Bank Deposits Treated as Business Turnover – ITAT Reduces Profit Rate from 10% to 2%

ITO Vs MisarYar Khan (ITAT Lucknow)

The ITAT Lucknow upheld the view that large bank deposits of ₹2.69 crore could not be taxed as unexplained income under Section 69A, and instead represented business turnover from the assessee’s Zari & Zardozi business. Accordingly, invocation of Section 69A read with Section 115BBE was rejected.

While the CIT(A) had already granted relief by treating the deposits as turnover and estimating income at 10%, the Tribunal found this rate to be arbitrary and excessive. Relying on the assessee’s past accepted profit margins (around 1.65%-2.14%), the ITAT held that estimation must be reasonable and based on past history.

The Tribunal therefore directed that income be estimated at 2% of turnover, significantly reducing the taxable income.

As a result:

• Revenue’s appeal was dismissed.
• Assessee’s cross objection was partly allowed.
• Addition u/s 69A was effectively replaced with reasonable business income estimation.

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

The appeal filed by the Revenue and the Cross Objection filed by the assessee are against the impugned appellate order dated 28.08.2025 of National Faceless Centre (NFAC), Delhi/ of learned Commissioner of Income Tax (Appeals).The grounds taken by the Revenue and the assessee in the appeal, and cross objection respectively, are as under:

ITA No. 738/Lkw/2025 A.Y. 2017-18 Revenue’s appeal

“On perusal of the order u/s 250 of the income Tax Act 1961 passed by the Id. CIT (A), National Faceless Appeal Centre(NFAC), in Appeal No. NFAC/2016-17/10465818 vide Order No ITBA/NFAC/S/250/2025-26/1080109430(1) dated 28.08.2025 and in view of the facts and circumstances of the case, I am of the opinion that the Ld. CIT(A) has erred in;

i. Law and on facts of the case by ignoring the fact that the Assessing Officer has made the addition after proper application of mind while framing the assessment order. The Ld. CIT(A) has not appreciated that the assessee during the course of assessment proceedings did not furnish nature and source of credit entries appearing in the bank account during the year under consideration despite being given various opportunities to do so.

ii. Law and on facts of the case by not going into the details and the facts of the assessment order that if the assessee has not been able to explain credits/cash deposits of Rs.2,69,52,847/- by providing satisfactory reasons during the course of assessment proceedings to make the department believe that transactions were genuine and related to business activities.

(iii) Law and on facts of the case that the CIT(A) was correct in upholding that the AO was not correct in making addition u/s 69 of the Income Tax Act, 1961..”

C.O. No.01/Lkw/2026 A.Y. 2017-18 Assessee’s appeal

“1. Because the Ld. CIT(A) has erred on facts & law while rejecting the ground of appeal relating to framing of assessment u/s 147rws 144 where additions have been made on issue of deposits of Rs. 2,69,52,847/- in the bank of the appellant whereas notice u/s 148A(b) was issued to reassess cash deposits of Rs. 13,16,500/- in the bank account of the appellant and purchase of immovable property for Rs. 56,46,000/- where ITR was not filed for relevant year. The reassessment framed on issues different as raised in notice u/s 148A(b) passed by the Assessing Officer is illegal and liable to be quashed.

2. Because the Ld. CIT (A) has erred in applying Net Profit Rate of 10% on zari business gross receipts of Rs. 2,69,52,847/- deposited into the bank account of the appellant. The Net Profit computed at Rs. 26,95,284/- is highly excessive, not in accordance with the previous history of the case and therefore liable to be revised.”

B. In this case, notice under section (u/s.) 148 of the Income Tax Act, 1961 (in short the ‘Act’) dated 23.02.2024 was issued to the assessee, thereby initiating proceeding u/s. 147 of the Act. The aforesaid notice was issued on the basis of information received by the Assessing Officer (AO) throughInsight portal of Income Tax Department under RMS category, that the assessee had deposited cash amounting to Rs.13,16,500/- in Bank and that the assessee sold in immovable property for Rs.56,46,000/-and further, that the assessee had sold immovable property for Rs.56,46,000/-. The Assessing Officer also issued notice u/s.133(6) of the Act to the Punjab National Bank to obtain bank statement of the assessee; in response to which, the bank furnished the information on 14.10.2024. The Bank statements showed total deposits of Rs.2,69,52,847/-.

C. During the proceedings u/s. 147 r.w.s. 148 of the Act, the assessee furnished copy of the immovable property sold, which showed that the assessee was not the sole owner of the property, and instead, the assesee’s shares in property sold was only 1/9^th. The Assessing Officer, based on 1/9^th share of the assessee in the property, computed income of Rs.6,27,330/-as ‘Long Term Capital Gain’ on the immovable property sold. Further, the aforesaid amount of Rs.2,69,52,847/- being total credits in the Bank accounts of the assessee, was added as assessee’s income treating the same as unexplained investment u/s. 69 r.w.s. 115BBE of the Act. The assessee filed appeal before the ld. CIT(A) vide impugned appellate order dated 28.08.2025. The assessee’s appeal was partly allowed. The ld. CIT(A)’s order allowed partial relief on the ‘Long Term Capital Gain’ computed by the AO at Rs.6,27,330/-. As regards the aforesaid addition of Rs.2,69,52,847/- made by the Assessing Officer u/s. 69A of the Act, the ld. CIT(A) treated this amount as assessee’s turnover from Zari and Zardozi business. The ld. CIT(A) estimated the assessee’s income from this business on the aforesaid turnover of Rs. 2,69,52,847/- at 10% of the total amount of Rs.2,69,52,847/-. Thus, out of total amount of Rs.2,69,52,847/-, an amount of Rs.26,95,284/- was estimated by the ld. CIT(A) as assessee’s income from Zari and Zardozi business, and the remaining amount was deleted. The ld. CIT(A) also disapproved invocation and Section 69A r.w.s. 115BBE of the Act.

