Ravindra Gajanan Mahadik Vs ITO (ITAT Pune)
Cash Deposits Are Not All Profit: Tribunal Restricts Addition to 8%
The controversy
When bank deposits predominantly arise from business transactions, can the entire amount be treated as unexplained income? In Ravindra Gajanan Mahadik, the Pune Tribunal examined the bank records and found that the disputed transactions were mainly connected with the assessee’s computer hardware business, with some transactions relating to an immovable property purchase.
In the absence of complete books and particulars necessary to examine every transaction, the Tribunal estimated net profit at 8%, sustaining an addition of ₹2,74,000 and deleting the balance.
The decision granted substantial relief against an addition originally stated at ₹34,25,000, although the order contains differing references to the amount of cash deposits and the addition sustained by the first appellate authority.
Business activity and failure to file the return
The assessee, an individual, was primarily engaged in computer repair and servicing. He had filed income-tax returns in earlier years but did not file a return for assessment year 2010-11.
According to the explanation before the Tribunal, ongoing court proceedings during the relevant year had contributed to this failure.
The Assessing Officer completed reassessment and made an addition concerning cash deposited in the bank account. The assessee challenged the assessment before the appellate authority and subsequently approached the Tribunal against the order dated 2 March 2026.
Before the Tribunal, the legal grounds were not pressed and were dismissed accordingly. The dispute was therefore considered on merits.
Dispute over the deposit figure
The assessee’s counsel submitted that actual cash deposits in the Axis Bank account were ₹20,50,000, rather than ₹34,25,000 as alleged by the Assessing Officer.
It was contended that some transactions had been counted twice.
The grounds of appeal referred to the CIT(A) confirming an addition of ₹20,50,000 under section 69A. They also divided that amount into ₹11,85,000 allegedly sourced from prior withdrawals and ₹8,65,000 attributed to business receipts.
However, the Tribunal’s discussion described the disputed addition as ₹34,25,000 and ultimately calculated the sustained addition at 8% of that figure.
The order therefore should not be represented as conclusively accepting the assessee’s argument that deposits amounted to only ₹20,50,000.
Prior withdrawals and subsequent redeposits
The assessee explained that cash had been withdrawn in connection with litigation and a proposed property transaction, including payment of stamp duty and token amounts.
Subsequently, acting on legal advice, payments were made through demand drafts or cheques. The excess cash was therefore redeposited into the bank.
The assessee relied upon a date-wise cash-flow extract to connect deposits with preceding withdrawals. Its grounds specifically asserted that ₹11,85,000 could be explained through immediately prior cash withdrawals.
This explanation sought to establish that part of the money deposited was recycled cash, rather than a fresh receipt or undisclosed income.
Business collections formed the other source
Counsel also submitted that the assessee regularly received cash from computer hardware installation, annual maintenance contracts and repair services.
Those collections were deposited in the bank account in the ordinary course of business.
The assessee argued that, to the extent the deposits represented business receipts, only the profit component could be brought to tax, rather than the entire gross amount.
Since the assessee carried on a small business without maintaining separate books, it requested estimation of profit at 8% under section 44AD.
The grounds additionally referred to a remand report dated 27 May 2019, which, according to the assessee, had verified and accepted several matters.
What the Tribunal found
The Tribunal examined the bank account furnished in the 16-page paper book, particularly pages 4 to 10.
It found that the assessee was regularly engaged in computer hardware business and that the disputed transactions were mainly attributable to business activity. Some transactions concerned the purchase of immovable property.
However, complete books and the particulars needed to scrutinise every transaction were unavailable.
In those circumstances, the Tribunal considered it appropriate to estimate net profit at 8%, referring to section 44AD. This produced an addition of ₹2,74,000, corresponding to 8% of ₹34,25,000.
The CIT(A)’s finding was reversed, the addition was restricted to ₹2,74,000, and the remaining addition was deleted. The appeal was partly allowed.
Author’s comments
The practical importance of the ruling lies in the Tribunal’s finding of a business connection. Once the deposits were found predominantly to represent business transactions, treating the entire amount as income would disregard the distinction between gross receipts and profit.
Nevertheless, the decision does not establish that every unexplained bank deposit can be resolved through an 8% estimate. The business nexus was supported by the bank records and the assessee’s established activity.
Two qualifications deserve attention. First, the Tribunal did not separately quantify the redeposited withdrawals. Secondly, although it referred to section 44AD, this short order does not examine the provision’s year-specific applicability for assessment year 2010-11.
The ruling is therefore best reported as a fact-based restriction of the addition to estimated business profit, without treating it as a general determination of section 44AD eligibility.
