Facts of the Case

The assessee company, engaged in civil contract work, filed its return declaring nominal income. During assessment proceedings, the Assessing Officer observed that the balance sheet reflected earnest money deposits of ₹3.79 crore as on 31.03.2010, compared to ₹1.22 crore in the preceding year.

The increase of ₹2.57 crore was questioned. As the assessee allegedly failed to satisfactorily explain the nature and source of this amount, the Assessing Officer treated it as unexplained cash credit and added it to income under Section 68.

The first appellate authority upheld the addition, leading the assessee to approach the Income Tax Appellate Tribunal.

Issues Involved

  1. Whether the increase in earnest money/security deposits can be treated as unexplained cash credit under Section 68.
  2. Whether amounts received through banking channels under contractual arrangements require deeper verification before addition.
  3. Scope of the Assessing Officer’s duty to examine documentary evidence relating to refundable deposits.

Petitioner’s Arguments (Assessee)

  • The amount represented security/earnest money received from contractors under contractual arrangements.
  • The deposits were received through proper banking channels, not in cash.
  • The contract work was not ultimately executed, and the amounts were refunded in the subsequent year.
  • Therefore, the transaction was genuine, temporary, and not income.
  • The addition was made without proper verification of supporting documents such as agreements, bank statements, and repayment evidence.

Respondent’s Arguments (Revenue)

  • The assessee failed to satisfactorily explain the nature and source of the increased amount during assessment.
  • Mere claim of contractual deposits without substantiating documents cannot discharge the burden under Section 68.
  • In absence of credible evidence, the Assessing Officer was justified in treating the sum as unexplained cash credit.

Court Order / Findings (ITAT)

  • Where the assessee claims that amounts were received through banking channels under contractual agreements and were subsequently refunded, such claims must be examined based on documentary evidence.
  • The addition under Section 68 cannot be sustained without proper verification of relevant materials.
  • The matter required factual investigation rather than outright addition.

Important Clarification by the Tribunal

  • Security deposits or earnest money received in the course of business are not automatically income.
  • If such amounts are refundable and supported by agreements and banking records, they require proper scrutiny before invoking Section 68.
  • The burden on the assessee can be discharged by producing credible documentary evidence.
  • The Assessing Officer must conduct a fair inquiry rather than relying solely on absence of explanation at the initial stage.

Link to download the order - https://itat.gov.in/public/files/upload/1610599437-329%20Unison%20Housing%20Company%20Ltd..pdf

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