The Income Tax Appellate Tribunal (ITAT) has held that every amount deposited in a taxpayer's bank account cannot automatically be treated as taxable income under the presumptive taxation scheme of Section 44AD, stressing that tax authorities must first examine the source and nature of such deposits.
The ruling came in the case of Surat-based fruit trader Zakir Yakubbhai Patel, who had opted for presumptive taxation under Section 44AD of the Income Tax Act.
Patel had declared taxable income of Rs 14.57 lakh in his income tax return. However, following scrutiny of cash deposits made in his bank account during the demonetisation period, the assessing officer determined his income at approximately Rs 5.09 crore — more than 34 times the amount declared by him.
Section 44AD provides a presumptive taxation framework for eligible small businesses. Taxpayers opting for the scheme are generally not required to maintain detailed books to calculate profits from every individual business expense, with taxable income instead presumed on the basis of turnover or gross receipts, subject to prescribed conditions.
In Patel's case, the assessing officer added around Rs 2.43 crore towards bank deposits and credits, Rs 71.87 lakh as unsecured loans and approximately Rs 1.79 crore as loans and advances. This took his assessed income to around Rs 5.09 crore.
The taxpayer challenged the assessment, and the dispute eventually reached the Surat bench of the ITAT.
Before the tribunal, Patel contended that the figures relied upon by the assessing officer were incorrect. He maintained that the actual cash deposited in his bank account was only Rs 89.16 lakh rather than Rs 2.43 crore.
He also argued that the unsecured loans referred to by the assessing officer related to previous years and should not have been included in the manner adopted by the tax department.
The tribunal found significant discrepancies in the data used for the assessment. It observed that the cash deposit figures prepared by the assessing officer did not correspond with the bank records.
Importantly, the ITAT held that merely because money had been deposited in a bank account, the entire amount could not automatically be considered taxable income without examining where the money came from and its nature, particularly in a case governed by Section 44AD.
However, the tribunal did not completely set aside the assessment.
Instead, it remanded the matter to the assessing officer for fresh verification, giving the tax department an opportunity to examine the correct figures and determine the nature and source of the transactions in accordance with law.
The ruling underlines the need for tax authorities to establish the factual basis of bank credits before treating them as income, rather than making additions solely on the basis of amounts appearing in a taxpayer's bank account.