sustained the AO’s addition, citing the sharp increase in cash deposits relative to turnover, high expenses payable as of March 31, 2016 (₹23.32 lakhs vs. ₹9.40 lakhs in the prior year), and the pattern of continued cash withdrawals despite holding an adequate cash balance.
• Aggrieved by the CIT(A)’s decision, the assessee appealed before the ITAT.

Legal Issues & Statutory Provisions

• Validity of making an addition on account of high closing cash-in-hand where the source is established through bank account withdrawals.
• Scope of making additions based on suspicion, conjectures, and prospective demonetisation events without concrete evidence of undisclosed utilization or bogus expenses.

Parties’ Submissions

• Assessee’s Submissions: The assessee demonstrated the source of cash-in-hand through bank statements showing cash withdrawals. The funds were not utilized for any other undisclosed purpose. The additions made by lower authorities were based purely on conjectures and surmises without supporting material evidence.
• Revenue’s Submissions: The Ld. Sr. DR supported the orders of the AO and CIT(A), pointing to abnormal cash withdrawal patterns, high payable expenses, and sharp turnover fluctuations.

Tribunal Observations & Findings

• The Tribunal noted that the Revenue brought no material on record to suggest that the cash withdrawn from the bank was utilized for making undisclosed payments or spent on any undisclosed purpose.
• The Tribunal observed that withdrawing higher amounts of cash compared to preceding years cannot be the sole basis for making an addition on pure suspicion.
• The Tribunal rejected the AO’s reasoning that cash was accumulated in FY 2015–16 to justify demonetisation deposits in late 2016, pointing out that the withdrawals occurred much prior to the demonetisation event.
• Regarding the increase in expenses payable, the Tribunal found that the AO made no finding that such expenses were bogus.
• The Tribunal concluded that the addition sustained by the CIT(A) was based purely on suspicion, conjectures, and surmises, which is legally untenable.

Directions & Final Decision

• The ITAT allowed the appeal of the assessee and directed the AO to delete the addition of ₹26,66,380.

FULL TEXT OF THE ORDER OF ITAT DELHI