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
Cases Discussed
- CIT v. President Industries (Gujarat High Court), (2002) 258 ITR 654 (Guj.)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These 2 appeals, filed by the assessee against the separate orders of the learned Commissioner of Income Tax (Appeal) (hereafter- learned CIT(A)) under the provision of section 250 of the Income Tax Act, 1961 (hereafter- the Act), were heard together.
First; we take up ITA No. 647/Bang/2026 for the AY 2016-17
2. The assessee in the memo of appeal has raised 16 grounds of appeal which, for the sake of brevity and convenience, we are not inclined to reproduce here.
3. At the outset, we note that ground Nos. 1, 10 and 11 are general in nature and does not call for any fresh adjudication. Hence, the same are dismissed as general/ infructuous.
4. The Ground are interconnected and pertains to the addition made by the AO which was subsequently confirmed by the Id. CIT-A under section 69A and 69 of the Act.
5. The brief facts of the case on hand are that the assessee, an individual, is engaged in the business of real estate. The assessee failed to file the ROI for AY 2016-17. Information available with the Department showed cash deposits of Rs. 30,56,500 in an account maintained with South Indian Bank and Rs. 34,45,500 in an account maintained with Axis Bank. It was also reported that the assessee had purchased an immovable property for Rs. 85,00,000 during the year. Accordingly, proceedings were initiated by passing an order u/s 148A(d) of the Act and issuing notice u/s 148 of the Act.
5.1 The assessee did not file the ROI in response to the notice issued u/s 148 of the Act. Assessee also failed to furnish the details and supporting evidence called for through various notices issued u/s 142(1) of the Act and show-cause notices. The assessee sought an adjournment on 31.10.2023 but did not make any further submission or explain the source of the bank deposits and the investment in the property.
5.2 The AO issued notices u/s 133(6) of the Act to South Indian Bank, Axis Bank and the seller of the property. On the basis of the information received from South Indian Bank, the AO treated deposits and loan repayments aggregating to Rs. 1,18,93,894 in the South Indian Bank account and deposits of Rs. 34,45,500 in the Axis Bank account as unexplained money. Accordingly, the total amount of Rs. 1,53,39,394 was added u/s 69A of the Act and taxed u/s 115BBE of the Act.
5.3 The seller of the property confirmed that the assessee had purchased the property for Rs. 85,00,000.00 only. Since the assessee did not explain the source of the investment, the AO made a further addition of Rs. 85,00,000 u/s 69 of the Act. The assessment was completed ex parte u/s 144 r.w.s. 147 of the Act at a total income of Rs. 2,38,39,394.00 only.
5.4 Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A).
5.5 Before Ld. CIT(A), the assessee submitted that he was engaged in the business of real estate, including purchase, development and sale of properties. It was contended that the return of income could not be filed as the e-filing credentials were with the auditor and the assessee was under the belief that the statutory compliances were being handled by him. The assessee further submitted that the notices issued u/s 148A, 148, 142(1) and 143(2) of the Act were not received by him and that he came to know about the assessment only after receiving a recovery communication from the Department.
5.6 The assessee explained that the delay of 168 days in filing the appeal occurred because the assessment order and demand notice were not received by him and the matter was being handled by his auditor and accountant. He, therefore, requested that the delay be condoned.
5.7 On merits, the assessee submitted that the cash deposits and the investment in the property represented receipts and sale proceeds from his real estate business. It was contended that the AO had wrongly treated the entire bank deposits of Rs. 1,53,39,394 as unexplained money u/s 69A of the Act and the property investment of Rs. 85,00,000 as unexplained investment u/s 69 of the Act. According to the assessee, only the business income could have been reasonably estimated u/s 44AD of the Act instead of taxing the entire deposits and investment.
