Security Deposits from Contractors Not Cash Credits: ITAT Upholds Deletion of ₹22.61 Cr Addition

ACIT Vs Patil Construction and Infrastructure Limited (ITAT Pune)

Security Deposits from Contractors Not Cash Credits: ITAT Upholds Deletion of ₹22.61 Cr Addition

The Income Tax Appellate Tribunal, Pune Bench, in ACIT vs Patil Construction and Infrastructure Ltd., upheld deletion of ₹22.61 crore added under Section 68, holding that security deposits/retention money from contractors are genuine trade liabilities and not unexplained cash credits.

The Assessing Officer treated deposits from contractors as non-genuine and taxed ₹22.61 crore as unexplained income, alleging lack of identity, creditworthiness, and genuineness. However, the assessee demonstrated that these amounts were retention money deducted from running bills of subcontractors, a standard industry practice in construction contracts.

The CIT(A) examined detailed ledgers, movement of deposits, and supporting records, and found that these were not fresh inflows but appropriations from contractual payments, consistently reflected in earlier years. As seen from financial data (page 14), balances of such deposits existed across multiple years, reinforcing their nature as ongoing business liabilities rather than unexplained credits.

The Tribunal agreed, noting that: transactions were routed through regular books; parties were identifiable subcontractors; there was continuous debit/credit movement including release of deposits; and no interest or loan relationship existed. It reiterated that Section 68 cannot be invoked for genuine trade liabilities arising from business transactions.

Further, the Tribunal rejected the Revenue’s argument of Rule 46A violation, holding that no fresh evidence was admitted—only existing records were examined. Applying consistency and settled law, the ITAT dismissed the Revenue’s appeal and upheld the CIT(A)’s order deleting the addition.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Revenue is directed against the order dated 05.08.2025 of the Ld. CIT(A), Pune-12 relating to assessment year 2022-23.

2. Facts of the case, in brief, are that the assessee is a company engaged in construction business. It filed its return of income on 31.10.2022 declaring total income of Rs.76,24,330/-. The case of the assessee was selected for complete scrutiny through CASS for the following reasons:

• Claim of Large Value Refund
• Low net profit shown by construction contractors and claim of large refund
• Deductees have claimed tax deduction against payments other than salary payments by a TAN in their ITRs, however, corresponding TDS statements are either not filed by the deductor or show a substantially lower figure of tax deduction (Selection of case of deductor)
• Non-compliance to Indian Accounting Standards Rules, 2015 (Ind-AS)
• High labilities as compared to low Income/receipts
• High ratio of refund to TDS
• Taxable receipts from Other Sources shown in Schedule TDS2 is higher than the receipts shown in ITR

3. Accordingly statutory notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued and served on the assessee. Thereafter, the Assessing Officer issued notice u/s 142(1) along with a questionnaire in response to which the assessee filed the requisite details from time to time.

4. During the course of assessment proceedings the Assessing Officer noted that the assessee has shown other current financial liabilities totaling to Rs.1,51,47,76,837/- which includes ‘Deposit from Contractor’ totaling to Rs.42,54,79,035/-, however, no such expenses to the contractors have been found debited to the profit and loss account as well as no details of TDS made by the assessee on the contract payments and in Form 3CD. He, therefore, was of the opinion that the liability shown under the head ‘Deposit from Contractor’ of Rs.42,54,79,035/- seems to be non-genuine. He, therefore, confronted the same to the assessee. The assessee in response to the same submitted that there is an addition of Rs.44,57,248/- [42,54,79,035/- (-) 42,10,21,787/-] only during the year. It was argued that the deposits from the contractors of Rs.42,54,79,035/- do not represent the deposits collected during the year. The assessee filed the following reply:

4.4.10. In this regard, the assessee has stated the business prudence and expediency to collect and retain the advances from the contractors; the relevant part of the reply is reproduced as under:

“It can be seen from the aforesaid schedule that there is an addition of Rs. 44,57,248/- (42,54,79,035/- (-) 42,10,21,787/-). It is thus, clear that the deposits from contractors of Rs. 42,54,79,035/- do not represent the deposits collected during the year. It is the practice of the assessee company to retain some portion of the amount payable to the contractors till the relevant contract is fully completed. These amounts are normally sewed on completion of the concerned project. There are large number of projects, which are carried out for more than 3-4 years. Thus, the amount so deducted continues to be retained by the assessee and is settled afterwards. Since, it is not a deduction made during the period relevant to the A.Y. 2022-23, the question of deduction of TDS does not arise. The TDS has been deducted wherever applicable and duly deposited.”

