A Pune bench of the Income Tax Appellate Tribunal (ITAT) has come to the rescue of a scrap dealer who was saddled with a tax demand of nearly Rs 44 lakh after the Income Tax Department treated cash deposits in his bank account as unexplained money.
The case involved Wajeed Khan, a scrap trader who had been in business for over a decade. The dispute centred on cash deposits of Rs 1.28 crore made in his cooperative bank account during FY 2015-16.
Why did the tax department reopen the case?
Wajeed had filed his income tax return declaring an income of Rs 3,00,340. However, the department’s Insight portal flagged cash deposits of Rs 1,28,26,078 in his bank account, prompting the reopening of the assessment under Section 147.
According to Wajeed, the deposits represented business receipts from his scrap trading activity, a business where cash transactions are common. He claimed the income should be taxed on a presumptive basis at 8% of turnover.
However, his case was weakened by the fact that he could not produce detailed transaction records. He stated that a computer virus had crashed his hard drive, resulting in the loss of accounting data and transaction details.
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How did the tax officer view the deposits?
The Assessing Officer was not convinced by the explanation and treated the entire Rs 1.28 crore as unexplained money under Section 69A of the Income Tax Act. The amount was then subjected to tax under Section 115BBE, resulting in a tax demand of around Rs 44 lakh.
The first appellate authority, Commissioner of Income Tax (Appeals), also upheld the assessment, leaving the taxpayer with little relief.
Can business cash deposits be taxed as unexplained money?
According to Rajiv Thakkar, Partner – Direct Tax at Bhuta Shah & Co LLP, cash deposits in a business account can be treated as unexplained money only if certain conditions are met.
“The initial onus lies on the taxpayer to satisfactorily explain the nature and source of the cash deposits,” he said.
Thakkar explained that such deposits may not attract Section 69A if the taxpayer can show that the business genuinely generates cash sales, the transactions are properly recorded, and the deposits are supported by records such as invoices, cash books, stock registers, GST returns and bank statements.
Fereshte Sethna, Founding Partner at DMD Advocates, said that cash deposits cannot automatically be treated as unexplained money.
“Regular cash deposits are generally not treated as unexplained money under Section 69A if the taxpayer is capable of establishing cash is derived from business turnover,” she said.
What changed at the ITAT?
The turning point came before the ITAT.
Instead of focusing only on the missing records, Wajeed relied on his tax history. He produced assessment records from the years immediately before and after the disputed year. These showed that the tax department had accepted his scrap business and the 8% profit model in those years.
The tribunal found merit in this argument and invoked the well-established principle of consistency.
What is the consistency principle?
The principle of consistency says that if the tax department has accepted a particular position in earlier and later years, it should not take a completely different view in one year unless there is a material change in facts or law.
Thakkar said the doctrine has been recognised by the Supreme Court in landmark judgments such as Radhasoami Satsang v. CIT and Excel Industries Ltd.
“Where a fundamental aspect of a matter has been accepted by the Revenue in earlier years and there is no material change in facts or law, it would not be appropriate for the Revenue to depart from the earlier view,” he explained.
What was the ITAT’s ruling?
The ITAT set aside the earlier order and sent the matter back to the Assessing Officer for fresh consideration after taking into account the accepted position in the preceding and subsequent years.
The ruling does not automatically delete the addition. However, it gives the taxpayer an opportunity to have the case reconsidered in light of the department’s own treatment of the same business in other years.
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Lessons for small business owners
Tax experts say the case highlights the importance of maintaining proper records, especially for businesses that deal heavily in cash.
Sethna said business owners should maintain a clear paper trail linking cash deposits to sales through stock records, sales ledgers, daily cash books, bank statements and other supporting documents.
Thakkar added that consistency across books of accounts, GST returns and income tax filings is equally important to avoid disputes over the source of cash deposits.
For taxpayers, the ruling is a reminder that while documentation remains crucial, a consistent tax treatment accepted by the department over multiple years can also play a significant role in defending a case.
Disclaimer: This article is based on an ITAT ruling and the outcome is specific to the facts of the case. Tax treatment of cash deposits depends on the nature of business, available records, and individual circumstances. The ITAT remanded the matter to the Assessing Officer for fresh consideration and did not grant a final deletion of the addition. Readers should consult a qualified tax professional before drawing conclusions or taking action based on this ruling.
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This article was first uploaded on June six, twenty twenty-six, at eighteen minutes past eight in the morning.
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