Cash Deposits in Cases of Businesses Covered under Presumptive Taxation

R.S. Kalra 09 May 2025 21,060 Views 0 comment Print Income Tax | Articles, Featured

1. Introduction

Various presumptive tax schemes are available under the Income-tax Act. The most relevant and most common for the purpose of our discussion are the provisions of section 44AD, section 44ADA and section 44AE of the Act. The provisions of these sections read with section 44AA of the Act relaxes the requirement of maintenance of books of accounts for the eligible assessee unless the assessee is offering lesser income than specified in respective sections. The element of cash transactions in the business qualifying under these sections is relatively more than the business which are not governed by these sections. As such, these assessees will not be having recourse to the regular books of accounts so as to establish the correctness of the claim that the cash deposited is out of normal business operations of the assessee.

An issue may arise where the assessee engaged in such business, say for example assessee assessed under section 44AD, has deposited cash in the bank account and during the course of the assessment, the assessee is not able to substantiate the same conclusively Present section 44AD, 44ADA and section 44AE were introduced to help small business persons/entities and goods carriage operators respectively. These provisions exempt these categories of assessees from maintaining the books of accounts if such assessees admit incomes at the specified presumptive rate of profit. In a case falling under section 44AD/AE, in the absence of the books of account, the assessee is not obliged to explain individual deposits in the bank accounts so long as the amounts deposited during the year can reasonably be attributed to business receipts. In view of the provisions of section 44AD/44AE, as the particular assessees need not maintain books of account, they can’t be punished for the non-maintenance thereof by treating as unexplained some of the business receipts deposited in banks. Once the turnover declared by the assessee is accepted by the Revenue, there can be no further additions on the ground that there are some discrepancies in the books or there is no direct evidence linking the sales with all the deposits. [CIT v Surinder Pal Anand [2010] 192 Taxman 264 (P&H); CIT v Pradeep Shantilal Patel [2014] 42 taxmann.com 2/221 Taxman 436 (Guj): Nand Lal Popli v DCIT [2016] 71 taxmann.com 246/160 ITD 413 (Chd.-Trib.); Thomas Eapen v ITO [2020] 113 taxmann.com 268/180 ITD 741 (Cochin-Trib.)].

In other words, in cases covered under Section 44AD/AE, the question of treating bank deposits as unexplained moneys arises only if such deposits have no nexus with the gross receipts.

The basic edifice of presumptive scheme under section 44AD is assessee would not be called to maintain books under the Act and get them audited if profit shown by assessee is otherwise in accordance with prescription of section 44AD of the Act. But maintaining books of account is sine qua non for making addition under section 68. Since section 44AD does not obligate assessee to maintain books, provisions of section 68 could not be invoked where assessee had filed return of income under provisions of section 44AD without maintaining books of account. The non-obstante clause in Section 44AD overrides only Sub Section 28 to 43C but not Section 68 to Section 69D. But then, in respect of bank deposits AO could resort to Section 69A only if there is some material on record to show that the deposited amounts do not relate to sales covered under Section 44AD. In other words, the Assessing Officer may treat such deposits as income u/s. 69A only if he takes out the deposits from out of the ambit of Section 44AD/44AE. Without such exercise by the Assessing Officer, no such addition could be made

(a) Deposits in bank account maintained by the assessee

This is the case of a person who has filed his return of income under presumptive taxation. He has made certain deposits in his bank account. Now a question arises, whether these deposits in bank can be transformed as unexplained cash credit under section 68 of the Act.

Before proceeding further to decide this issue it would be imperative to refer to the relevant provisions of section 68 of the Act. The same are reproduced herein under:

“68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the assessing officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:”

(b) The pre-requisites for invoking the provisions of section 68 are-

i. any sum is found credited in the books of an assessee.

ii. the assessee offers no explanation about the nature and source thereof.

iii. the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory.