The list of such depositors being very lengthy, the same is given in summarized manner. If you feel it necessary, we can give you the full list also, which comprises of about 800 items. We do hope that the aforesaid factual position brings out clearly that it is not at all correct to hold that the outstanding liability shown in this respect is not genuine. The amount is in the nature of security deposits collected from the sub-contractors and the said amount is payable to the said sub-contractors as on 31.03.2022.

5. However, the Assessing Officer was not satisfied with the explanation given by the assessee and made addition of Rs.22,61,51,802/- by observing as under:

4.4.11. The contention of the assessee as well the details and extract of the ledgers have been examined in order to ascertain the veracity of the same. As against the assertion of the assessee that “there is an addition of Rs. 44,57,248/- (42,54,79,035/- (-) 42,10,21,787/-). It is thus, clear that the deposits from contractors of Rs.4 2,54,79,035/- do not represent the deposits collected during the year^–, it is noticed that during the year, the assessee received the alleged new advance totaling to Rs. 22,61,51,8027- from the contractors. The details furnished by the assessee can be summarized as under: —

4.4.12. It is pertinent to mention here that no other supporting documents have been filed by the assessee in order to prove the genuineness of the transactions. It is concluded from the reply, supporting details/extract of the ledgers appended with the reply, as well as the surrounding circumstances that the assessee has received Rs. 22,61,51,802/- from these person as unsecured loans, some of which also carry interest ranging from merely 02% to @10%. The details of the total interest paid/payable on these advances has not been filed.

4.4.13. It is pertinent to mention that Audit Report for immediate preceding year i.e. AY 2020-21 reveals that the assessee used to deduct or collect tax as per the provisions of Chapter XVII-B or Chapter XVII-BB, under various sections e.g. 192, 194 A, 194 C, 194 H, 1941 and 194J of the IT Act. The same should^–be hold true for the year under consideration also, as the assessee is an acclaimed Class ‘I-A’, contractor, whose turnover is Rs. 3,02,81,81,024/, thus, it is not possible that the assessee itself able to complete the huge projects and no other contractors/sub-contractors were engaged for the purpose. Further how it could be possible that not a single person was there having taxable salary. Furthermore, the assessee himself admitted to have received “Interest bearing advance” from the contractors, however, liability to deduct the tax on the interest paid/accrued has not been shown.

It is pertinent to mention here that one of the reasons for selection of the case through CASS is “Deductees have claimed tax deduction against payments other than salary payments by a TAN in their ITRs, however, corresponding TDS statements are either not filed by the deductor or show a substantially lower figure of tax deduction (Selection of case of deductor)”.

Therefore, it is unambiguously evident that the assessee has violated the provisions of the TDS, however, in the absence of the information regarding quantum debited to the profit and loss account, no disallowance u/s 40(ia) of the IT Act has been considered.

In view of the foregoing discussion, the assessee has utterly failed to explain the identity, creditworthiness of the alleged contractors and genuineness of the alleged advance amounting to Rs. 22,61,51,802/-, which was received during the year has been added to the income of the assessee, u/s 68 of the IT Act by treating the same, as unexplained sum found credited in the books of the assessee and be taxed u/s 115 BBE of the IT Act. Penalty proceedings u/s 271AAC(1) of the IT Act has also been initiated, separately, since, in this case, the income determined includes income referred under section 68 of the IT Act, which is chargeable to tax under the provisions of section 115BBE of the Income Tax Act, 1961.

(Addition of Rs. 22,61,51,802/-)

6. In appeal the Ld. CIT(A) deleted the addition by observing as under:

Finding and Decision of the Appellate Authority:

