FD Encashment Cannot Be Counted Again as Bank Deposit: ITAT Hyderabad

Altaf Ali Baig Moghal Vs ITO (ITAT Hyderabad)

Same Money, Second Addition—FD Encashment Is No Fresh Deposit

The Hyderabad ITAT deleted an addition of ₹11,65,000 sustained by the CIT(A), finding that the Assessing Officer had incorrectly computed the bank deposits by treating encashment of a fixed deposit as a fresh deposit.

The AO originally added ₹32,50,000 as unexplained bank deposits. During the appellate proceedings, verification established that the relevant deposits and transfers aggregated to ₹20,85,000, explained through rural agricultural land sale proceeds of ₹18,53,000 and agricultural income of ₹2,32,000.

Although the CIT(A) accepted these sources, it sustained the difference of ₹11,65,000. The Tribunal found that the remaining addition arose from an incorrect reading of the banking transactions. Money already deposited and subsequently converted into an FD could not be counted again merely because the FD was encashed.

A Student, Agricultural Land and Bank Deposits

The assessee was a 24-year-old student, who stated that he had no independent source of income. His explanation for the bank deposits was that they arose from the sale of agricultural lands and agricultural income.

The record included a gift deed dated 7 July 2015, under which land had been received from his father. Two agricultural land sale deeds, both dated 25 March 2021, recorded consideration of ₹11,03,000 and ₹7,50,000, aggregating to ₹18,53,000.

The assessee explained that the consideration was received in instalments and deposited in the bank. He further identified ₹2,32,000 as agricultural income, bringing the explained sources to ₹20,85,000.

However, the AO proceeded on the basis that unexplained deposits amounted to ₹32,50,000 and made an addition accordingly.

₹32.50 Lakh in the Return Was a Clerical Error

During the first appellate proceedings, the matter was examined through a remand report.

The AO verified the registered sale deeds and recorded that agricultural land measuring 2.49 acres, situated in Karlapalem Village, Bapatla District, had been sold for an aggregate consideration of ₹18,53,000.

The remand proceedings also clarified that the amount of ₹32,50,000 shown in the return was a clerical error. The actual consideration supported by the sale deeds was ₹18,53,000.

Certificates issued by the Village Revenue Officer and Town Planning Officer were examined. The remand report recorded that the land was situated in a rural area outside the specified urban limits and qualified as rural agricultural land.

Thus, the verification supported the assessee’s explanation regarding both the amount of the sale proceeds and the character of the land.

Bank Verification Revealed the Actual Amount

The bank verification recorded cash deposits of ₹9,00,000, ₹1,00,000 and ₹5,85,000, together with ₹5,00,000 received by transfer. These amounts aggregated to ₹20,85,000.

Importantly, the remand report also recorded that the term deposits had been created out of these bank deposits. The fixed deposits therefore represented deployment of money already present in the account.

The CIT(A) accepted ₹18,53,000 as land sale consideration and ₹2,32,000 as agricultural income. Relief was consequently granted for ₹20,85,000.

Nevertheless, the CIT(A) retained the original figure of ₹32,50,000 as the starting point and sustained the balance of ₹11,65,000. The dispute before the Tribunal concerned this surviving addition.

FD Encashment Was Counted Again

The assessee argued that the AO had included fixed deposit maturity proceeds while computing the aggregate deposits, thereby counting the same funds more than once.

The Tribunal examined the banking trail and noted that a fixed deposit had been created on 3 September 2020 out of an earlier deposit and encashed on 2 November 2020.

It held that the original deposit and the subsequent FD encashment could not both be treated as separate introductions of money. The conversion of an existing balance into a fixed deposit, followed by its encashment, did not establish a fresh unexplained source.

The Tribunal found that the AO’s computation was contrary to the facts and records. Once the explained deposits had been accepted, the remaining addition could not survive on the basis of the incorrectly inflated aggregate.