(c) Maintenance of books of account is sine qua non for making addition under section 68

A bare perusal of section 68 of the Act makes explicitly clear that the addition can be made under the section if, any sum is found credited in the books maintained by the assessee. The Hon’ble High Court of Gauhati in the case of Anand Ram Raitani v CIT (1997) 223 ITR 544 (Gau): 1997 TaxPub (DT) 0638 (Gau-HC) has held that existence of books of account is a condition precedent for invoking the provisions of section 68 by the assessing officer. The relevant extract of the judgment is as under:

“We have gone through section 68 of the Act. The assessing officer before invoking the power under section 68 of the Act must be satisfied that there are books of account maintained by the assessee and the cash credit is recorded in the said books of account and if the assessee fails to satisfy the assessing officer, the said sum so credited has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for invoking of the power. Discharging of burden is a subsequent condition. If the first point is not fulfilled the question of burden of proof does not arise. The assessing officer made the assessment by making addition of the amount for which disallowance was claimed Mr. Bhuyan very candidly admits that addition was made in exercise of the power under section 68 of the Act, therefore, the first condition necessary for invocation of the power is the existence of the books of account.

√ As per section 68 only amounts that are found credited in the books of account of the assessee during the year can be added. Loans received in the earlier years cannot be added. ITO v Nasir Khan J. Mahadik [2012] 134 ITD 166 (Mum)

√Where assessee was engaged in business and required to maintain books of accounts, not doing so would not disentitle the Department from invoking section 68. Assessee cannot take advantage of his own wrong. Arunkumar J. Muchhala v CIT 399 ITR 256 (Bom)

√ The High Court held that the assessee has admitted that books were maintained but that they have not been produced before the Assessing Officer. Addition under section 68 sustained. Sudhir Kumar Sharma HUF v CIT [2014] 46 taxmann.com 340 (P&H HC). SLP dismissed in [2016] 69 taxmann.com 219 (SC)

2. Meaning of Books of Accounts

The “books or books of account” have been defined in section 2(12A) of the Act. The same reads as under:–

“2(12A) books or books of account” includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electromagnetic data storage device;”

The definition of books under the Act is inclusive. A perusal of the definition shows that the same does not include bank passbook or bank statement. A conjoint reading of above provisions would thus lead to the conclusion that the addition under section 68 can be made only where any amount is found credit in the books as defined under section 2(12A) of the Act maintained by the assessee.

(d) Books of the assessee and not any other person

It is to be noted that the books in which credit appears should be of the assessee only. Thus, any credit in the books of one person cannot be assessed in the hands of other person under section 68. [Shanta Devi v CIT 171 ITR 532 (P&H); Anand Ram Raitani v Raitani 223 ITR 544 (Gau)]

(e) Balance sheet and profit and loss accounts are not Books of account. They are just by products

The Hon’ble Madras High Court in case of CIT v Taj Borewell (291 ITR 232) has held that the Profit and Loss Account and Balance Sheet cannot be said to be books of account of the assessee. On the facts of that case, the Court has given the finding that “object of a P&L a/c is to ascertain the income of a business and by offsetting the expenses of earning that income, to ascertain the net increase (profit) or decrease (loss) in the traders’ “net worth” for the period while Balance sheet lists the assets and liabilities and equity accounts of the company. It is prepared ‘as on’ a particular day and the accounts reflect the balances that existed at the close of business on that day.

(f) Loose sheet or loose papers are not books of account.

Going by the definition of the books as given by section 2(12A) of the Act, loose sheet found during search could not be treated as books for the purpose of section 68 and also any entry in such sheet cannot be treated a credit entry. The entries in loose papers/sheets are irrelevant and inadmissible as evidence. Such loose papers are not “books of account” and the entries therein are not sufficient to charge a person with liability

Common Cause (A Registered Society) v UOI (2017) 394 ITR 220
CB I. v. C. Shukla (1998) 3 SCC 410

(g) Objectives of books of account

In the case of Sheraton Apparels v ACIT (2002) 256 ITR 20 (Bom HC) Bombay High Court laid down the following objectives of books of accounts:

Main objectives of the books of account are to maintain a record of business:

to calculate profit earned or loss suffered during the period of time;
to provide credible data and information to file the tax returns;
to depict the financial position of the business;
to portray the liquidity position;
to provide up to date information of assets and liabilities with a view to derive information so as to prepare a profit and loss account and draw a balance-sheet to determine income and source thereof;
It cannot be understood to mean compilation or collections of sheets in one volume;
Not diaries which are maintained merely as a man’s private record;
Not the ones prepared by him as may be in accordance with his pleasure or convenience to secretly record secret, unaccounted clandestine transactions not meant for the purposes of the Act, but with specific intention or desire on the part of the assessee to hide or conceal income so as to avoid imposition of tax thereon.

(h) Whether bank pass book is considered to be books of accounts?