(D) In the course of appellate proceedings of the Income Tax Appellate Tribunal, a paper book containing the following particulars furnished from the assessee’s side:

(E) At the time of hearing, the ld. Departmental Representative (DR) placed reliance on the assessment order and submitted that addition made u/s. 69A of the Act was a consequence of the assessee not furnishing the required information during assessment proceedings. He also submitted that the assessee’s claim that the assessee was engaged in Zari and Zardozi business was not supported by the materials on record. He submitted that the addition made u/s. 69A of the Act amount to Rs.2,69,52,847/- should be confirmed.

(E.1) The ld. Counsel for the assessee submitted that the assessee was in business ofZari and Zardozifor several years. He also drew our attention to the fact that the assessee’s income for Assessment Year 2015-16, from Zari and Zardozibusiness, based on audited accounts of the assessee, was Rs.14,77,030/- on total turnover of Rs.6,89,61,445/-which amounted to income of 2.14% on the turnover. Further, he submitted that assessee’s income from Zari and Zardozi business in A.Y. 2016-17, based on the audited account, was Rs.14,44,660/- at total turnover of Rs.8,75,49,075/-, which amounted to 1.65% of the turnover. He also submitted that the assessee’s returns filed for A.Ys. 2015-16 and 2016-17 showing the aforesaid income of Rs.14,77,030/-and Rs.14,42,660/- in A.Ys. 2015-16 and 2016-17 respectively, at the rate of 2.14% and 1.65% of the total turnover respectively was accepted by the Income Tax Department. He submitted furthermore, that the nature of Zari and Zardozi business is such in which the income estimated by the ld. CIT(A) at 10% of turnover was excessive and unreasonable. He contended that in this line of business the rate of profit estimated by the ld. CIT(A) is unimaginable and unheard of.

(E.2) We have heard both sides, and perused the materials on record. That the assessee has been Zari and Zardozi business is evident from record. In fact, the AO himself, in the aforesaid assessment order dated 04.03.2025, has commented that the assessee is engaged in the business of Zari and Zardozi work during the financial year under consideration. The Assessing Officer has also further commented that the assessee in his reply stated that the cash withdrawals or is day to day expenses and business expenses also. Moreover, the assessee has filed returns for the aforesaid Assessment Years of A.Ys. 2015-16 and 2016-17, showing Zari and Zardozi business and income earned therefrom has been accepted by the Income Tax Department. Therefore, in view of these facts, the view taken by the ld. CIT(A) that deposits in the Bank accounts were the assessee’s business turnover from Zari and Zardozi business is well founded on sound basis. For these reasons, view taken by the ld. CIT(A) in not approving invocation of Section 69 of the Act r.w.s. 115BBE of the Act as unexplained investments is also in accordance with evidence and materials on record. These view taken by the ld. CIT(A) are therefore upheld.

(E.2.1) The next issue is estimation of income from Zari and Zardozibusiness of the assessee. The rate of 10% on total turnover, as adopted by the ld. CIT(A) for estimation of assessee’s income is adhoc and based on guess work. As the ld. CIT(A) has not provided any basis or reasoning as to why the rate of 10% was adopted by the ld. CIT(A). The ld. CIT(A) has not referred to past record of the assesse either. As mentioned earlier in forgoing paragraphs of this order income of the assessee from Zari and Zardozi business was at the rate 2.14% and 1.65% respectively, for earlier years i.e. A.Ys. 2015-16 and 2016-17 respectively. Having regard to the past record of assessee’s income from Zari and Zardozi business, the rate of 10% adopted by the ld. CIT(A) as on assessee’s total turnover from Zari and Zardozi business, for estimating assessee’s income from the business, is found to be excessive and unreasonable. In our view, the rate of 2%, instead of 10% adopted by ld. CIT(A), will be just and reasonable in the facts and circumstances of the case. Accordingly, the Assessing Officer is directed to compute the assessee’s income from Zari and Zardozi business by applying the rate of 2% on the total turnover for the purpose of estimating business income from Zari and Zardozi business; and determine assessee’s total income accordingly. In view of these directions, grounds taken by Revenue in the appeal filed by the Revenue are dismissed, and Ground No.2 of Cross Objection filed by the assessee is partly allowed.

F. Ground No.1 taken by the assessee was not pressed by ld. Counsel for the assessee, at the time of hearing before us. Therefore, Ground No.1 in the assessee’s Cross Objection is dismissed, being not pressed.

G. In the result, appeal filed by Revenue is dismissed and Cross Objection filed by the assessee is partly allowed.

(Order pronounced in the open court on 07.04.2026)