Bank Credits Are Not Sales: Limits of Estimating GST Turnover from a Current Account

Summary: A credit appearing in a current account establishes receipt of money but does not by itself establish a taxable supply under GST. Sections 7 and 9 of the CGST Act make supply of goods or services the taxable event, while Section 2(31) requires consideration to be connected with a supply. Unlike Sections 68, 69 and 69A of the Income Tax Act, the GST law contains no deeming provision converting unexplained bank credits into taxable turnover. Bank statements also do not identify the goods or services supplied, the recipient, invoice, quantity or movement of goods. The GST record-keeping framework instead relies on tax invoices, supply and stock records and, where applicable, e-way bills. Accounting principles similarly distinguish recognition of a sale from subsequent receipt of its consideration, while auditing standards treat unexplained differences as matters requiring investigation rather than proof of turnover. Judicial principles governing best judgment assessment also require estimates to have a rational nexus with relevant material and prohibit arbitrary assumptions. Therefore, although bank-account discrepancies can legitimately trigger investigation, the Department must establish a connection between particular credits and particular undeclared taxable supplies before treating those credits as GST turnover.

Introduction

A credit in a current account proves only one thing: that money reached the account. It does not prove who paid it, why it was paid, or whether any goods or services moved in return. Yet a growing number of show cause notices and orders under Sections 73, 74 and 74A of the GST law simply total the credits appearing in a dealer’s bank statement, compare that figure with the turnover declared in GSTR-1 and GSTR-3B, and treat the difference as suppressed sales.

The method has an obvious attraction for the Department. Bank statements are easy to obtain, the arithmetic is simple, and the resulting figure looks precise. But precision is not proof. When the notice does not name the person who made the payment, does not identify any invoice, contract or e-way bill, and does not show any movement of goods, the demand rests on an assumption that every rupee received is the price of a taxable supply.

This article examines whether that assumption can survive scrutiny. It looks at the charging scheme of the CGST and UPGST Acts, the law of evidence, the record keeping provisions of the GST law, the accounting standards issued by the Institute of Chartered Accountants of India, the teaching of the Institute of Cost Accountants of India, the Standards on Auditing, and the consistent view of the Supreme Court and the Allahabad High Court on best judgment assessment. The conclusion, in short, is that bank credits are not sales, and a demand built on them without corroboration is unsustainable in law and unsound in accounting.

The taxable event under GST: supply, not receipt

The charge under Section 9 of the CGST Act, and its counterpart in the UPGST Act, falls on the supply of goods or services. Section 7 defines supply as all forms of supply such as sale, transfer, barter, exchange, licence, rental, lease or disposal, made or agreed to be made for a consideration by a person in the course or furtherance of business. The levy therefore attaches to a transaction. It does not attach to money as such.

The word consideration is itself defined. Section 2(31) treats as consideration any payment made in respect of, in response to, or for the inducement of the supply of goods or services, whether by the recipient or by any other person. Each limb of the definition ties the payment to a supply. A payment that cannot be connected with any identified supply is not consideration in the statutory sense, however large the amount may be.

Valuation follows the same logic. Section 15 fixes the value of a supply at the transaction value, that is, the price actually paid or payable for the supply where the supplier and the recipient are not related and price is the sole consideration. A transaction value presupposes a supplier, a recipient and a supply between them. Where the recipient is unknown and the supply is not identified, there is nothing to which a transaction value can attach.

The time of supply provisions in Sections 12 and 13 point the same way. For goods, the time of supply is the date of issue of the invoice or the last date on which it ought to have been issued. Receipt of payment becomes relevant chiefly for advances against services, and even then the advance must relate to an identifiable supply. The scheme nowhere makes the mere arrival of money in a bank account a taxable event.

Three questions must therefore be answered before a bank credit can be taxed. What was supplied? To whom was it supplied? Is the credit the consideration for that supply? A notice that answers none of these has not identified a taxable event at all.

No deeming fiction in GST

The Income Tax Act contains express provisions for unexplained receipts. Section 68 permits a sum credited in the books to be charged as income where the assessee offers no satisfactory explanation about its nature and source. Sections 69 and 69A extend the same approach to unexplained investments and money. These are deeming provisions. They create a legal fiction which would not otherwise exist, and they place the burden of explanation on the assessee by the force of the statute.

The CGST and UPGST Acts contain no comparable provision. There is no section which says that an unexplained credit in a bank account shall be deemed to be the value of a taxable supply. Parliament was fully aware of the income tax model when it enacted the GST law, and it chose not to adopt it.

