Inayathulla Vs ITO (ITAT Bangalore)
Bangalore ITAT: Entire Bank Credits Cannot Be Taxed as Unexplained Income; Only Profit Element Taxable Where Transactions Represent Business Turnover
The assessee, engaged in real estate business, had not filed his return. Based on information regarding substantial bank deposits and purchase of property for ₹85 lakh, reassessment proceedings were initiated. Since the assessee failed to respond adequately, the AO made an addition of ₹1.53 crore under Section 69A representing bank deposits and a further ₹85 lakh under Section 69 towards property investment, completing the assessment ex parte at ₹2.38 crore.
The CIT(A) dismissed the assessee’s appeal in limine because of a 168-day delay, without examining the additions on merits. Before the ITAT, the assessee contended that the bank accounts represented running accounts of his real estate business involving continuous receipts, withdrawals and rotation of funds, and therefore the entire credits could not constitute income.
The Tribunal did criticize the assessee’s conduct, observing that a taxpayer cannot ignore statutory proceedings and later seek relief merely by blaming the auditor or accountant. Nevertheless, considering the substantial additions and the interests of justice, it condoned the delay.
More importantly, on merits, the ITAT made significant observations on taxation of bank deposits. It held that where bank statements show continuous debit and credit transactions, the AO cannot pick only the credits and treat the entire amount as income while ignoring corresponding withdrawals. If the credits constitute business receipts, only the profit element embedded therein can be brought to tax.
Even in a best-judgment assessment, the AO must adopt a fair and reasonable method. Where transactions relate to the assessee’s real estate business, income may be determined through methods such as peak credit, turnover analysis, past profit rate and transaction pattern, rather than mechanically treating gross deposits as unexplained income.
The Tribunal also specifically cautioned against double taxation. Withdrawals from one account subsequently redeposited cannot automatically be treated as fresh unexplained income. Likewise, if funds already forming part of the bank-credit addition were used to purchase the ₹85 lakh property, the same amount cannot again be assessed separately as unexplained investment under Section 69.
Accordingly, the matter was restored to the AO for fresh examination of the complete bank statements, with directions to consider both debits and credits, identify transfers, withdrawals and redeposits, and prevent duplication. If the transactions are found to represent business activity, only the profit component is to be taxed by adopting an appropriate profit rate or peak-credit method. The same directions were applied to AY 2018-19
FULL TEXT OF THE ORDER OF ITAT BANGALORE