A bank deposit may represent business turnover or recycled funds. The amount deposited is not automatically the amount earned.
FULL TEXT OF THE ORDER OF ITAT PUNE
1. The captioned appeal at the instance of assessee pertaining to Assessment Year 2010-11 is directed against the order dated 02.03.2026 of Addl/JCIT(A)-2, Chennai emanating out of Assessment order dated 21.12.2017 passed u/s.143 r.w.s.147 of the Income Tax Act, 1961 (in short ‘the Act’).
2. Assessee has raised the following grounds of appeal :
“The following grounds are taken without prejudice to each other -On facts and in law,
1] The Ld. CIT(A)/NFAC has erred in partly confirming the additions made by the Ld. AO in the impugned assessment order passed u/s 144 r.w.s. 147 of the Income Tax Act which is patently illegal and unsustainable in law and the same may please be deleted.
2] The Ld. CIT(A)/NFAC erred in confirming an addition to the extent of Rs. 20,50,000/- treating entire cash deposit amount during the year under consideration as unexplained income of the appellant u/s. 69A of the Act without giving any justification for the same.
2.1] The Ld. CIT(A)/NFAC failed to appreciate that the cash deposits amount of Rs. 20,50,000/-during the year under consideration was sourced out of prior cash withdrawals and business receipts and therefore, it cannot be considered as unexplained income.
2.2] The Ld. CIT(A)/NFAC erred in not appreciating the cash flow extract indicating the date wise cash withdrawals and cash deposits wherein it was clearly evident that cash deposits to the extent of Rs. 11,85,000/- were sourced out of immediate prior cash withdrawals and thus, addition to that extent was not justified.
3.1] The Ld. NFAC/CIT(A) ought to have appreciated that the remaining cash deposits i.e. Rs. 8,65,000/- were sourced out of business receipts of Computers repairing & Consultancy Services and accordingly, only net income from business can be brought to tax and not entire cash deposits/business receipts.
3.1] The Ld. NFAC/CIT(A) failed to appreciate that as the appellant was doing small business no separate books were maintained and therefore, the profit may be estimated as per provisions of section 44AD of the Act @ 8% of the business receipts/cash deposits.
4] The Ld. CIT(A)/NFAC erred in confirming the addition by completely ignoring the remand report dated 27.05.2019 furnished by the Ld. AO upon verification of evidences furnished before appellate authority wherein most of the issues were duly verified and accepted.
5) The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
3. At the time of hearing, ld. Counsel for the assessee requesting for not pressing the legal grounds raised by the assessee and the same are therefore dismissed as ‘not pressed’.
4. The grievance of the assessee revolves around the addition for unexplained cash deposit of Rs.34,25,000/-.
5. I have heard the rival submissions and perused the record placed before me. I observe that the assessee is an individual and did not file the return of income for A.Y. 2010-11. Assessee is stated to be primarily engaged in the business of Computer Repair and servicing and in the past used to file the Income Tax Return. However, due to some court proceedings going on during the year under consideration the assessee failed to file the return. Ld. Assessing Officer has made the impugned addition for explained cash deposit which has been subsequently affirmed by the ld.CIT(A).
6. Before me, ld. Counsel for the assessee has submitted that firstly the cash deposit in the bank account held with Axis Bank is Rs.20,50,000/- and not Rs.34,25,000/- as alleged by the Assessing Officer and secondly that ld. Assessing Officer has taken some of the transactions two times. Further, it is submitted that due to some court litigation assessee had to withdraw the cash from the bank for payment of stamp duty and token amount to the parties. Thereafter on the legal advice the token amount was paid through Demand Draft/Cheque. Therefore, the excess cash was deposited back in bank. It is also submitted that in the course of business of Computer Hardware Installation cash is regularly collected towards AMC and repair charges and deposited in the bank account.
7. On due consideration of the submissions made by ld. Counsel for the assessee and on perusal of the bank account placed in the paper book running into 16 pages and more specifically pages 4 to 10 I find that the assessee is regularly carrying on the business of Computer Hardware and the alleged transactions are mainly on account of business activity and on few occasions some transactions have been carried out for the purchase of immovable property. However, in absence of complete details of books of account and necessary details to examine each and every transaction, I deem it appropriate to estimate the Net Profit of the assessee @8% u/s.44AD of the Act which works out to Rs.2,74,000/-. Accordingly, finding of ld.CIT(A) is reversed and addition of Rs.2,74,000/- is sustained. Remaining addition stands deleted. Grounds of appeal raised by the assessee are partly allowed.
8. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 05th October, 2026
