I have read from lot of places that transferring funds from NRO to NRE is possible given correct documents are provided.
Yes this is correct. The key document 15CB establishes that you have paid taxes that were due before money is transferred from the NRO account to the NRE account and/or are repatriated.
Here is what I am simply doing-
Steps 3 & 4 more so the step 4 can be seen as new income.
So the source of the funds is originally from NRE account. However, the CA feels that since my withdrawal and deposit mechanism in NRO is cash, I might be subject to questioning.
Is there any issues in doing the above?
The CA is right. The Cash Withdrawal and Cash Deposit has broken the link between the money withdrawn and the money deposited. It could easily be the case that the Cash Withdrawals were spent on expenses and the Cash Deposit is new (taxable) income to you. This new income needs to be declared and the taxes paid.
If you Uncle is a close relative (the exact relationships that are called close relatives are defined by law), the return of the money can be declared to be a gift from your Uncle to you and no taxes are due from you on the money. If the funds are large, it is advised to have a gift deed. It is not a simple matter of creating a gift deed stating that your Uncle has given you a gift; your Uncle has to show how he acquired so many assets that he gave you some money as a gift and whether appropriate taxes were paid by him. If your Uncle is not a close relative, he can still gift you up to Rs 50,000 per year without you having to pay any income tax on the money received, but again, a gift deed would be needed to account for the cash deposits.
In short, keep speaking to your CA. He will advise you on the best course of action.
Transfering money from NRE account in India to family member