5.8 The Ld. CIT(A) observed that the appeal was required to be filed on or before 14.03.2024, whereas it was filed on 30.08.2024, resulting in a delay of about five and a half months. The Ld. CIT(A) held that the assessee had merely stated that the assessment order was not received but had not filed any affidavit or supporting evidence to establish sufficient cause for the delay. Accordingly, the Ld. CIT(A) refused to condone the delay u/s 249(3) of the Act and dismissed the appeal in limine. Since the appeal was dismissed on the ground of limitation, the additions made by the AO were confirmed without adjudicating the grounds on merits.
6. Aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before us.
7. The Ld. AR before us has filed a paper book running from pages 01 to 64. The assessee submitted that the Ld. CIT(A) erred in dismissing the appeal in limine on account of a delay of 168 days without deciding the issues on merits. He submitted that the delay occurred because the assessee had not received the assessment order and was under the bona fide belief that the proceedings were being handled by his auditor. The assessee came to know about the assessment only upon receipt of the recovery communication and thereafter filed the appeal immediately.
7.1 The Ld. AR further submitted that the delay was neither intentional nor deliberate. The Id. AR for the assessee has undertaken that the assessee shall remain vigilant in future and shall duly comply with all notices and proceedings. He requested that the delay before the Ld. CIT(A) be condoned and the matter be restored for adjudication on merits. Further, on merits, the assessee has filed a written submissions before us and submitted that the assessment was completed ex parte mainly on the basis of AIR information and bank transactions, without examining the actual nature and source of the entries. The AO treated aggregate bank credits of Rs. 1,53,39,394 as unexplained money u/s 69A of the Act and further added Rs. 85,00,000 as unexplained investment u/s 69 of the Act towards purchase of an immovable property.
7.2 The Id. AR submitted that the assessee was engaged in the real estate business and that the bank accounts were running business accounts containing continuous deposits and withdrawals. It was pointed out that the Axis Bank account reflected total credits of Rs. 2,84,15,944 and total debits of Rs. 2,84,02,997, whereas the South Indian Bank account reflected total credits of Rs. 1,14,28,507 and total debits of Rs. 1,18,71,222. According to the assessee, the movement of funds established that the bank entries represented business receipts and corresponding business payments and could not be treated in their entirety as unexplained income.
7.3 The assessee contended that even where the bank receipts were treated as unrecorded business turnover, only the profit element embedded in such turnover could be brought to tax. The entire gross receipts could not be assessed as income. Reliance was placed on the judgment of Hon’ble Gujarat High Court in the case of CIT v. President Industries in (2002) 258 ITR 654 (Guj.)
7.4 The assessee further submitted that the addition of Rs. 85,00,000 towards purchase of property resulted in double taxation. The property consideration was paid through the same Axis Bank account whose deposits had already been considered by the AO while making the addition u/s 69A of the Act. The assessee had paid Rs. 30,00,000, another Rs. 30,00,000 and Rs. 25,00,000 through banking channels. Therefore, once the credits in the bank account were brought to tax, the utilization of the very same funds for purchasing the property could not again be treated as an independent unexplained investment.
7.5 It was also submitted that the AO had not examined the source of each credit, withdrawals, transfers between accounts, redeposits, business receipts, loans or other explained entries. The conditions for invoking sections 69 and 69A of the Act were therefore not satisfied. According to the assessee, mere non-compliance with notices could not substitute the statutory requirement of establishing that the money or investment was unexplained.
7.6 With respect to the Axis Bank transactions of Rs. 34,45,500, the assessee submitted that the AO himself recorded that the notice issued u/s 133(6) of the Act to Axis Bank remained unanswered. Nevertheless, the amount was included in the addition merely on the basis of AIR information without obtaining the bank statement or conducting any independent enquiry. The assessee contended that AIR information could only be a starting point for enquiry and could not, by itself, constitute conclusive evidence for making an addition.
7.7 Without prejudice, the assessee submitted that if the bank receipts were considered to represent business turnover, only the net profit embedded therein should be estimated by adopting a reasonable profit rate having regard to the nature of business and the assessee’s past results. He therefore requested that the additions made on the gross bank transactions and the separate addition towards the property investment be deleted or suitably restricted.