It is to be noted that a bank passbook is not considered as books of account due to following reasons:

The relationship between the banker and the customer is one of debtor and creditor and not a trustee and beneficiary.
It is only a copy of the constituent’s account in the books maintained by the bank.
It is not as if the pass book is maintained by the bank as an agent of the constituent.
Nor can it be said that the pass book is maintained by the bank under the instructions of the constituent.

(i) Following judicial pronouncements support this issue that a pass book is not a book of account

The Hon’ble Bombay High Court in the case of CIT v Bhaichand N. Gandhi (supra) upholding the decision of Tribunal concluded that bank passbook does not constitute books as envisaged under section 68 of the Act. The relevant extract of the judgment reads as under:–

“…………. . the pass book supplied by the bank to its constituent is only a copy of the constituent’s account in the books maintained by the bank. It is not as if the pass book is maintained by the bank as the agent of the constituent, nor can it be said that the pass book is maintained by the bank under the instructions of the constituent. In view of this, the Tribunal was, with respect, justified in holding that the pass book supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions. In our view, the Tribunal was justified in the conclusions at which it arrived.”

We find that the aforesaid view of the Hon’ble Bombay High Court had thereafter been followed by a ‘SMC’ bench of the ITAT, Mumbai in the case of Smt. Manshi Mahendra Pitkar v ITO 1(2), Thane (2016) 73 taxmann.com 68 (Mumbai Trib.) wherein it was held as under:—

“I have carefully considered the rival submissions. In the present case the addition has been made by the Income Tax authorities by treating the cash deposits in the bank account as an unexplained cash credit within the meaning of section 68 of the Act. The legal point raised by the assessee is to the effect that the bank Passbook is not an account book maintained by the assessee so as to fall within the ambit of section 68 of the Act. Under section 68 of the Act, it is only when an amount is found credited in the account books of the assessee for any previous year that the deeming provisions of section 68 of the Act would apply in the circumstances mentioned therein. Notably, section 68 of the Act would come into play only in a situation Where any sum is found credited in the books of an assesse.

The Hon’ble Bombay High Court in the case of Shri Bhaichand Gandhi (supra) has approved the proposition that a bank Pass Book maintained by the bank cannot be regarded as a book of the assessee for the purposes of section 68 of the Act. Factually speaking, in the present case, assessee is not maintaining any books of account and section 68 of the Act has been invoked by the Assessing Officer only on the basis of the bank Pass Book. The invoking of section 68 of the Act has to fail because as per the judgment of the Hon’ble Bombay High Court in the case of Shri Bhaichand N. Gandhi (supra), the bank Pass Book or bank statement cannot be construed to be a book maintained by the assessee for any previous year as understood for the purposes of section 68 of the Act. Therefore, on this account itself the impugned addition deserves to be deleted. I hold so. “We further find that a similar view had also been arrived a tin a ‘ third member ‘ decision of the Tribunal in the case of Madhu Raitani v ACIT (2011) 10 taxmann.com 206 (Gauhati) (TM), as well as by the co-ordinate Benches of the Tribunal in the case of Mehul v Vyas v ITO (2017) 164 ITD 296 (Mum) and ITO, Barabanki v Kamal Kumar Mishra (2013) 33 taxamann.com 610 (Lucknow)

The Co-ordinate Bench of the Tribunal in the case of Shri Kokarre Prabhakara v ITO (supra), in a similar situation where the assessee had declared income under section 44AD of the Act without maintaining books and the assessing officer had invoked the provisions of section 68 of the Act, the Tribunal deleted the addition by placing reliance of various decisions of the Tribunal holding that where the returns are filed on the basis of income declared under section 44AD of the Act, there cannot be any application of section 68 of the Act.