Accordingly, ₹11,65,000 was deleted, and the appeal was allowed. The order expressly records that the AO had counted both creation and encashment of the FD while only one deposit transaction arose from those funds. viewOrder-38 The surviving ₹11.65 lakh addition was consequently deleted. viewOrder-38

Author’s Comments

A bank credit is an entry requiring examination; it is not automatically a fresh receipt from an unexplained source. An FD maturity credit must be traced to the deposit from which the FD was created.

This case also demonstrates that accepting the source of part of the deposits does not complete the exercise. The appellate authority must verify whether the total deposits themselves have been correctly computed. Otherwise, relief for explained sources may still leave behind an addition arising purely from duplication.

The assessee relied on CIT v. P.K. Noorjahan, citing his age and absence of an independent income source. However, the Tribunal’s operative reasoning rested on the banking records and erroneous counting of FD encashment, rather than a general proposition that a student cannot have unexplained money.

For practitioners, a clear reconciliation connecting the original deposit, FD creation and maturity proceeds can be decisive. Here, the surviving addition represented an accounting misreading—not a separately identified unexplained receipt.

Cases Discussed

• CIT v. Smt. P.K. Noorjahan, [1999] 237 ITR 570 (SC) — Relied upon by the assessee while challenging the addition, particularly with reference to his status as a student and absence of an independent source of income. The Tribunal ultimately deleted the addition on examination of the banking transactions and duplication arising from FD encashment.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal by the Assessee is directed against the Order of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC”], Delhi for the Assessment Year 2021-2022.

2. The Assessee has raised the following grounds of appeal:

1. “That, on the facts and in the circumstances of the case, the order passed by the Ld. CIT(A) u/s. 250 dt.25.02.2026, partly sustaining the assessment made u/s. 143(3), is erroneous to the extent, it upholds an addition of Rs.20,85,000/- u/s. 69A towards alleged unexplained cash deposits.

2. The Ld. CIT(A) failed to appreciate that the impugned cash deposits were duly explained as arising from the sale proceeds of agricultural land received by the assessee (a 24-year-old student with no Independent source of income) through registered sale transactions executed for a total consideration of Rs.18,53,000/-, received in instalments. The corresponding cash deposits were made in line with such receipts, which is evident from the registered documents and surrounding facts.

3. The Ld. CIT(A) ought to have taken into cognizance that the assessee being a student at the relevant time had no source of income to say that the Impugned deposits in the bank account were from out of the alleged undisclosed sources.

4. The Ld. CIT(A) erred in disregarding these material evidences/submissions and in sustaining the addition without proper appreciation of facts and settled legal principles, including the ratio laid down by the Hon’ble Supreme Court in CIT vs. P.K. Noorjahan. The addition so sustained is arbitrary, unjustified, and liable to be deleted.

5. For these and other grounds that may be urged at the time of hearing, the appellant respectfully prays that the order of the Ld. CIT(A) be set aside, and the addition sustained by him to the extent stated above be deleted, in the interest of justice and fair play.”

3. The solitary issue arises in this appeal is whether in the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition made by the Assessing Officer on account of cash deposit in the bank account.

4. The learned Authorised Representative of the Assessee has submitted that the assessee was a student at the relevant time and received gift of land vide Gift Deed dated 07.07.2015 from his father which was sold on 25.03.2021 for a consideration of Rs.11,03,000/-. The said amount was deposited in the bank. Further, an old deposit of Rs.5 lakhs was also made in the bank account therefore, the entire deposit was made from the sale consideration of land of Rs.11,03,000/- + Rs.7,50,000/- total amounting to Rs.18,53,000/- which was duly examined by the Assessing Officer during the remand proceedings. The learned Authorised Representative of the Assessee has submitted that there is a clerical mistake in the return of income regarding the exempt income of Rs.32,50,000/- whereas, the actual sale consideration of the agricultural lands was Rs.18,53,000/-. He has further submitted that an sum of Rs.2,32,000/- was agricultural income and therefore, the assessee explained the cash deposit of Rs.20,85,000/- during the relevant financial year from the source of sale of agricultural lands and agricultural income. Despite this source was explained and examined by the Assessing Officer in the remand proceedings, the learned CIT(A) has sustained the addition to the extent of Rs.11,65,000/-. The learned Authorised Representative of the Assessee has thus submitted that when the total deposit in the bank account is only of Rs.20,85,000/-, the addition made by the Assessing Officer as well as confirmed by the learned CIT(A) by taking the total deposit of Rs.32,50,000/- is contrary to the facts and record as well as unjustified. The learned Authorised Representative of the Assessee has referred to the details of deposit in the bank account and submitted that the Assessing Officer has taken the aggregate of maturity of the fixed deposit as cash deposit in the bank account. Thus, he has pleaded that the addition sustained by the learned CIT(A) is not sustainable and liable to be deleted. He has relied upon the Judgment of Hon’ble Supreme Court in the case of CIT vs. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC).

