The Income Tax Appellate Tribunal (ITAT), Bangalore, has delivered an important ruling on the treatment of cash deposits under Section 69 of the Income Tax Act. The Tribunal held that a cash deposit cannot be treated as unexplained merely because there is a time gap between the earlier withdrawal of money from a disclosed bank account and its subsequent redeposit.
In the case involving Mrs. Nagarathna of Vijayanagar, Bengaluru, the ITAT accepted her explanation that a cash deposit of ₹25 lakh had been sourced from savings accumulated through earlier withdrawals made from the bank accounts of herself and her husband.
The Tribunal observed that when the taxpayer establishes a reasonable and identifiable source of the cash and the Revenue fails to produce evidence showing that the withdrawn money had been spent elsewhere, mere suspicion cannot justify an addition under Section 69.
Background of the ₹25 Lakh Cash Deposit Case
Mrs. Nagarathna, an employee of BESCOM, deposited ₹25 lakh in cash into her bank account maintained with Corporation Bank, Nrupathunga Road Branch, Bengaluru, on June 29, 2016.
The Income Tax Department subsequently examined the transaction and noticed that the taxpayer had sold an immovable property shortly before making the cash deposit.
Based on the proximity between the property transaction and the cash deposit, the Assessing Officer (AO) suspected that the taxpayer may have received undisclosed cash consideration from the property sale.
The AO consequently treated the entire ₹25 lakh as unexplained money under Section 69 and added the amount to the taxpayer’s taxable income.
Taxpayer’s Explanation Before the Income Tax Department
During the assessment proceedings, Mrs. Nagarathna explained that the cash deposited in the bank did not represent undisclosed consideration from the property sale.
According to her, the money represented accumulated savings generated from earlier cash withdrawals made from the disclosed bank accounts of herself and her husband.
The taxpayer and her husband had been regularly withdrawing money from their respective bank accounts with the intention of accumulating funds for investment in a house property.
The explanation was supported by banking records and other financial documents.
However, the Assessing Officer was not satisfied with the explanation and proceeded with the addition. The first appellate authority also upheld the addition, forcing the taxpayer to approach the ITAT Bangalore.
Evidence Produced Before ITAT Bangalore
Before the Tribunal, the taxpayer’s counsel, Advocate Dr. Sheetal Borkar, relied upon bank statements, bank-loan records and a detailed cash-flow statement.
The financial records showed that during the preceding period:
- Mrs. Nagarathna had withdrawn approximately ₹13.17 lakh from her bank account.
- Her husband had withdrawn approximately ₹11.95 lakh.
- The combined withdrawals were therefore more than ₹25 lakh, the amount subsequently deposited in cash.
The taxpayer contended that the withdrawals represented money that had been retained as savings and was ultimately deposited into the bank account.
Importantly, the Revenue could not establish that these withdrawn funds had subsequently been spent, transferred elsewhere or otherwise become unavailable with the taxpayer.
Revenue’s Argument: Timing Created Suspicion
The Income Tax Department argued that the taxpayer’s explanation was not supported by sufficient evidence demonstrating that the cash withdrawn several months or years earlier had actually remained in her possession until the date of deposit.
The Revenue also pointed to the fact that the cash deposit occurred soon after the sale of the property.
According to the Department, the circumstances reasonably suggested that the taxpayer could have received additional, undisclosed consideration in cash from the property buyer over and above the amount recorded in the sale documents.
The Revenue therefore argued that the addition under Section 69 should be sustained.
ITAT Bangalore Relies on Karnataka High Court Ruling
The taxpayer relied upon the judgment of the Karnataka High Court in Smt. P. Padmavathi v. ITO (ITA No. 414 of 2009).
In that case, the High Court had accepted an explanation concerning cash deposited after earlier withdrawals from a bank account.
The ITAT Bangalore found the principle relevant to the present dispute. It recognised that the mere passage of time between withdrawal and redeposit cannot automatically make the taxpayer’s explanation unacceptable.
Where the taxpayer produces evidence showing a plausible source of funds, the explanation must be examined on the basis of the overall facts and evidence rather than rejected solely because the money was not redeposited immediately.
Suspicion Cannot Replace Evidence
A significant aspect of the Tribunal’s decision was the absence of positive evidence supporting the Revenue’s allegation of undisclosed consideration.
There was no statement from the purchaser indicating that additional cash had been paid to the taxpayer. Nor was there any documentary material establishing an undisclosed or “under-the-table” payment over and above the consideration mentioned in the registered sale document.
The Tribunal therefore found that the Department’s conclusion was substantially based on the timing of the transactions.
The mere fact that a property had been sold shortly before the cash deposit, according to the reasoning adopted by the Tribunal, could not by itself establish that the deposited amount represented undisclosed property-sale consideration.
ITAT Deletes ₹25 Lakh Addition
After considering the documentary evidence and the surrounding circumstances, ITAT Bangalore held that the taxpayer had satisfactorily explained the source of the ₹25 lakh cash deposit.
The Tribunal noted that the taxpayer had identified a plausible source through earlier withdrawals from disclosed bank accounts. At the same time, the Revenue had failed to demonstrate through positive evidence that the withdrawn funds had been utilised elsewhere.
Accordingly, the Tribunal rejected the addition made under Section 69, deleted the ₹25 lakh unexplained-money addition and allowed the taxpayer’s appeal.
The ruling was delivered on August 17, 2026.
Key Takeaway for Taxpayers
The ITAT Bangalore ruling highlights an important principle in cash-deposit cases. A substantial cash deposit does not automatically become unexplained merely because there is a considerable gap between the date of withdrawal and the date of redeposit.
Taxpayers facing scrutiny over cash deposits should maintain proper documentary evidence, including bank statements, withdrawal details, cash-flow statements, loan records and other supporting financial documents.
At the same time, the decision does not mean that every cash deposit following an earlier withdrawal will automatically be accepted. The taxpayer must still establish a credible and identifiable source of the money.
The important lesson from the Nagarathna case is that where the taxpayer provides a reasonable explanation supported by financial records, and the Revenue cannot establish that the money was utilised elsewhere or that the deposit came from an undisclosed source, mere suspicion cannot substitute for evidence.
The ruling therefore provides useful guidance in cases involving cash deposits, unexplained money under Section 69, bank withdrawals, property transactions and income-tax scrutiny proceedings.