Revenue's appeal dismissed as bank deposits from Kirana business verified by VAT authorities under section 69A

ITAT Lucknow dismissed Revenue's appeal regarding addition under section 69A for unexplained bank deposits. The deceased assessee's legal heir provided evidence of a Kirana business with verified turnover by VAT authorities. The tribunal found non-compliance was due to assessee's illness and death during assessment proceedings, not tax evasion. Since bank deposits were below business turnover and AO made no adverse comments during remand, the tribunal upheld CIT(A)'s decision to assess income at 8% of gross receipts under section 44AD instead of treating deposits as unexplained money.

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Issues Presented and Considered

The core legal questions addressed in this appeal are:

• Whether the addition of Rs. 77,96,530/- under section 69A of the Income Tax Act, 1961, on account of unexplained bank deposits, was justified when the assessee failed to furnish complete details of these deposits.
• Whether the bank deposits could be treated as turnover of the Kirana business run by the assessee, thereby allowing assessment under the presumptive taxation scheme under section 44AD at a profit rate of 8% on the turnover.
• The correctness and legality of the CIT(A)'s order deleting the addition under section 69A and restricting the income to 8% of the turnover as per section 44AD, despite the assessee's failure to file returns or explain the source of deposits during the assessment proceedings.

Issue-wise Detailed Analysis

Issue 1: Validity of Addition under Section 69A for Unexplained Bank Deposits

The legal framework governing unexplained cash credits is section 69A of the Income Tax Act, 1961, which permits the Assessing Officer (AO) to treat any sum found credited in the books of an assessee as income if the assessee fails to satisfactorily explain the source of such credit. The AO invoked this provision after the assessee did not respond to notices seeking explanation for cash deposits totaling Rs. 11,72,500/- during the demonetization period, distributed between two bank accounts. Additionally, the assessee failed to file the income tax return for the relevant assessment year despite multiple notices, prompting the AO to proceed under section 144(1)(b) for best judgment assessment.

The AO aggregated all deposits and credits in the bank accounts amounting to Rs. 77,96,359/- and treated them as unexplained money, making an addition under section 69A. The AO's approach was premised on the absence of any explanation or return filing, which legally justified invoking section 69A and section 144(1)(b) to complete the assessment.

The Revenue's contention before the Tribunal was that the deletion of this addition by the CIT(A) was erroneous because the assessee did not furnish complete details of the bank deposits, and therefore, the addition under section 69A should stand.

Issue 2: Treatment of Bank Deposits as Business Turnover and Applicability of Section 44AD

The legal framework for presumptive taxation of small businesses is provided under section 44AD of the Income Tax Act, which allows an eligible assessee to declare income at a prescribed percentage (8% in this case) of total turnover or gross receipts, thereby simplifying compliance and assessment.

During the appellate proceedings, the legal heir of the deceased assessee submitted that the deposits were receipts from the Kirana business run by the assessee prior to his death. She produced a VAT audit report confirming a turnover of Rs. 95,83,320/-. The CIT(A) called for a remand report from the AO, who verified the existence of the Kirana business, the turnover as per VAT records, and the death of the assessee. The AO did not dispute the turnover figure but did not comment on the justifiability of assessing income under section 44AD.

The CIT(A) accepted the turnover as verified by VAT authorities and directed the AO to restrict the addition to 8% of the turnover, effectively allowing presumptive taxation under section 44AD instead of treating deposits as unexplained credits under section 69A.

The Revenue challenged this approach, arguing that the CIT(A) erred in law and facts by accepting the deposits as turnover without complete details and that the addition under section 69A should not have been deleted.

The assessee's representative explained that the non-compliance before the AO was due to the assessee's illness and subsequent death, and that the legal heir had furnished adequate evidence to establish the source of deposits as business receipts. The VAT assessment order was relied upon as corroborative evidence of the business turnover.

Issue 3: Legality and Appropriateness of CIT(A)'s Order

The Tribunal considered the factual matrix, including the assessee's death, the legal heir's submissions, and the VAT audit confirming the turnover. The Tribunal noted the absence of any adverse remarks by the AO on the turnover figure during remand proceedings, indicating tacit acceptance.

The Tribunal observed that the non-filing of returns and failure to respond to notices before the AO was attributable to the illness and death of the assessee, and not an attempt to evade tax. Given that the total deposits were significantly less than the verified turnover, the Tribunal found no reason to treat the deposits as unexplained credits under section 69A.

In view of these facts and the provisions of section 44AD, the Tribunal upheld the CIT(A)'s order allowing income to be assessed at 8% of the turnover, thereby rejecting the Revenue's appeal.

Significant Holdings

The Tribunal held:

"Since the total amount of cash deposit and even the total amount of credits in the said bank account are well below the turnover of the late assessee's business, and since the ld. AO has verified this in the course of remand proceedings and not recorded any adverse comments, when given the opportunity to do so, we are of the opinion that the ld. CIT(A) is justified in accepting the request of the assessee's legal heir to assess the income from the said business @ 8% of gross receipts in view of the provisions of section 44AD."

The core principles established are:

• Where an assessee fails to furnish explanation for bank deposits, addition under section 69A is justified unless credible evidence is furnished to establish the source.
• Non-compliance due to illness and death of the assessee is a relevant circumstance to consider in evaluating the failure to respond to notices.
• Verification of turnover by VAT authorities can serve as reliable evidence to accept business turnover for presumptive taxation under section 44AD.
• Presumptive taxation under section 44AD can be applied even where initial assessment invoked section 69A, if turnover is duly established.
• The AO's tacit acceptance of turnover figures during remand proceedings is significant in upholding the CIT(A)'s order.

Final determinations on the issues are:

• The addition under section 69A was rightly deleted by the CIT(A) in light of the evidence of business turnover.
• The bank deposits were correctly treated as business turnover and income assessed under section 44AD at 8% of turnover.
• The Revenue's appeal against the CIT(A)'s order was dismissed.

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