4.3 I have considered the assessment order, submission of the appellant and the facts of the case. Facts in brief are the appellant is a Pvt. Ltd. Company and is registered as Class ‘I-A’, contractor and engaged mainly into business of civil construction of bitumen or concrete roads, storm roads drainage, building primarily for government agencies. The appellant filed its return of income on 31.10.2022, declaring total income at Rs. 76,24,330/- (book profit under MAT Rs. 2,73,23,231/-). During the course of assessment proceedings, a notice u/s 142(1) dated 20.11.2023 along with its enclosures was issued, fixing for 28.11.2023. In addition, the appellant was asked to respond to the following specific queries, directly relating to the reasons. In response to the same, the appellant filed a written submission on 28.11.2023, which was incomplete. Further, in view of observation in para 4.4.2 to 4.4.4 of assessment order, a show cause notice proposing variation was issued to the appellant on 11.03.2024, fixing date of compliance on 14.03.2024. In response to show cause notice, the appellant filed a written submission on 14.03.2024 along with enclosures and subsequently, a detailed reply on 18.03.2024 along with its annexure. On verification of appellant submission, the Ld. AO found that the appellant had shown other current financial liabilities totaling to Rs. 1,51,47,76,837/-, which includes ‘Deposit from Contractor’ totaling to Rs. 42,54,79,035/-, however, no expenses/payment to the contractors/ sub-contractors had been found debited to the P&L A/c. The Ld. AO also found that no details of the TDS made by the appellant on the contract payments in the Form 3CD, thus the liabilities shown under the head ‘Deposit from Contractor’ of Rs. 42,54,79,035/- seems to be non-genuineness. In response thereto, the appellant filed a detailed reply along with the details of deposits from contractors and extract of the ledgers of the ledger a/c. The same was verified by the Ld. AO and noticed that during the year under consideration, the appellant received the alleged new advance totaling to Rs. 22,61,51,802/- from the contractors. The summarized details were furnished by the appellant as under.

4.4 In this regard, the Ld. AO mentioned that no other supporting documents had been filed by the appellant in order to prove the genuineness of the transactions. It was concluded from the reply, supporting details/extract of the ledgers appended with the reply, as well as the surrounding circumstances that the appellant had received Rs. 22,61,51,802/- from these persons as unsecured loans, some of which also carry interest ranging from merely @2% to @10%. The details of the total interest paid/payable on these advances had not been filed.

4.5 In view of above scenario, the Ld. AO held that the appellant has failed to explain the identity, creditworthiness of the alleged contractors and genuineness of the alleged advance amounting to Rs. 22,61,51,802/-, which was received during the year. Accordingly, addition of Rs.22,61,51,802/- was made by the Ld. AO and added to the total income of the appellant on account of unexplained sum found credited in the books of accounts u/s 68 of Act and taxed u/s 115BBE of the Act.

4.6 Upon a careful and detailed examination of the assessment order, the written submissions, and oral explanations made by the appellant, several important findings emerge in support of the appellant’s case. To begin with, the nature of the transactions in question, amounting to Rs.22,61,51,802/-, has been satisfactorily clarified by the appellant. Contrary to the AO’s characterization of these credits as unexplained cash receipts or unsecured loans, the appellant has convincingly demonstrated that these are in fact security deposits deducted from contractual payments made to subcontractors and vendors. These deposits were not new infusions of funds or external credits but were appropriations made under standard industry practice to ensure performance and compliance with contractual obligations, particularly in relation to the quality of civil construction work.

4.7 Furthermore, the appellant has furnished detailed documentary evidence to substantiate the genuineness of these transactions. The records include comprehensive ledger accounts, summaries of credits and debits, and the opening and closing balances of each category of security deposit, including deposits deducted at 5% and 6% rates, and those related to GST vendor compliance. The transparency in recording these transactions in the books of account, along with a consistent pattern of debits and credits throughout the year, reinforces the appellant’s claim. It is also noteworthy that many of these deposits were released or adjusted during the year against contractual settlements, further confirming that these were genuine trade-related liabilities and not unexplained cash credits.

7. Aggrieved with such order of the Ld. CIT(A) the Revenue is in appeal before the Tribunal by raising the following grounds:

1) Whether on the facts and circumstances of the case and in law, the CIT(A) was right in holding that the credits of Rs.22,61,51,802/- were genuine trade-related liabilities and not unexplained cash credits without appreciating the fact that the assessee neither before the AO nor before the CIT(A) gave complete details of the creditors.

2) Without prejudice to the above, whether on the facts and circumstances of the case, the CIT(A) was right in holding that the credits were genuine trade-related liabilities and not unexplained cash credits on basis of additional evidence without giving opportunity to the Assessing Officer as mandated by Rule 46A of Income-tax Rules, 1962.

