ITAT Upholds Tax Addition on Demonetization Cash Deposits: Hasmukh Ramanlal Patel Vs ITO (Ahmedabad) – A Clear Message on Section 69A Compliance

In the post-demonetisation era, Indian taxpayers faced intense scrutiny from the tax authorities over cash deposits made during the demonetisation window (9 November to 30 December 2016). One such case — Hasmukh Ramanlal Patel vs ITO before the Income-tax Appellate Tribunal (ITAT), Ahmedabad — has recently reaffirmed that mere assertions of old cash held in hand cannot absolve taxpayers of their burden to prove the source convincingly. In this article, we break down the case into four digestible parts: Facts and Issues, Tribunal’s Observations, Applicable Law, and Final Conclusion – explained in a way that’s easy for both laypersons and tax professionals to understand.

Facts and Issue of the Case

The crux of the matter in Hasmukh Ramanlal Patel vs ITO revolves around a taxpayer who deposited ₹15.26 lakh in cash into his bank account during the demonetization period.

Here’s what happened:

• The assessee (taxpayer) had taken a bank loan of ₹20 lakh in March 2016 for cold storage business purposes.
• In March 2016 itself, he withdrew ₹7 lakh on 22 March and ₹8.16 lakh on 29 March, totaling about ₹15.16 lakh in cash, which he claimed to have kept at his residence.
• During the demonetisation period (November 2016), he re-deposited the same amount of ₹15.26 lakh back into his bank.
• When called upon by the Assessing Officer (AO) to explain the source of this deposit, the assessee claimed that it was simply old cash withdrawn months earlier and held at home.
• The AO, unable to accept this explanation without documentary evidence, treated the deposited amount as “unexplained cash” under Section 69A of the Income-tax Act, 1961 and added the same as the taxpayer’s income.

The taxpayer appealed to the Commissioner of Income-Tax (Appeals) [CIT(A)], who upheld the AO’s addition, leading the matter to be further appealed before the ITAT Ahmedabad.

The main issue before the Tribunal was whether the cash deposit made during demonetisation could be accepted as explained on the basis of prior withdrawals and retained cash-in-hand, without corroborative evidence.

Observations by the Tribunal and CIT(A)

After examining the appeals filed by the assessee, both the CIT(A) and the Tribunal upheld the revenue’s view. Their reasoning can be summarized through the following key observations:

Lack of Documentary Evidence

The Tribunal noted that the assessee failed to produce credible documentary evidence supporting his claim that the cash was withdrawn in March 2016 and kept honestly till demonetization.

Loan Purpose & Cash Retention

The loan taken in March 2016 was for a specific purpose — cold storage, indicating that the amount was meant to be used for that business activity. It was implausible, according to the Tribunal, that such a large sum would remain unused at home for over seven months without any logical explanation or usage record.

Absence of Cash-Flow or Corroborative Proof

The absence of a cash flow statement, utilization details, or any corroborative third-party evidence (for example, witnesses or bills) undermined the assessee’s case. Mere assertions without supporting evidence were insufficient to establish that the cash was genuinely available and owned by the assessee.

Given these observations, the Tribunal agreed with the lower authorities that the explanation was not satisfactory. It upheld the addition of ₹15.26 lakh as unexplained cash under Section 69A of the Act.

Law Applicable in Cash Deposit & Demonetization Cases

To understand the legal basis of this case, it is essential to grasp the relevant provisions and principles the Tribunal relied upon:

Section 69A: Unexplained Cash Credits

Section 69A of the Income-tax Act empowers the tax authorities to treat unexplained cash deposits as deemed income if the taxpayer fails to satisfactorily explain the nature and source of the cash.

This provision is widely used in demonetisation cases where substantial cash deposits were made within a short timeframe, triggering inquiries into the legitimacy of such deposits.

Burden of Proof on Assessee

Once the AO raises an issue about unexplained cash, the onus shifts to the taxpayer to prove the cash is legitimate — either through evidence of prior income, withdrawals, or other bona fide sources. Unsupported claims or post-hoc explanations are generally not sufficient, as seen in this case.

Documentary Evidence Matters

Tax tribunals and courts regularly emphasize that documentary evidence (such as bank statements, cash books, bills, CDs, and third-party confirmations) is crucial to substantiate claims of old cash. Unsupported claims of cash held at home are often rejected.

Purpose of Loan and Cash Usage

When cash originates from a loan disbursed for a specific purpose, retaining the amount for months without usage or explanation weakens the taxpayer’s credibility — a position courts uphold consistently in tax jurisprudence.

Conclusion by the Tribunal: Clear Message on Compliance

In the case of Hasmukh Ramanlal Patel Vs ITO, the ITAT, Ahmedabad bench delivered a firm conclusion that resonates with broader tax jurisprudence:

Addition Upheld

The Tribunal dismissed the assessee’s appeal, confirming the addition of ₹15.26 lakh as unexplained cash deposited during the demonetisation period. The taxpayer failed to substantiate his claim with credible evidence — leading the Tribunal to treat the cash as unexplained and taxable under Section 69A of the Income-tax Act.

Lesson for Taxpayers

This case sends a crucial message to taxpayers: claims of cash held personally must be backed by robust records — mere assertions or retrospective explanations are insufficient. Prior withdrawals, especially from loans taken for specific purposes, need corroborative evidence like utilisation records, cash books, witness testimony, or third-party confirmations. TaxGuru

Importance of Documentary Support

The absence of a cash flow statement, bills, receipts, or corroborative proof ultimately led to the taxpayer’s defeat. This verdict reinforces the legal principle that the burden of proof lies on the taxpayer where unexplained cash deposits are examined.