Cash deposits in bank accounts often trigger additions under section 69A, especially where assessees are unable to maintain complete books of account. However, judicial authorities have consistently drawn a clear distinction between unexplained money and business receipts arising from regular trading activity. In the present ruling, the Rajkot Bench of the Income Tax Appellate Tribunal has reaffirmed that where cash deposits are intrinsically linked to trading transactions, the Revenue cannot tax the entire deposits as unexplained income. Instead, only the profit element embedded in such receipts is liable to tax at normal rates, and not at the punitive rate prescribed under section 115BBE. This decision provides important guidance for small traders and professionals dealing with cash-intensive businesses.
Facts of the case
The assessee was a small trader engaged in the business of trading brass components. During the relevant assessment year, substantial cash deposits were found in his bank account. The assessee explained that these deposits represented trading receipts, which were directly deposited by purchasers from different parts of the country. However, the assessee did not maintain complete books of account to the satisfaction of the Assessing Officer.
Assessment proceedings
The Assessing Officer rejected the explanation and treated the entire cash deposits as unexplained money under section 69A, taxing the same at the higher rate prescribed under section 115BBE, without allowing any deduction for expenses or profit element.
Issue before the ITAT
Whether the entire cash deposits representing trading receipts could be taxed as unexplained money under section 69A, or whether only the profit element embedded in such receipts was liable to tax at normal rates.
Findings of the Tribunal
The ITAT observed that:
- It was undisputed that the assessee was engaged in trading activity.
- The cash deposits had a direct nexus with business receipts, and were not independent unexplained assets.
- When deposits represent business turnover, only the profit component can be brought to tax, not the gross receipts.
Decision
The Tribunal held that:
- Treating the entire trading-related cash deposits as unexplained money under section 69A was erroneous.
- Only the profit element, estimated at 8% of the trading receipts, was taxable.
- Such income was chargeable to tax at normal rates and not under section 115BBE.
Key takeaway
Where cash deposits are linked to business transactions, the Department cannot tax the entire amount as unexplained income. Only a reasonable estimate of business profit can be assessed.
Citation: [2025] 180 taxmann.com 856 (Rajkot – Trib.)[21-11-2025]