In a significant observation, the Income Tax Appellate Tribunal has held that all bank deposits under Section 44 AD cannot automatically be treated as taxable income, while stressing that authorities must determine their source and nature before making additions.
The ruling came in the case of a Surat fruit trader, who had opted for the presumptive taxation scheme under Section 44AD of the Income Tax Act. While the trader had declared a mere ₹14.57 lakh in his Income Tax Return (ITR), the tax department assessed his income to be approximately ₹5.09 crore, Navbharat Times reported. The amount he was allegedly assessed at was more than 34 times his declared income.
Section 44 AD provides a presumptive taxation system for eligible small businesses, and does not require taxpayers to calculate taxable profit by maintaining detailed accounts for every individual business expense. Instead, it allows income to be presumed based on business’s turnover/ gross receipts, subject to conditions of the provision.
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What is the case? How did the Income Tax authorities calculate a higher income?
While the fruit trader, identified as Zakir Yakubbhai Patel declared ₹14.57 lakh as taxable income, the assessing officer put it at ₹5.09 crore. Patel had filed his return under Section 44AD, wherein regular bookkeeping is not mandatory.
The tax department put his case under scrutiny based on the cash deposits made in his bank account during demonetisation. The assessing officer added about ₹2.43 crore as bank deposits and credits, ₹71.87 lakh as unsecured loans and about ₹1.79 crore as loans and advances. Following this, the total estimated income of the businessman became around ₹5.09 crore, Navbharat Times reported.
The matter then reached the ITAT’s Surat bench, wherein the tribunal detected significant errors in the tax officer’s data.
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What did the ITAT say?
The taxpayer argued before the tribunal that the figures used by the officer were incorrect, and that the actual cash deposit in his bank account was only ₹89.16 lakh, not ₹2.43 crore. He further highlighted that the unsecured loans mentioned by the AO were from previous years.
The ITAT judges found that the cash deposit figures prepared by the assessing officer (AO) were completely incorrect and did not match the bank records. They acknowledged errors in the Income Tax Officer’s data, and stated that every amount deposited in a bank account cannot be considered taxable income without examining its source and nature under Section 44AD. However, instead of cancelling the officer’s assessment, the tribunal remanded the matter to the tax officer for further verification.