The consequence is important. It is a settled rule of interpretation that a taxing statute is construed strictly and that a legal fiction cannot be created by implication. A fiction exists only where the legislature has enacted it, and it extends only as far as its words go. The Department cannot borrow the logic of Section 68 and apply it to a levy on supply. To do so would be to tax by analogy, which fiscal law does not permit.

The point also answers a common argument in orders, namely that the dealer failed to explain the credits and that the credits may therefore be treated as sales. Under the income tax law that reasoning has statutory backing. Under the GST law it has none. An unexplained credit remains exactly that: unexplained. It does not become the price of a supply merely because the explanation was not accepted.

Evidentiary value of a bank entry and the burden of proof

A bank statement is an extract of the bank’s own books of account. Under Section 34 of the Indian Evidence Act, 1872, now Section 28 of the Bharatiya Sakshya Adhiniyam, 2023, entries in books of account regularly kept in the course of business are relevant, but such statements shall not alone be sufficient evidence to charge any person with liability.

The Supreme Court explained the provision in Central Bureau of Investigation v. V.C. Shukla, (1998) 3 SCC 410. Entries in books of account may be admitted, but they need independent corroboration before they can fasten liability on anyone. The principle applies with full force here. A credit entry in the bank’s ledger records the receipt of money. It does not, by itself, fasten on the account holder a liability to pay tax on a supply which the entry does not describe.

The burden of proof follows the ordinary rule in Sections 104 and 105 of the Bharatiya Sakshya Adhiniyam, 2023 (formerly Sections 101 and 102 of the Evidence Act). Whoever desires a court to give judgment on a legal right or liability dependent on a fact must prove that the fact exists. In proceedings under Sections 73, 74 and 74A, it is the Department which asserts that a supply took place and that it was not declared. The burden of proving that assertion is on the Department.

In a case under Section 74 or 74A(5)(ii), the burden is heavier still. Those provisions require fraud, wilful misstatement or suppression of facts with intent to evade tax. Suppression is a positive allegation. It cannot be inferred from a bare arithmetical difference between bank credits and declared turnover, without any material showing that a particular supply was made and deliberately concealed.

Orders sometimes reverse this burden by recording that the dealer failed to prove that the credits were not sales. That approach asks the dealer to prove a negative, and it substitutes suspicion for evidence. Courts have consistently refused to sustain findings of that kind.

The record keeping scheme of the GST law

The GST law itself tells us where evidence of a supply is to be found. Section 31 requires a registered person to issue a tax invoice for every taxable supply, showing the description, quantity and value of the goods or services. Section 35, read with Rule 56 of the CGST and UPGST Rules, requires the maintenance of accounts of production or manufacture, inward and outward supply, stock of goods, input tax credit availed, and output tax payable and paid. For the movement of goods above the prescribed value, Rule 138 requires an e-way bill.

These documents are the primary record of supply under the statute. The bank statement is not among them. It is a record of payments, maintained by a third party, and it says nothing about the description, quantity, rate or recipient of any supply.

The following table shows what each record proves and what it does not.

When the Department alleges an unrecorded sale of goods, it should be able to point to at least one of the first three records: an invoice or document recovered in a search, a stock deficiency found on physical verification, a buyer’s purchase entry, a transporter’s record, or an e-way bill generated without a matching return entry. An allegation of sale with no buyer, no goods, no movement and no document is not a finding of supply. It is a conjecture drawn from a payment record.

What accounting principles say

The law and the accounting profession arrive at the same conclusion by different routes. The accounting position can be stated from the standards and study material of the two statutory bodies of the profession in India.

The accrual basis

The Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India adopts accrual as an underlying assumption. The effects of transactions are recognised when they occur, and not when cash or its equivalent is received or paid. AS 1, Disclosure of Accounting Policies, lists going concern, consistency and accrual as the fundamental accounting assumptions. Section 128 of the Companies Act, 2013 makes the accrual basis and the double entry system mandatory for companies.

Under the accrual basis, a sale is recorded when it is made. The receipt of money afterwards is a separate event which merely settles what the buyer owes.

If the Department treats the second entry as a fresh sale, the same supply is taxed twice, once when invoiced and again when realised. This is the most common defect in orders based on bank credits, particularly where sales of an earlier period are realised in the year under assessment.

Revenue recognition under AS 9

AS 9, Revenue Recognition, defines revenue as the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, the rendering of services, and the use by others of its resources yielding interest, royalties and dividends (para 4.1). The inflow must arise from one of these activities. Under paras 10 and 11, revenue from the sale of goods is recognised when the seller has transferred to the buyer the property in the goods, or the significant risks and rewards of ownership. Without a buyer and a transfer of goods, there is nothing to recognise.