3) The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal at the time of hearing

8. The Ld. DR strongly challenged the order of the Ld. CIT(A) in deleting the addition of Rs.22,61,51,802/- made by the Assessing Officer. He submitted that when the assessee had not filed the complete details either before the Ld. CIT(A) or the Assessing Officer of such credits, the Ld. CIT(A) should not have held that the credits were genuine trade related liabilities and not unexplained cash credits. He further submitted that the Ld. CIT(A) has accepted certain additional evidences in violation of Rule 46A of IT Rules, 1962 and therefore, the order of the Ld. CIT(A) is not in accordance with law. He accordingly submitted that the order of the Ld. CIT(A) be reversed and that of the Assessing Officer be restored.

9. The Ld. Counsel for the assessee on the other hand heavily relied on the order of the Ld. CIT(A). He submitted that the assessee is engaged in the business of civil construction for government and semi-government agencies. Referring to page 185 of the paper book, he drew the attention of the Bench to the Schedule No.18 – Other current financial liabilities according to which the assessee has shown deposits from the contractors at Rs.23,48,56,535/- as on 31.03.2019 and Rs.41,94,66,939/- as on 31.03.2020. Referring to page 234 of the paper book he submitted that such deposits from the contractors are shown at Rs.42,10,21,787/-as on 31.03.2021. Referring to page 74 of the paper book, he drew the attention of the Bench to the reply given by the assessee in response to the show cause notice dated 11.03.2024 issued by the Assessing Officer according to which an amount of Rs.42,54,79,035/- is shown as deposit from the contractor which has been kept by the assessee against the work. He drew the attention of the Bench to the relevant question raised by the Assessing Officer and the answer given by the assessee which is as under:

10. Referring to page 110 of the paper book, the Ld. Counsel for the assessee again drew the attention of the Bench to the reply given by the assessee before the Assessing Officer which reads as under:

11. Referring to pages 133 to 135 of the paper book, he drew the attention of the Bench to the list of security deposits from the contractors which were given before the Assessing Officer. Referring to the reply submitted before the Ld. CIT(A), copy of which is placed at pages 136 to 147 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to para 8 which reads as under:

12. Referring to page 149 of the paper book, he drew the attention of the Bench to the detailed submission made before the Ld. CIT(A). He submitted that no new evidences or details were filed before the Ld. CIT(A) and all the details were already filed before the Assessing Officer.

13. The Ld. Counsel for the assessee submitted that the security deposit / retention money deducted from running bills of sub-contractors in the ordinary course of business cannot be treated as unexplained cash credits u/s 68 of the Act. He submitted that all these deposits were appropriations from contractual payments and are not fresh credits. The parties were identified sub-contractors and vendors, the transactions were routed through regular books of account. There was continuous debit / credit movement including the release of deposits and no interest was paid or payable. He submitted that the Assessing Officer has brought nothing to rebut all these materials produced before him to disprove the claim of the assessee.

14. Referring to the provisions of section 68 of the Act, he submitted that the said section has no application to trade liabilities. Referring to the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Pancham Dass Jain reported in 205 CTR 444 (All), he submitted that the Hon’ble High Court in the said decision has held that trade liabilities arising during business cannot be assessed as cash credits. Referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Kailash Jewellery House vide ITA No.613/2010, he submitted that the Hon’ble High Court in the said decision has held that once purchases are accepted, corresponding liabilities cannot be treated as unexplained. Referring to the decision of Hon’ble Gujarat High Court in the case of Rohini Builders reported in 256 ITR 360 (Guj), he submitted that the Hon’ble High Court in the said decision has held that where identity and genuineness are proved, addition is unsustainable. Referring to the decision of the Hon’ble Delhi High Court in the case of Usha Stud Agricultural Farms Ltd. reported in 301 ITR 384 (Del), he submitted that the Hon’ble High Court in the said decision has held that section 68 cannot be invoked when the transaction is explained.

15. The Ld. Counsel for the assessee in his next plank of argument submitted that the Assessing Officer has presumed that the deposits were unsecured loans and interest was payable. However, the fact is that no interest is recorded in audited accounts, there is no lender and borrower relationship exists and there is no material evidence before the Assessing Officer to support the allegation. Relying on various decisions, he submitted that presumptions and surmises however strong may be, cannot substitute evidence. The Ld. Counsel for the assessee submitted that the books of the assessee are audited and they have not been rejected. Further, there is no receipt during the year and it is only contractual payments out of which money has been deducted. He submitted that once the addition u/s 68 of the Act is unsustainable, taxation u/s 115BBE of the Act cannot survive. He submitted that retention of money is a standard industry practice in infrastructure contracts to ensure the quality of work, defect liability compliance, GST payment confirmation and the contract performance. However, the approach of the Assessing Officer effectively seeks to tax a running business liability which is impermissible. He submitted that these deposits are refundable and in fact during the year also certain amounts were released which were the opening balances accepted in earlier years.