8. The Ld. DR, on the contrary, vehemently relied upon the order of the Ld. CIT(A). However, he submitted that the matter may be restored to the Ld. CIT(A), subject to a direction to the assessee to remain vigilant and cooperate in the proceedings.
9. We have heard the rival submissions of both the parties and perused the materials available on record. The Ld. CIT(A) dismissed the appeal in limine on account of a delay of 168 days without adjudicating the additions on merits. The explanation of the assessee is that the assessment order was not received by him and that he came to know about the assessment only upon receipt of the recovery communication.
The Id. AR for the assessee before us has also undertaken that he shall remain vigilant in future and shall fully cooperate in the proceedings.
9.1 At the same time, we should not ignore the careless and negligent actions of the assessee. The assessee did not file the ROI and did not respond to the notices sent during the assessment process. Even before the Ld. CIT(A), the assessee did not provide proper evidence to explain the delay. A taxpayer cannot ignore statutory proceedings and then seek relief by blaming the auditor or accountant. The assessee is responsible for monitoring his tax matters and following the notices issued by the Department.
9.2 Be that as it may be, we find certain that there are some undisputed facts enumerated as under:
i. On perusal of the bank statements, it is noted that there are regular debit and credit entries, indicating continuous movement of funds through bank accounts. The AO has considered only the credit entries as income while ignoring the corresponding debits and withdrawals. If the credits are treated as business receipts, the related payments and withdrawals must also be examined. The entire bank credits cannot be treated as income, and only the profit element, if any, can be brought to tax.
ii. The AO did not examine the nature of each transaction and separately identify cash deposits, cheque receipts, transfers between accounts, redeposits, loan receipts, property sale receipts and other explained credits. The debit and credit entries were not matched to determine the actual movement and rotation of funds.
Even in a best judgment assessment, the AO must adopt a fair and reasonable method and cannot treat the gross bank credits as income merely because the assessee failed to comply with the notices.
iii. If the transactions are found relating to the assessee’s real estate business, the income should be determined by applying a reasonable and scientific method, such as peak credit, turnover analysis, past profit rate and the pattern of transactions, instead of treating the entire deposits as unexplained income.
iv. The AO should also ensure that the same amount is not taxed twice. Withdrawals from one account and redeposits in the same or another account shall not be treated as fresh unexplained income without proper verification. The assessee’s claim that certain amounts were received from the sale of properties should be verified from the sale deeds, confirmations, books of account and bank statements. If the same funds were used for purchasing another property, due credit should be allowed so that the amount is not added once as unexplained bank deposits and again as unexplained investment.
9.3 In view of the above, considering the large additions involved, undertaken of the Id. AR on behalf of the assessee and in the interest of justice, we are inclined to overlook the delay before the Id. CIT-A by condoning the same and send the matter back to the AO for a fresh review on its merits. The assessee must stay alert, provide all relevant evidence, and cooperate fully without asking for unnecessary delays. Hence, we direct the AO to examine the complete bank statements by considering both the debit and credit entries. The AO shall identify the nature of the transactions, verify transfers, withdrawals, redeposits and business receipts, and ensure that the same amount is not taxed more than once. If the transactions are found relating to the assessee’s business, only the profit element shall be brought to tax by applying a fair and reasonable method, such as peak credit or an appropriate profit rate based on the facts of the case. Thus, the grounds raised by the assessee are accordingly allowed for statistical purposes.
10. In the result, the appeal of assessee is allowed for statistical purposes.
Coming to ITA 684/Bang/2026 relevant to AY 2018-19
11. At the outset, we note that since the facts and issues involved in the present appeal are identical to those considered by us in ITA No. 647/Bang/2026 relevant to AY 2016-17, our findings recorded in para 9 above shall apply mutatis mutandis to the present appeal as well.
12. In the result, the appeal of assessee is allowed for statistical purposes.
13. In the combined result, both appeals of assessee are allowed for statistical purposes.
Order pronounced in court on 6th day of August, 2026
