Facts of the Case

The Assessing Officer received information that the assessee had deposited ₹17,86,000 during the demonetization period in his State Bank of India account. Multiple notices under section 142(1) were issued but remained uncomplied with, leading to a best-judgment assessment under section 144.

On examination of bank statements obtained under section 133(6), the Assessing Officer found total deposits of ₹1,42,65,729 during FY 2016-17 and, in the absence of explanation, treated the entire amount as unexplained income.

The assessee appealed, contending that notices were not properly served and that deposits represented business receipts, realization from debtors, advances from customers, loans, and sale proceeds. However, the CIT(A) upheld the addition, citing lack of documentary evidence and non-cooperation.

 Issues Involved

  1. Whether entire bank deposits can be taxed as unexplained income without considering business activities.
  2. Whether additions under section 69A are justified when deposits allegedly represent sales and receipts from debtors.
  3. Whether ex-parte assessment due to non-compliance can ignore debit entries and business payments.
  4. Whether only demonetization deposits or total yearly deposits should be considered for addition.

Petitioner’s Arguments

The assessee submitted that he was engaged in wholesale cosmetic business and operated through sub-agents across the region. Deposits in the bank account comprised sales proceeds, advances from customers, loans, and recoveries from debtors, all related to business operations.

He argued that the Assessing Officer erroneously considered only the credit side of the bank account while ignoring withdrawals used for purchases and payments to suppliers and sub-agents. It was also emphasized that only ₹17,86,000 had been deposited during demonetization, whereas the addition covered the entire annual deposits.

The assessee further pleaded lack of education and unfamiliarity with electronic notices as the reason for non-compliance and sought opportunity to produce evidence.

Respondent’s Arguments

The Revenue argued that the assessee had consistently failed to respond to statutory notices and had not produced any evidence to substantiate the claimed business activity. Therefore, the addition of unexplained bank credits was justified under section 69A.

Court Order / Findings (ITAT Allahabad)

The Tribunal observed that the Assessing Officer had added the entire amount of deposits without examining whether the assessee was engaged in business or whether withdrawals corresponded to purchases and operational expenses.

It held that if the assessee establishes existence of business activities and purchases, many bank credits could represent sales receipts rather than unexplained income. In such cases, only the profit element embedded in the turnover would be taxable, not the entire receipts.

The Tribunal also noted that the CIT(A) should have remanded the matter for verification instead of confirming the addition without examining the business claim.

Accordingly, the matter was restored to the Assessing Officer for de novo assessment with directions to verify books of account, bills, vouchers, purchase records, and bank transactions to determine the nature of deposits. The assessee was advised to be vigilant in responding to electronic notices in faceless proceedings. The appeal was allowed for statistical purposes.

Important Clarification

The Tribunal emphasized that bank deposits representing business turnover cannot automatically be treated as unexplained money. Where business activity is proved, taxation should be confined to real income (profit) rather than gross receipts.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771066818_SUNEELKUMARGUPTARATHHAMIRPURVS.THEINCOMETAXOFFICERWARD225BANDA.pdf

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