16. So far as the ground raised by the Revenue that there was violation of Rule 46A of IT Rules, 1962 is concerned, he submitted that no additional evidence within meaning of Rule 46A has been filed before the Ld. CIT(A). Whatever documents filed before the Ld. CIT(A) were in the nature of ledger extracts, summaries and explanations which were already part of assessment proceedings or were only compilations / explanations of existing records and there is no new third party evidence, confirmations or documents produced for the first time. He submitted that the Assessing Officer himself has relied on the same ledgers since the assessment order itself reproduces the opening balance, credits during the year, debits during the year, closing balance etc. Therefore, once the Assessing Officer relied on the same material, Rule 46A does not get triggered. He submitted that it is the settled proposition of law that the powers of the Ld. CIT(A) are co-terminus with the powers of the Assessing Officer. The Ld. CIT(A) is empowered to examine records, draw correct legal inferences and grant relief where addition is unsustainable. Therefore, mere appreciation of existing material cannot be equated with admission of additional evidence. He accordingly submitted that since the order of the Ld. CIT(A) is a reasoned one, the same should be upheld and the grounds raised by the Revenue be dismissed.

17. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.22,61,51,802/- u/s 68 r.w.s. 115BBE of the Act on the ground that the assessee failed to explain the identity and creditworthiness of the contractors and the genuineness of the advances amounting to Rs.22,61,51,802/- received by it during the year. We find the Ld. CIT(A) deleted the addition, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the Ld. DR that the Ld. CIT(A) without appreciating the facts properly and by admitting certain additional evidences in violation of Rule 46A of the IT Rules, 1962 has deleted the addition which is not in accordance with law. It is the submission of the Ld. Counsel for the assessee that the security deposits / retention money deducted from the running bills of sub-contractors in the ordinary course of business cannot be treated as unexplained cash credit u/s 68 of the Act. It is his submission that since no additional evidences are produced before the Ld. CIT(A) and the submissions and the details produced before him were already filed before the Assessing Officer, therefore, there is no violation of Rule 46A.

18. We find some force in the above arguments of the Ld. Counsel for the assessee. A perusal of the audited balance sheets of the assessee filed in the paper book for different assessment years shows that the assessee was showing deposits from the contractors continuously, the details of which are as under:

19. Similarly, the assessee has given bifurcation of various details as to how the assessee was deducting the security deposits from the payments made to the contractors, GST to the vendors etc, the details of which are as under:

20. We find the assessee while explaining the security deposits @ 6% deducted from various persons has filed the following details:

21. Similarly, the security deposit of Rs.3,30,42,127/- was deducted from certain contractors, the details of which are as under:

22. These details were also produced before the Assessing Officer which he did not appreciate properly and the Ld. CIT(A) has considered the same in the right perspective and deleted the addition, which in our opinion does not call for interference.

23. We find merit in the arguments of the Ld. Counsel for the assessee that the perusal of the order of the Ld. CIT(A) shows that he has given a categorical factual finding that the deposits were appropriations from contractual payments and parties were identified sub-contractors and vendors, transactions were routed through regular books of account, there was continuous debit / credit movement including the release of deposits and no interest was paid or payable by the assessee. The Ld. DR could not controvert any of the above factual finding given by the Ld. CIT(A). It has been held in various decisions that the trade liabilities arising during business cannot be assessed as cash credits. We further find that in the preceding year also similar amounts were appearing in the balance sheet of the assessee. However, no addition has been made nor any reopening u/s 147 or 263 proceedings have taken place after passing of the present assessment order. Therefore, following the rule of consistency also, no disallowance could have been made by the Assessing Officer on account of such security deposits / earnest money deducted from the running bills of the sub-contractors. Since the Ld. CIT(A)’s order is a detailed one and the Ld. DR could not controvert the factual findings given by the Ld. CIT(A), therefore, in absence of any contrary material, we do not find any infirmity in his order. We, accordingly, uphold the order of the Ld. CIT(A) and dismiss the grounds raised by the Revenue.

24. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open Court on 20^th April, 2026.