Facts of the Case

The Assessing Officer observed substantial cash deposits aggregating ₹30,63,500 in the assessee’s bank accounts and initiated reassessment proceedings under section 147. The assessee, a small scrap trader, filed a return declaring income under section 44AD on presumptive basis.

He explained that the deposits represented business receipts collected in cash from small traders, which were periodically deposited for safety reasons. Due to the nature of his business in rural areas, he did not maintain formal books of account but produced certain purchase vouchers.

The Assessing Officer accepted that some business activity existed but treated cash deposits exceeding ₹2,00,000 as unexplained, making an addition of ₹10,35,000. The appellate authority confirmed the addition.

 Issues Involved

  1. Whether cash deposits representing business receipts can be treated as unexplained when income is declared under section 44AD.
  2. Whether partial rejection of business receipts as unexplained is permissible after accepting existence of business.
  3. Whether lack of detailed documentation invalidates presumptive taxation claims.

 Petitioner’s Arguments

The assessee contended that the entire deposits constituted sales proceeds of business already offered to tax under section 44AD. Once business activity was accepted, treating part of the turnover as unexplained was contradictory.

It was further argued that under presumptive taxation, maintenance of detailed books is not mandatory, and therefore the inability to provide complete documentation could not justify addition of business receipts as unexplained income.

Respondent’s Arguments

The Revenue submitted that the assessee failed to substantiate the source of deposits with documentary evidence and did not provide detailed narration of transactions. Therefore, the additions made by the Assessing Officer were justified.

Court Order / Findings (ITAT Allahabad)

The Tribunal examined the bank statements and observed patterns of deposits followed by payments to various parties across the country, indicating business activity. The Assessing Officer himself had not disputed that the accounts were used for business purposes.

The Tribunal held that once the assessee declared income under section 44AD and the Assessing Officer accepted that business was carried on, it was inconsistent to treat a portion of business receipts as unexplained solely because documentary evidence was inadequate.

It further noted that no independent enquiry was made with parties to whom payments were issued to disprove the business transactions. Since presumptive taxation does not require maintenance of detailed books, insistence on strict documentary proof was contrary to the scheme of section 44AD.

Accordingly, the addition of ₹10,35,000 was deleted as an ad hoc and unsustainable adjustment.

Important Clarification

The Tribunal clarified that while unexplained deposits may be taxed in appropriate cases, business receipts declared under presumptive taxation cannot be arbitrarily segregated and taxed again without disproving the existence or scale of business activity.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771061938_PANNALALPRAJAPATIMIRZAPURVS.ITOWARD32MIRZAPUR.pdf

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