The department questioned why such a large amount would be withdrawn without a clear purpose and then allegedly kept in cash for two-three months.
A large cash withdrawal from your bank account followed by a big cash deposit a few months later can raise questions from the Income Tax Department. But an earlier withdrawal can also support the explanation for a later deposit — provided the taxpayer can establish a credible link between the two.
A recent Income Tax Appellate Tribunal (ITAT) ruling has highlighted an important point: a time gap between withdrawal and redeposit can invite scrutiny, but the gap alone does not prove that the later deposit is unexplained income.
The case involved Bhupendra Flour Mills Pvt Ltd, where the tax department had treated Rs 2.33 crore deposited during the demonetisation period as unexplained money. The company argued that the cash had come from withdrawals made from its bank account a few months earlier.
The ITAT eventually accepted the company’s explanation and deleted the addition.
For taxpayers, the case offers an important lesson: if you withdraw large amounts of cash and later deposit it, maintaining a clear cash trail can become crucial.
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Rs 2.33 crore deposited during demonetisation
The case relates to Assessment Year 2017-18. The company’s assessment was completed by the Assessing Officer (AO) under Section 143(3) on December 19, 2019. The AO made two additions, one of which was the Rs 2.33 crore cash deposit that is relevant here.
The story goes back to 2016.
Before demonetisation, Bhupendra Flour Mills had withdrawn substantial amounts of cash from its SBOP bank account in Bathinda.
According to the bank records, the company withdrew about Rs 2.325 crore between July and October 2016. A major portion — Rs 1.66 crore — was withdrawn up to August 31. Another Rs 41 lakh was withdrawn between September 15 and 19, while Rs 22.50 lakh was withdrawn on October 17.
Then came demonetisation.
During the demonetisation period in November 2016, the company deposited Rs 2.33 crore in cash into a newly opened account with UCO Bank at Parliament Street, New Delhi.
The company’s explanation was that the money deposited in Delhi had come from the earlier cash withdrawals from its Bathinda bank account.
But the Income Tax Department was not convinced.
Why did the tax department question the cash?
The main issue was not whether the company had actually withdrawn cash earlier. The bank records showed those withdrawals.
The question was: What happened to the money between the withdrawal and the eventual deposit?
During a survey conducted on March 7, 2017, company director Gurdas Garg stated that the cash deposits were sourced from earlier withdrawals from SBOP, Bathinda.
However, according to the ITAT order, the director also stated that during the intervening period some of the money had been given as advances or loans to friends, while some cash had been physically taken to Delhi for a proposed property purchase that did not happen.
The tax department found that there were no supporting documents for these claims.
The AO also found that the cash book subsequently produced by the company showed the money as remaining in cash, which he considered inconsistent with the director’s statement that the money had been advanced to friends and others.
This made the department question whether the cash deposited in Delhi was actually the same money that had been withdrawn from Bathinda.
The department’s argument: Why keep Rs 2.33 crore in cash for months?
The AO raised several questions.
The withdrawals had taken place between July and October, while the cash was deposited during demonetisation in November. The department questioned why such a large amount would be withdrawn without a clear purpose and then allegedly kept in cash for two-three months.
The AO also questioned the claim that the money was physically taken from Bathinda to Delhi.
The company could not produce documentary evidence showing how such a large amount was transported, where it was kept and for how long. The AO also pointed out that the company maintained bank accounts at both places and could have transferred money through banking channels instead of physically moving such a large amount of cash.
There was another point that caught the department’s attention.
The company opened a new UCO Bank account in Delhi on November 21, 2016, during the demonetisation period, and deposited the cash there. The AO found it unusual because the company did not have an office in that location.
The AO therefore concluded that the cash deposited in Delhi had come from an undisclosed source and treated Rs 2.33 crore as unexplained money under Section 69A. The tax was to be charged under Section 115BBE.
The CIT(A) also upheld the addition.
But the ITAT looked at the actual cash trail
The company then took the matter to the ITAT.
The tribunal noted an important fact: both the bank account from which the cash had been withdrawn and the bank account into which the cash was deposited were reflected in the company’s financial statements.
The ITAT also noted that the SBOP bank statement showed cash withdrawals of about Rs 2.325 crore before demonetisation, followed by redeposit of the amount in the newly opened Delhi bank account.
The tribunal then focused on whether the department had been able to establish that the withdrawn cash had actually been used somewhere else.
Its answer was no.
The ITAT said that unless the Revenue established with concrete evidence that the cash withdrawals had been utilised elsewhere, it could not simply presume that the later deposits came from an undisclosed source.
