There are often additions on account of cash deposit in the bank wherein the addition is treated as unexplained deposits. The addition is done even when deposit of cash in the bank is out of the cash withdrawals from Bank Account earlier and the same is duly explained to the AO during the course of assessment.

In such cases, AO many a times don’t give the benefit of recycling of cash and add the whole deposit of cash in the bank account as unexplained investment u/s 69.

Question arises, whether action of AO is valid under the Income Tax Act and can it be sustained?

It must be noted that AO’s action holding the entire deposit of cash in the bank account without giving benefit of redeposit/ recycling is fully incorrect.

Cash withdrawn from bank a/c re-deposited after gap of some time, AO cannot automatically drawn the conclusions that such cash deposit as unexplained investment u/s 69 as long as AO has in his possession some tangible material to proof that cash withdrawn was utilized for some other purpose.

It may be noted that there is no prohibition regarding withdrawal and deposit of cash in the bank account. There is no bar to hold cash by the assessee in his own possession in any quantum. Cash withdrawn for the psychological reasons (security purpose), social needs like hand loan to family members, friends, neighbours, staff, relatives for marriage or for medical treatment etc. are acceptable valid reasons from the social view point in Indian scenario. There is no prohibition under the law for such activity.

Under the present system of Law, even oral agreements are enforceable whereby assessee paying advance in cash after withdrawing from the bank account for some personal or commercial dealing. It means that cash received back after a gap of some months cannot be denied and cannot be out rightly rejected even if there is no written agreement to this effect.

So long as AO is not able to establish that cash withdrawn from bank a/c was utilized for some other purpose, redeposit of the cash in the bank a/c again cannot be rejected. Assessee is entitled to get the benefit of recycling and accordingly cash deposit in the bank a/c after gap of few months could not be brought to tax u/s 69 as unexplained investment.

The view is affirmed by the judiciary also in favour of assessee by following Case Laws.