5. On the other hand, the learned DR has submitted that no documentary evidence was submitted before the Assessing Officer to explain the source of deposit in the bank account. The assessee also failed to establish direct co-relation between the sale consideration of land and deposit in the bank account. He has relied upon the Orders of the authorities below.

6. I have considered the rival submissions as well as relevant material on record. The Assessing Officer has made an addition of Rs.32,50,000/- on account of unexplained cash deposit in the bank account. It is pertinent to note that the assessee explained the source as sale of agricultural land to the extent of Rs.18,53,000/- vide two sale deeds both dated 25.03.2021 for consideration of Rs.11,03,000/- + Rs.7,50,000/- respectively. This fact is also not disputed by the Assessing Officer while examining the documents in the remand proceedings as reproduced by the learned CIT(A) in the impugned order in Para no.7.3 as under:

“7.3. In the remand proceedings, the AO verified the sale deeds and recorded that the appellant had sold agricultural land admeasuring 2.49 acres situated at Survey Nos.873/18 and 873/2A, Karlapalem Village, Bapatla District, for an aggregate consideration of Rs.18,53,000/- (Rs.11,03,000/- Rs.7,50,000/-). It was also clarified that the amount of Rs.32.50,000/- shown in the return was a clerical error and the actual sale consideration was Rs.18,53,000/-

Further, the Assessing Officer examined the certificate of the Village Revenue Officer and Town Planning Officer and recorded that the land is situated in a rural area and falls outside the specified urban limits. The remand report categorically states that the land qualifies as rural agricultural land and that capital gains arising therefrom are exempt.

The bank account verification in the remand report shows that the appellant had deposited Rs.9,00,000/-, Rs.1,00,000/- and Rs.5,85,000/- in cash and received Rs.5,00,000/- by transfer, aggregating to Rs.20,85,000/-. The appellant explained that Rs.18.53.000/- represented sale proceeds and the balance Rs.2,32,000/- was agricultural income. The term deposits were found to have been made out of these bank deposits.”

6.1. Further, the Assessing Officer has taken the total deposit as Rs.32,50,000/- whereas as per the deposit and credits in the bank account of the assessee, a fixed deposit was created on 03.09.2020 out of the earlier cash deposit by the assessee which was encashed on 02.11.2020. The Assessing Officer has considered both the amounts as deposit in the bank account whereas the creation of the fixed deposit was only prior to cash deposit of Rs.10 lakhs and therefore, out of these transactions, only one transaction of deposit is made out i.e., Rs.10 lakhs which was converted into fixed deposit and therefore, the subsequent encashment of fixed deposit cannot be considered as a fresh deposit in the bank account. These facts were also recorded by the learned CIT(A) in the impugned order which are as under:

6.2. The learned CIT(A) has accepted the sale consideration of agricultural land as well as Rs.2,32,000/- as agricultural income total amounting to Rs.20,85,000/- out of the total addition of Rs.32,50,000/- and the balance amount of Rs.11,65,000/- was sustained as addition. Once the Assessing Officer has wrongly considered the total amount of deposit in the bank account on encashment of the fixed deposit then, this addition made by the Assessing Officer is also contrary to the facts and record. Accordingly, the same is deleted.

7. In the result, appeal of the Assessee is allowed.

Order pronounced in the open court on 30.09.2026.