In the case of Vishan Swaroop Gupta [TS-109-ITAT-2021(JPR)] Jaipur ITAT deletes addition under section 68 for AY 2015-16, made by Revenue based on unexplained cash deposited in assessee’s (retired doctor) bank account, holds credit in bank account not equivalent to credit books of accounts; The addition was partly upheld by CIT(A) to the tune of `4.03 lakhs; ITAT finds force in assessee’s contention that provisions of section 68 which requires any sum to be credited in the ‘books of accounts’ of assessee (with no/unsatisfactory explanation of source) to attract an addition, should be construed strictly; Accepts assessee’s contention that as per section 44AA, assessee is not required to maintain books of account and the pre-requisite condition for invoking section 68 is the credit entries in the books of account of the assessee; Relies on Bombay HC ruling in Bhaichand N. Gandhi, and Mumbai ITAT ruling in Manshi Mahendra Pitkar, holds “a bank pass book or bank statement cannot be considered to be a ‘book’ maintained by the assessee for any previous year for the purpose of Section 68”:

In the case of Dinesh Kumar Verma [TS-703-ITAT-2020(Mum)] Mumbai ITAT deletes section 68 made for assessee-individual during AY 2014-15, holds that section 68 cannot be invoked where the assessee has filed return of income under section 44AD without maintaining books of account; Revenue had made additions under section 68 w.r.t assessee’s cash deposit into his bank account treating as unexplained cash; Perusing section 68, ITAT states that the section “makes explicitly clear that the addition can be made under the section if, any sum is found credited in the books maintained by the assessee.”; Relies on Gauhati HC ruling in Anand Ram Raitani to hold that maintenance of books by the assessee is sine qua non for making addition under section 68; Rejects Revenue’s contention that passbook of assessee’s bank account constitutes books of account; Opines that “Since section 44AD does not obligates the assessee to maintain books, the provisions of section 68 cannot be invoked where the assessee has filed return of income under the provisions of section 44AD…” :

In the case of Smt. Babbal Bhatia [TS-306-ITAT-2018(DEL)] Delhi ITAT deletes addition under section 68 [dealing with unexplained cash credits] in respect of cash deposited in the bank accounts of assessee-individual during AYs 2010-11 to 2012-13, despite assessee being unable to explain the sources of cash deposits; Holds that section 68 is applicable only when the credits are found in the books of account of assessee, relies on jurisdictional HC ruling in Ms. Mayawati; Clarifies that a credit in the bank account of an assessee cannot be construed as a ‘credit’ in the books of the assessee, remarks that The account of the assessee in the books of the bank is different from the books of the assessee.”; Noting that assessee had made it very clear in the returns of income that she is not maintaining books of account, ITAT deletes addition; Relies on Bombay HC ruling in Bhaichand N Gandhi, distinguishes Revenue’s reliance on Delhi ITAT Special Bench ruling in Manoj Aggarwal noting that it was delivered before jurisdictional HC ruling in Mayawati, also distinguishes Revenue’s reliance on Bombay HC ruling in Arun Kumar J. Muchhala on facts.

Sri Girish v Yalakkishettar v The Income Tax officer (ITA No. 354/Bang/ 2019) (dated 27.01.2020) (SMC) (Bangalore)

In the present case, the Assessing Officer found certain deposits as unexplained in the bank account of the assessee with ICICI Bank, Dharwad branch at `36.26 lakh. In my opinion, when moneys are deposited in the bank account, the relationship that is constituted between the banker and the customer is one of the debtor and creditor and not of trustee and beneficiary. Applying this principle, the bank statement supplied by the bank to its constituent is only a copy of the constituent’s account in the books maintained by the bank. It is not as if the bank statements are maintained by the bank as the agent of the constituent, nor can it be said that the pass book is maintained by the bank under the instructions of the constituent. Therefore, the bank statements supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, nor a book maintained by the assessee or under his instructions. As such, addition under section 68 of the Act of the amount entered only in the bank statements was not justified.

My view is fortified by the judgment of the Hon’ble Bombay High Court in the case of CIT v Bhaichand H. Gandhi [141 ITR 67 (Bom.)] and also the judgment of the Hon’ble Allahabad High Court in the case of Smt. Sarika Jain v CIT (407 ITR 254). The Hon’ble Allahabad High Court held that the Tribunal is not competent to sustain the addition under section 69A of the Act after deleting the said addition made by the A.O. and confirmed by the CIT(A) under section 68 of the Act, the entire order of the Tribunal stands vitiated in law. Being so, the amount found credited in the bank account of the assessee cannot be made an addition under section 68 of the Act. Accordingly, I am inclined to delete the addition made under section 68 of The Income Tax Act, 1961.

The assessee is an individual engaged in the retail trade business. He has offered the income under section 44AD by applying net profit rate at 10% of gross receipts of `15,10,125/-. For A.Y 2015-16, on the basis of information that assessee has deposited cash of `8,70,500/- in bank. In response to notice under section 148, the assessee has stated this cash is deposited out of his business receipts of `15,10,125/- and which is more than cash deposited in savings bank and therefore no addition on account of unexplained cash deposit in the bank account can be made. The AO has not appreciated the explanation of the assessee and made the addition of entire cash deposits of `8,70,500/-.

