Facts of the Case

The assessee, an advocate by profession practicing for many years, filed his return of income declaring professional income and income from other sources. During scrutiny assessment under Section 143(3), the Assessing Officer discovered an undisclosed bank account maintained by the assessee with a bank.

Substantial cash deposits were found in the said account. The assessee claimed that a portion of the deposits represented professional receipts and that significant expenditure had been incurred to earn such income. The assessee also stated that certain amounts credited in the account were received as gifts from relatives.

The Assessing Officer treated the cash deposits as unexplained income to a large extent and also taxed interest earned on the bank account, which had not been disclosed in the return. The Commissioner of Income Tax (Appeals) partly confirmed the additions while allowing limited deduction for expenses. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal.

Cash deposits and undisclosed bank transactions formed the core of the dispute in the assessment.

Issues Involved

  1. Whether cash deposits in the undisclosed bank account constituted unexplained income.
  2. Whether the assessee was entitled to deduction of expenditure against such deposits treated as professional receipts.
  3. Whether gifts claimed from relatives were satisfactorily explained.
  4. Whether interest income from the undisclosed account was taxable.

Petitioner’s Arguments (Assessee)

  • The cash deposits represented professional receipts earned from legal practice.
  • Significant overhead expenses were incurred in generating professional income and should be allowed as deduction.
  • Certain amounts were received as genuine gifts from family members.
  • The estimation of income by the Assessing Officer was excessive and arbitrary.
  • The order of the CIT(A) allowing only a limited percentage of expenses was unjustified.

Respondent’s Arguments (Revenue)

  • The bank account was not disclosed to the department, indicating concealment.
  • The assessee failed to substantiate the source of cash deposits satisfactorily.
  • Alleged gifts were not supported by credible evidence of creditworthiness and genuineness.
  • Interest income from the account had not been declared and was rightly taxed.
  • The assessment order and appellate order were legally valid.

Court Order / Findings (ITAT)

The Tribunal examined the material on record and held that unexplained cash deposits in an undisclosed bank account can be brought to tax where the assessee fails to establish their source satisfactorily.

It observed that the assessee could not substantiate the claim of gifts or fully prove the nature of deposits. Accordingly, the additions relating to unexplained amounts were largely upheld.

However, the Tribunal acknowledged that professional income necessarily involves expenditure. It upheld the approach of allowing reasonable deduction of expenses rather than treating the entire deposits as income.

The Tribunal also confirmed the taxation of interest income earned on the undisclosed bank account, as the same had not been offered to tax. Ultimately, the appeal was partly allowed, granting limited relief to the assessee.

Interest income from the undisclosed account was rightly taxable as it belonged to the assessee and was not declared.

Important Clarification

The decision reiterates important legal principles:

  • Undisclosed bank accounts discovered during assessment can justify additions.
  • Cash deposits must be explained with credible evidence of source.
  • Gifts must satisfy tests of identity, creditworthiness, and genuineness.
  • Only the real income component should be taxed where deposits represent business or professional receipts.
  • Interest income not disclosed in the return is taxable.

Link to download the order - 

https://itat.gov.in/public/files/upload/1672903414-Vijay%20Gautam%20PDf.pdf

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