Fruit dealer's bank deposits treated as business receipts; 8% profit rate applied, savings interest deduction allowed u/s 80TTA

ITAT held that the assessee's status as a fruit dealer was genuine, noting the affidavit, confirmations from other dealers, and the AO's own acceptance of the fruit business in a later reassessment for AY 2016-17. Once the business was accepted, all deposits in the bank account, both cash and cheques totaling Rs. 1,29,16,984/-, were treated as gross receipts from fruit trading rather than unexplained cash credits under s.68. In the absence of books, ITAT directed the AO to compute income by applying an 8% net profit rate on these gross receipts. Interest on the savings bank account was to be assessed as "income from other sources" with deduction u/s 80TTA allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the entire credits in the assessee's bank accounts for the relevant year could be treated and taxed as "unexplained cash credits" under section 68 of the Income-tax Act, 1961.

1.2 Whether, on the facts, the assessee's claim of being engaged in the business of dealing in fruits was to be accepted, and if so, how the bank deposits (cash and cheque) were to be characterised for tax purposes.

1.3 Whether, in the absence of books of account, income should be computed by estimating net profit on the total bank deposits treated as gross business receipts, instead of applying section 68.

1.4 Whether the treatment of savings bank interest and the assessee's eligibility to deduction under section 80TTA were correctly dealt with in assessment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Applicability of section 68 to bank deposits and characterisation of deposits as business receipts

Interpretation and reasoning

2.1 The reopening was based on substantial cash deposits in the assessee's bank accounts in a year in which no return had been filed. In assessment, the entire sum of Rs. 1,29,16,984/-, being credits in bank accounts (including cheque deposits of Rs. 25,99,984/-), was treated as "unexplained cash credits" under section 68.

2.2 The Court noted internal inconsistencies in the assessment: (i) the reasons for reopening referred to cash deposits of Rs. 1,59,30,000/-, (ii) show cause notice referred to Rs. 1,00,80,000/- as unexplained cash deposits, while (iii) the final addition u/s 68 was Rs. 1,29,16,984/- and included cheque deposits, although the Assessing Officer himself acknowledged part of these were cheque deposits.

2.3 The appellate authority's reasoning that accepting cash was against the Reserve Bank of India notification and that transactions were not permitted except in limited circumstances was held to be misconceived and illogical, as the year in question was assessment year 2015-16 and the case did not concern demonetisation-period deposits.

2.4 The assessee claimed to be a fruit dealer buying fruits from farmers and selling to wholesalers, filed an affidavit to this effect, produced names of four fruit dealers who identified him as a fruit dealer, and filed confirmations from three persons stating that the assessee was known to them as a fruit vendor. These materials were rejected by the Assessing Officer on the ground of absence of further corroborative evidence.

2.5 The Court noted that in the assessee's own case for the immediately succeeding assessment year 2016-17, in an assessment completed under section 147 read with section 144B, the Assessing Officer had accepted the assessee's fruit business as genuine. This subsequent acceptance, read with the affidavit and confirmations, led the Court to hold that the assessee's claim of carrying on fruit business was authentic.

2.6 Once the business of dealing in fruits was accepted, and there was no contrary material brought on record, the Court accepted the assessee's submission that the collections from the fruit business were deposited into the bank accounts. The entire deposits (cash and cheques) were therefore treated as business receipts, not as unexplained credits under section 68.

Conclusions

2.7 The application of section 68 to the entire bank deposits was unwarranted on the facts. The assessee's fruit business was accepted as genuine, and the total deposits in the bank accounts represented business receipts and not unexplained cash credits under section 68.

Issue 3 - Method of computation of income in absence of books; estimation of profit on gross receipts

Interpretation and reasoning

3.1 The assessee did not maintain books of account and had, in response to notice under section 148, filed a return along with a trading and profit and loss account showing:

- Sales of products: Rs. 87,25,500/-

- Sale of services: Rs. 5,54,500/-

- Total gross receipts: Rs. 92,80,000/-

- Net profit: Rs. 8,18,588/-, which included savings bank interest of Rs. 76,188/- and reflected exactly 8% net profit rate on turnover.

3.2 Having accepted that the assessee was in the fruit business and that the total bank deposits (Rs. 1,29,16,984/- including cheque deposits) represented business collections, and in the absence of books of account, the Court treated the total deposits as gross business receipts.

3.3 The Court adopted the net profit rate of 8% as admitted and demonstrated by the assessee in the trading and profit and loss account, to be applied on the total deposits treated as gross receipts.

Conclusions

3.4 The entire bank deposits of Rs. 1,29,16,984/- (cash and cheque) are to be treated as gross receipts from the assessee's fruit business, and income is to be computed by applying a net profit rate of 8% on this figure, instead of taxing the credits under section 68.

Issue 4 - Treatment of savings bank interest and deduction under section 80TTA

Interpretation and reasoning

4.1 The Assessing Officer had separately added savings bank interest of Rs. 76,297/- under the head "Income from other sources" and denied deduction under section 80TTA of Rs. 10,000/-.

4.2 The Court, while estimating business income, directed that the savings bank interest should not be subsumed in the business profit but should be correctly assessed under the head "Income from other sources."

4.3 Having treated the interest as "Income from other sources," the Court also directed that the assessee be allowed the statutory deduction under section 80TTA to the extent of Rs. 10,000/-.

Conclusions

4.4 Savings bank interest is to be assessed under the head "Income from other sources," and the assessee is entitled to deduction under section 80TTA of Rs. 10,000/-. The business income is to be computed separately on an estimated profit of 8% of the gross deposits treated as receipts from fruit business.

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