Is action of AO justified?

When the Assessee is following presumptive taxation system for his retail trade business and he is offering 10% of his business receipts for taxation under section 44AD. If the Assessee has offer explanation of the cash deposits form the business receipts. The Assessing officer cannot make separate addition for cash deposited in bank under section 68 for cash credits. The provision of section 68 cannot be invoked where the income offered under section 44AD of the Act as the said section does not oblige the assessee to maintain any books of account.

In Shri Kokarre Prabhakara v ITO ITA 1239/Bang/2019 Dtd.11/09/2020, held that where the assessee had declared income under section 44AD without maintaining books and the Assessing Officer had invoked the provisions of section 68 of the Act, tribunal deleted the addition holding that where the returns are filed on the basis of income declared under section 44AD of the Act, there cannot be any application of section 68 of the Act.

In Dineshkumar Verma, ITA No. 1183/MUM/2019 (A.Y. 2014-15), dated 28/12/2020 (Mum)(Trib.) the cash was deposited in the bank accounts of the assessee. The returned income did not match the presumptive rate of tax on the gross turnover of the assessee. Tribunal held that, an addition under Section 68 can only be made where any sum is credited in the books of the assessee maintained for any previous year. Therefore since no books of account were maintained in the ordinary course of business of the assessee, no such addition under Section 68 was tenable.

The jurisdiction High court in the case of CIT v Bhaichand H. Gandhi (1983) 141 ITR 67 (Bom) (HC) held that, bank pass book is not constitute books of account.

3. Treatment of cash deposits in banks, not related to business activities:

Where the assessee doesn’t carry on business or where the cash deposits are established to be unrelated to the assessee’s business activities, question arises whether the Assessing officer is justified in making addition of the aggregate of cash deposits in banks for which, in his opinion ¸ the source are not satisfactorily explained. In such cases, normally three types of contentions are raised by the assessees

The cash deposits have been made out of the past savings or from the accumulated funds brought forward from earlier years, besides current year’s income;
The cash deposits have been made out of the earlier withdrawals if the withdrawals preceded the deposits or
Where there are both deposits and withdrawals, only the peak balance in the bank account (s) there in may be treated as taxable but not the aggregate of the amounts deposited during the relevant years.

4. Cases involving accumulated savings/amounts of earlier years

Where the assessee shows sufficient evidence to establish the fact of the receipt of funds in earlier years or out of the taxed or tax-exempt incomes like retirement benefits, agricultural incomes accumulated in the earlier years, his explanation that the cash deposits in the current year came of such funds deserves acceptance but should not be brushed aside lightly by ignoring the evidence and the explanation submitted by the assessee. Such an explanation could not be rejected on the basis of suspicion and speculation that funds, stated as available by the assessee, might have been used up for other purposes before the deposit took place or because there were withdrawals of small amounts from banks before making the deposits in the bank indicating non-availability of the funds as claimed by the assessee. Where no proper books of account are available, the extent of past savings can be seen from the incomes returned for the earlier years also.

5. Deposits claimed to have been made out of amounts withdrawn from the bank

It is very commonly observed that the assessee has deposited cash in the bank account and the assessee contends that the same is out of amounts that he has withdrawn earlier either from the same bank account or from any other bank account during the same financial year. There can be also cases where the amounts were withdrawn in the earlier financial year/s and the same has now been deposited back in the bank account. Normally, there should not be much of a difficulty in such a situation since, it is apparent that the cash has been withdrawn from his own bank account by the assessee. In other words, once the assessee discloses the source as having come from the withdrawals made on a given date from a given bank, it is not open to the Revenue to disbelieve the plea of the assessee merely on the surmise that it would not be probable for the Assessee to keep the money unutilized.

In the absence of any evidence to the effect that the sum was utilized by the assessee in any other manner, the Revenue would not be justified in unreasonably rejecting a good explanation and adding the amount as income from undisclosed sources. Where the explanation, given by assessee that deposit was made out of sum withdrawn earlier and kept with herself for buying some property which did not materialize, was not fanciful and sham story and it was perfectly plausible, the addition was deleted.

