Bank deposits in undisclosed accounts taxed only as business profit, not full unexplained income, under section 68.

Section 68 applies only to credits in books of account maintained by the assessee, so undisclosed bank deposits cannot be taxed as unexplained income where no such books exist. On the facts, the bank entries, trading pattern, reopening material, and counterparty response indicated business activity in rubber chemicals, so the deposits were treated as business turnover and only the profit element was brought to tax. The Tribunal rejected a 5% estimate and adopted an 8% gross profit rate on the turnover, while giving credit for income already offered by the assessee.

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Issues: (i) Whether the entire bank deposits in the assessee's undisclosed accounts could be taxed as unexplained income under section 68. (ii) Whether, on the facts, the deposits were to be treated as business receipts and only profit thereon could be brought to tax, and at what rate.

Issue (i): Whether the entire bank deposits in the assessee's undisclosed accounts could be taxed as unexplained income under section 68.

Analysis: Section 68 applies only where a sum is found credited in books of account maintained by the assessee. The assessee had not maintained books of account, and the bank accounts themselves were not treated as books of account. The deposits were largely through banking channels, with corresponding debit and credit movements, and the revenue had not established that the whole of the deposits represented unexplained credits in the statutory sense.

Conclusion: The entire bank deposits could not be added as unexplained income under section 68.

Issue (ii): Whether, on the facts, the deposits were to be treated as business receipts and only profit thereon could be brought to tax, and at what rate.

Analysis: The record showed business activity in rubber chemicals, supported by the reopening reasons, the bank entries, the replies from at least one counterparty, and the trading pattern reflected in the bank accounts. In such circumstances, the proper approach was to treat the deposits as business turnover and tax only the profit element. The estimate of profit had to reflect the business nature of the receipts; the Tribunal rejected the assessee's plea for a 5% rate and adopted 8% as a reasonable gross profit rate on the turnover, after giving credit for income already declared in response to notice under reassessment.

Conclusion: The deposits were to be treated as business receipts and assessed only to the extent of estimated profit at 8% after due credit for income already offered by the assessee.

Final Conclusion: The additions were reduced to a profit-based estimate on business turnover, and the assessee obtained relief against the treatment of the full bank deposits as income.

Ratio Decidendi: Section 68 cannot be invoked to tax bank deposits as unexplained credits unless the amount is credited in books of account maintained by the assessee; where undisclosed banking transactions evidence business receipts, only the profit element on such turnover is exigible to tax.

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