The tribunal referred to the Punjab & Haryana High Court’s decision in Shiv Charan Dass vs CIT, which supported the view that in the absence of evidence showing that the withdrawn cash had been used elsewhere, the department could not reject the taxpayer’s explanation merely on that basis.
The ITAT therefore deleted the Rs 2.33 crore addition.
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Is an earlier withdrawal enough to explain a later deposit?
Not necessarily.
Sneha Padhiar, Partner – Direct Tax, Bhuta Shah & Co LLP, said an earlier cash withdrawal can support the explanation for a subsequent cash deposit, but the withdrawal alone may not always be conclusive.
“The overall facts and circumstances of the case need to be considered,” she said.
This includes whether the withdrawal is properly reflected in the bank statements and books of account and whether there is evidence that the cash was used somewhere else in the intervening period.
In the Bhupendra Flour Mills case, she said, the ITAT noted that the withdrawals and subsequent deposits were duly accounted for and the Revenue had not established any alternative utilisation of the withdrawn funds.
“Accordingly, the Tribunal accepted the assessee’s explanation that the deposits represented the earlier withdrawals,” Padhiar said.
That distinction is important for taxpayers.
Showing an old bank withdrawal is useful, but it does not automatically prove that every later cash deposit came from that withdrawal. The surrounding facts and the cash trail matter.
What documents should you maintain?
This is where the case becomes particularly relevant for businesses and taxpayers who deal with large cash transactions.
Padhiar said taxpayers should maintain contemporaneous documents that connect the withdrawal with the subsequent deposit.
These would normally include bank statements showing the withdrawals and deposits, properly maintained books and cash books, cash withdrawal and deposit slips, and records explaining how the cash was used.
If cash was physically moved from one city or state to another, she said, relevant documents supporting the movement should also be preserved.
“The importance of such documentation is evident from the case,” she said, pointing to the Revenue’s questions over the absence of supporting records, including cash books, vouchers and documents relating to the stated utilisation of the cash.
In simple terms, if you withdraw a large amount today and deposit it months later, you should be able to explain the journey of that money in between.
Who has to prove what?
There is an important distinction here.
The taxpayer cannot simply make a claim without evidence.
According to Padhiar, the taxpayer must initially provide a credible explanation and supporting evidence about the source of the cash deposit.
But once the taxpayer establishes a reasonable connection between the earlier withdrawal and the later deposit, the department cannot reject the explanation merely on assumptions or suspicion.
That is essentially what the ITAT found in this case.
The tribunal noted that the withdrawals and deposits were accounted for and that there was no concrete evidence showing that the withdrawn cash had been used elsewhere. It therefore held that the addition could not be sustained merely on presumptions and assumptions.
Why does the time gap matter?
A taxpayer may wonder: If the money was withdrawn from my bank account, why should the Income Tax Department care when I deposited it again?
The answer is that a long gap can naturally raise questions about what happened to the money in between.
Padhiar said a substantial time gap can invite scrutiny because the longer cash remains outside the banking system, the greater the need to establish that it was retained and was not used elsewhere.
That was one of the department’s concerns in this case. The withdrawals had happened two-three months before the deposits, and the department questioned how such large sums could have remained unused without proper supporting evidence.
But the ITAT drew an important line.
A time gap can trigger an inquiry. It does not, by itself, establish that the later deposit is unexplained income.
As Padhiar explained, the ITAT ultimately held that the time gap alone could not justify the addition because the withdrawals were accounted for and the Revenue had not established any alternative utilisation of the cash.
What taxpayers should learn from the case
The case does not mean that anyone who withdraws cash and deposits it later will automatically get relief from the tax department.
The practical lesson is simpler: maintain the cash trail.
If a large withdrawal is made for a genuine reason, keep the relevant bank records and supporting documents. If the cash is later deposited, the taxpayer should be able to explain why it was withdrawn, how it was held or used in the intervening period and why the later deposit represents the same money.
The more unusual the transaction, the more important the documentation becomes.
In Bhupendra Flour Mills’ case, the ITAT ultimately found that the department had not established that the withdrawn cash had been used elsewhere. Since both the withdrawals and deposits were accounted for, the tribunal accepted the company’s explanation and deleted the Rs 2.33 crore addition under Section 69A.
For taxpayers, the takeaway is therefore not “withdrawal equals proof.”
It is: A bank withdrawal can help establish the source of a later cash deposit, but the taxpayer should be ready to explain and document what happened to the money in between. If the department cannot show that the money was used elsewhere, suspicion alone may not be enough to treat the later deposit as unexplained income.
Disclaimer: This article is based on the facts and observations recorded in the ITAT order and expert comments. Tax treatment may vary depending on the facts and circumstances of each case. Readers should seek professional tax advice before taking any action.
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