It is noteworthy that, as yet, there is no law prescribing upper limit for holding cash or that the funds withdrawn from bank account(s) cannot be held or retained by the assessee’s on hand. Also there is no law prohibiting frequent withdrawals and re-deposits of cash from banks nor is there any law requiring the depositing back of the unused amounts withdrawn from banks immediately or as soon as possible.

The only way to disprove such an explanation by the assessee is for the Assessing Officer to bring some material on record to show that the earlier withdrawals were utilised for some other purpose. In this regard, as stated earlier, the onus is on the Revenue and the Revenue cannot shift the same onto the assessee.

Obviously, there can be no hard and fast rule as to much lapse of time is acceptable and very long or unusual lapse of time between the withdrawal of money and later deposit of money is unlikely to be accepted.

At the same time, a longer time gap between the amounts withdrawn and amounts deposited will certainly be seen unfavorably by the department and courts. However, this being a factual matter, the conclusion will depend on the facts of each case and the evidences which the assessee has been able to adduce during the assessment proceedings. The possibility of addition under the specified sections in respect of each of such case given hereunder.

The possible defense available to the assessee in each such situation:

(a) The assessee has deposited an amount of `50 Lakhs in the bank account during the month of January 2021. The assessee contends that he has withdrawn amount of `65 Lakhs during the months of July 2020 to December 2020 and the deposit of `50 Lakhs is sourced from the same. Most of the withdrawal aggregating to 55 Lakhs were made during July and August on various dates and the withdrawals from September 2020 to December 2020 has been of `2,50,000/- in each month. It is also seen that the assessee has been withdrawing almost similar amount ranging from `2 Lakhs to 2.50 Lakhs during April 2020 to June 2020 in each month and this has been shown as drawings of the assessee. Balance in cash book as on 1-7-2020 was `23,000/-. Considering the above facts, the assessing officer refuses to accept that the withdrawals of `55 Lakhs made in July and August 2020 was available with the assessee till January 2021. The assessing officer believes that the same must have been used for some different undisclosed purpose and therefore, not available with the assessee. The officer also raises a question as to if this amount was lying with the assessee why the assessee kept on withdrawing further amounts during September to December 2020? He also states that on the basis of probability of human behavior, no prudent person would keep such high amount at home, thereby losing on interest and also running the risk of being robbed. As regards balance `10 Lakhs, the assessing officer contends that going by the past transactions in the case of the assessee at least `2 Lakhs per month have been shown as drawings and therefore, the assessing officer treats `8 Lakhs out of the same as drawings. Balance `2 Lakhs out of `10 lakhs are considered as explained and the assessing officer proposes an addition of `48 Lakhs as unexplained cash credit in the case of the assessee. The assessing officer has interalia relied on the judgment of the Hon. Supreme Court in the case of Sumati Dayal v CIT (1995) 214 ITR 801 (SC) (b) When the above matter travelled to the CIT (A), the CIT (A) agreed that though cash appears to have been available with the assessee on arithmetic, he also felt that it was against human probability. He further asked explanation from the assessee as to why such huge amount was kept as cash on hand for a period of almost more than 4 months. Since, the assessee could not reply to the same, he confirmed the addition as made by the assessing officer.

6. Cases where only addition of peak credit of the bank deposits is justified:

During the course of assessment of income, the AO may discover cash receipts in the books, or cash deposits in the bank account of the assessee, which are apparently not satisfactorily explained and he may be tempted to tax under section 68, total of such receipts in the accounting year, whereas the assessee may try to explain that such deposits, or part of the deposits, are out of withdrawals made from the same cash book or bank account and then request the AO to adjust deposits against withdrawals. If this request is accepted, then highest of unexplained deposits is treated as an undisclosed income under section 68. This is called determination of peak. Similarly, unexplained cash credits may be sought to be explained through other undisclosed income/profit separately taxed, then set off of unexplained cash credits against undisclosed income/profit is claimed by the assessee. Such adjustment is called telescoping. The underlying concept is that assessee should not be taxed both for inflow and outflow of undisclosed money, if they can be related to each other.