The identified customer under Ind AS 115

Ind AS 115, Revenue from Contracts with Customers, is even more direct. Under para 9, revenue is recognised only where there is a contract with a customer which the parties have approved, under which each party’s rights and the payment terms can be identified, and which has commercial substance. Under paras 15 and 16, where consideration is received but these criteria are not met, the amount is recognised as a liability and not as revenue. It becomes revenue only when the entity has no remaining obligations and the consideration is non refundable, or when the contract has been terminated.

In other words, under the current Indian standard, money received without an identified customer and an identified contract is not a sale. It is a liability until its nature is established. The accounting rule mirrors the legal requirement of Section 2(31) that consideration must be linked to a supply.

Capital and revenue receipts

The study material of the ICAI Foundation Course (Paper 1, Principles and Practice of Accounting) and of the ICMAI Foundation Course (Paper 2, Fundamentals of Financial and Cost Accounting) draws a firm line between capital receipts and revenue receipts. Loans, capital introduced by the proprietor or partners, and the proceeds of fixed assets are capital receipts. They are recorded as liabilities or as equity, and never as sales. The business entity concept taught in the same material separates the proprietor’s personal money from the receipts of the business. A credit representing the proprietor’s own funds or a relative’s loan cannot become business turnover.

The bank reconciliation statement

Both bodies teach the preparation of the Bank Reconciliation Statement as a basic accounting procedure. It exists because the bank pass book and the cash book do not agree. The differences arise from cheques deposited but not cleared, direct credits, dishonoured instruments, bank charges and interest, and errors. The very existence of this procedure shows that the bank statement is a document to be reconciled with the books. It is not a substitute for them.

Cost records

The Cost Accounting Standards of the Institute of Cost Accountants of India deal with the measurement of cost and not with the recognition of revenue. Their relevance lies in a principle common to the Generally Accepted Cost Accounting Principles issued by that Institute: cost and revenue figures must be supported by source documents and must be capable of reconciliation with the financial accounts. A turnover figure assumed from bank credits, with no source document behind it, fails that requirement.

Standard texts

The same principles are set out in the standard accounting texts regularly cited before courts and tribunals, including M.C. Shukla, T.S. Grewal and S.C. Gupta, Advanced Accounts (S. Chand), S.N. Maheshwari and S.K. Maheshwari, Financial Accounting (Vikas), R.L. Gupta and M. Radhaswamy, Advanced Accountancy (Sultan Chand), and Jain and Narang, Financial Accounting (Kalyani), in their chapters on accounting concepts, capital and revenue receipts, bank reconciliation and revenue recognition.

The auditor’s standard of evidence

The Standards on Auditing issued by the ICAI are useful because they describe how a trained professional is expected to move from a figure to a conclusion. A tax officer exercising quasi-judicial power can hardly be held to a lower standard.

SA 500, Audit Evidence, requires conclusions to be based on sufficient and appropriate evidence. It recognises that evidence from independent external sources and documentary evidence is generally more reliable, and that evidence from one source which is inconsistent with other records must be investigated before reliance is placed on it. A bank credit is reliable evidence that money was received. It is not evidence of the nature of the receipt, and it is inconsistent with the dealer’s returns only if one first assumes that it represents a sale.

SA 505, External Confirmations, describes the procedure for confirming a balance or transaction directly with a third party. Where the nature of a receipt is in doubt, the natural course is to identify the remitter from the bank’s records and ask what the payment was for. A Department which has the power to summon under Section 70 and to obtain bank records cannot reasonably skip that step and presume the answer.

SA 520, Analytical Procedures, treats a significant unexplained variance as a matter for further inquiry and corroboration. It does not treat the variance as a conclusion in itself. A difference between bank credits and declared turnover is, at best, the starting point of an inquiry. An order which stops at that difference has stopped where the inquiry should have begun.

The judicial view on estimation

The courts have long accepted that when accounts are unreliable, the assessing authority may make an estimate. They have been equally firm that an estimate must rest on material and must bear a rational relation to it.