Application of the concept of peak credit is one the accepted methods of computing income. Where there is a series of cash deposits and withdrawals in the bank account or in several bank accounts and there is no nexus between such deposits and the assessee’s business or where there is no business at all, Courts and Tribunal Benches have upheld the addition of only the peak of the balances during the period after giving credit for the balance at the beginning of the year in the absence of any material indicating the utilisation of cash withdrawals for other purposes. The application of the concept of peak credit removes the cascading effect of the preceding unexplained deposits by virtue of earlier deposits getting subsumed by the later, bigger balances arising from additional deposits till the maximum amount of balance is reached, in one account under question or on a consolidated basis in case of multiple bank accounts.

In Sanjay Jain v ITO [IT Appeal No. 3314 (Delhi) of 2019, dated 6-3-2020], the aggregate deposits exceeded the gross receipts admitted under section 44AD and the Assessing Officer added the difference amount as unexplained moneys under section 69A. However, the Tribunal held that such excess amount represented suppressed sales as the withdrawals had been used for the business purchases and the accounts showed systematic deposits as well as withdrawals and with the assessee being a small trader, credit should be given to withdrawals thereby upholding only the addition of the amount of peak credit.

7. Taxability of Cash Deposited in Joint Bank Accounts

Where cash deposit were made by assessee in savings bank account which was jointly held by him and his father, since said bank account and interest income accrued on same was duly disclosed by assessee’s father in his return of income, no addition could be made in hands of assessee in respect of cash deposit in said bank account by treating same as unexplained cash credit under section 68

Alok Keshwani v ITO [2024] 160 taxmann.com 1020 (Raipur – Trib.)

The assessee had made cash deposit in his savings bank account but had not filed any return of income. The Assessing Officer (AO) thus initiated proceedings under section 147. However, the assessee had failed to comply with the notice issued under section 148, and the AO passed order under section 144 read with section 147 and made addition of the entire amount of cash deposits along with corresponding interest income in the assessee’s hands.

On appeal, the CIT(A) upheld the additions made by the AO. Aggrieved-assessee filed the instant appeal before the Tribunal.

The Raipur Tribunal held that the assessee had provided certain documents, such as a copy of the return of income, balance sheet, and capital account of his father, which revealed that the father disclosed the savings bank account in his return of income along with the interest income that had accrued on the same.

Also, the assessee reconciled the amount reflected in his father’s balance sheet against that disclosed in the aforementioned bank account by placing a bank reconciliation statement on record.

Based on the aforesaid facts, there was substance in the assessee’s claim that the bank account and interest income accruing on the same had been accounted for/offered for tax in the hands of his father, i.e., the primary account holder.

Therefore, without any material proving to the contrary, there was no justification for the AO to have added the cash deposits made during the year to the said bank account or the interest income in the hands of the assessee.

However, the assessee adopted a lackadaisical approach and failed to participate in the course of the assessment proceedings, which led to the AO framing the assessment. Accordingly, the matter required to be restored to the AO for the limited purpose of verifying the assessee’s claim correctly.

♦ Assessee claimed that the bank account belonged to his maternal grandfather and his name was added only for assistance to his old grandfather. Could not produce evidence to show that the grandfather had substantial source of income to justify huge amount deposited in bank. Addition confirmed in the hands of the assessee. Praveen Kumar v CIT [2019] 415 ITR 241 (P & H – HC)

8. Detection of Undisclosed Bank Account

In case undisclosed bank account was found during search. The cash has been deposited on regular basis in this undisclosed account. The assessee explains cash deposited is out of unrecorded sales. The details of month-wise unrecorded sales and quantitative stock details are available with the assessee. Now a question arises that whether the AO can make addition for entire amount applying section 68 or 69A? Whether the assessee can seek that only profit element be taxed and that too under normal provisions?

In this context, it is to be noted the Income-tax is a tax on Income. All receipts are not income and therefore, entire amount of Deposit cannot be treated as income. In case, if assessee can demonstrate that the amount deposited is not income but the same is gross receipt, then only profit element can be subject to addition. It is worth mentioning here that profit needs to be estimated on the basis of material on records. It will be reasonable to assume 8% as profit after considering the presumptions adopted in section 44AD. In the following cases, the profit may be even less than 8%

CIT v Shitalben Saurabh Vora – 133 taxmann.com 442 (SC) admitting SLP against Guj HC judgment. Substantial deposit but also corresponding withdrawals and negligible balance in bank –Tribunal estimated 2% of gross receipts as income – Tribunal order affirmed by HC.
Dineshbhai Dhansukhlal Mithaiwala v ITO 152 ITD 874 (Ahd.) – profit estimated @ 3%