The Supreme Court

In Raghubar Mandal Harihar Mandal v. State of Bihar, AIR 1957 SC 810, the Court held that a best judgment assessment must be made honestly and fairly, and must not be vindictive, capricious or arbitrary. In State of Kerala v. C. Velukutty, (1966) 60 ITR 239 (SC), the Court explained that the authority may use its judgment, but the estimate must have a reasonable nexus with the available material. An assessment made without any such nexus is not best judgment at all. In Kachwala Gems v. Joint CIT, (2007) 288 ITR 10 (SC), the Court accepted that some guesswork is inherent in a best judgment assessment, but held that it must be based on relevant material and have a reasonable nexus to it.

Adopting the entire credit side of a bank statement as turnover does not meet this test. It is not an estimate drawn from material showing suppression. It is the substitution of one kind of figure for another without any reasoning that connects the two.

The Allahabad High Court

The Allahabad High Court has applied these principles consistently under the UP Trade Tax and UP VAT regimes, and the reasoning carries over directly to GST.

In Moti Lal Dwarika Prasad v. Commissioner of Sales Tax, 1989 UPTC 358 (All), the Court held that estimation of turnover must not be arbitrary. The decision was relied on again in a Writ Tax decision of September 2025, where the Court found that, once evaded purchases had been determined at about Rs. 1.16 crore, fixing evaded sales at Rs. 2.5 crore without any reasoning was arbitrary. The Court also held that the absence of a proper opportunity of hearing vitiated the determination.

In a 2023 decision reported as 2023 LiveLaw (AB) 452, the Court, relying on Krishna Gramodyog Samiti v. Commissioner of Sales Tax, held that a best judgment assessment cannot be founded on surmises and conjectures and must rest on cogent material indicating suppression or concealment of transactions. It further held that rejection of books of account does not, by itself, justify enhancement of turnover.

In Zubaida Khatoon Memorial Charitable Society v. Commissioner, Commercial Tax, the Court set aside a determination of iron and steel turnover at Rs. 1.25 crore, because no material found during the survey supported any conclusion of suppressed purchases or sales. In Mangal Sen Ram Sanohi v. Commissioner of Sales Tax, U.P., the Court held that fixing a random figure of turnover without disclosing its basis is not a best judgment assessment.

Under the GST law

The same approach is now being applied to GST demands. In Neutral Glass Allied Industries Pvt. Ltd. (Gujarat High Court), a demand confirmed solely on the difference between the sales ledger and the figure reported in Form 3CD, without establishing a taxable supply under Section 7, was set aside and remanded. In K.N. Raj Constructions v. State Tax Officer (Madras High Court, order dated 03.12.2025), the Court held that turnover figures cannot be adopted mechanically for proceedings under Section 74 without verifying the actual supplies and receipts, and directed a forensic examination by the audit wing.

The income tax analogy

Even under the Income Tax Act, which has the deeming provision in Section 68, the courts have refused to treat gross bank deposits as income without more. In PCIT v. Shitalben Saurabh Vora, (2021) 133 taxmann.com 441 (Guj.), the Gujarat High Court upheld the Tribunal’s view that deposits could not be treated as income on a standalone basis without considering the withdrawals, even though the assessee had not maintained books. If gross credits cannot be taxed wholesale under a statute which contains a deeming fiction, the case against doing so under a statute which contains none is considerably stronger.

What a bank credit may actually represent

In the ordinary working of a small business, the credit side of a current account carries many kinds of receipts. Only some of them have anything to do with sales, and those that do have usually already been declared.

Conclusion

The GST law taxes supplies. It does not tax money. A credit in a current account is a fact about money, and until it is connected with an identified supply to an identified person, it tells the assessing officer nothing about tax.

Every strand of the analysis leads to the same place. The statute defines consideration by reference to a supply and contains no fiction that converts unexplained receipts into turnover. The law of evidence refuses to let account entries fasten liability without corroboration and puts the burden of proving a supply on the person who alleges it. The accounting standards recognise revenue only on the transfer of goods or the performance of services to an identified customer, and treat unexplained receipts as liabilities rather than income. The auditing standards treat an unexplained difference as the beginning of an inquiry, not its end. And the courts, from Raghubar Mandal in 1957 to the Allahabad High Court in 2025, have insisted that an estimate must be founded on material and must not be arbitrary.

None of this means that a dealer may ignore a genuine discrepancy. Where the Department brings independent material showing that particular credits are the price of particular undeclared supplies, the demand will stand on that material. What the law does not permit is a short cut: totalling the credits, subtracting the declared turnover, and calling the difference a sale. Practitioners should resist that short cut at every stage, from the first reply to the writ court, and should insist on the reconciliation that both law and accounting require.

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Ravindra Kumar Rastogi, Advocate, Chamber No. 5, High Court, Allahabad | Mobile: 9897493155