Cash deposits characterised as business receipts rather than unexplained income, income estimated at 12% net profit rate.

Where cash deposits in bank accounts were linked to petty electrical contracting activity, only the income element embedded in gross receipts can be taxed rather than the entire deposits; the tribunal accepted application of presumptive taxation under section 44AD and adjusted the assessment to reflect business receipts. The tribunal preferred a compromise net profit rate above the assessee's claim but below the department's suggestion, and therefore estimated taxable income by applying a 12% net profit rate on gross receipts, allowing the appeal partly.

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Issues: Whether the entire bank deposits of Rs. 10,27,541/- can be treated as unexplained income, or whether the income should be estimated by applying a net profit rate (presumptive taxation) on the gross receipts shown in the bank account.

Analysis: The assessment was completed ex-parte by treating the aggregate cash deposits as unexplained income. The assessee later furnished the complete bank statement with entry-wise explanations showing small and moderate deposits throughout the year accompanied by frequent withdrawals and negligible running balances. The factual pattern indicates linkage of the deposits with petty electrical contracting business activity rather than undisclosed sources. Where deposits are linked to business activity, the entire deposits are not taxable as income; only the income element in the gross receipts can be brought to tax. Considering the nature of the business and the transaction pattern, estimation of income by applying a presumptive/net profit rate is appropriate. Both parties' pleadings on the appropriate net profit rate were considered and a 12% net profit rate on the gross receipts of Rs. 10,27,541/- was applied as a balanced estimate.

Conclusion: The addition treating the entire cash deposits of Rs. 10,27,541/- as unexplained income is set aside; income is to be recomputed by applying net profit @ 12% on gross receipts of Rs. 10,27,541/-, with consequential relief to the assessee. The appeal is partly allowed in favour of the assessee.

Ratio Decidendi: Where bank deposits are shown to be linked with business activity, only the income element of gross receipts is taxable and the assessing authority may estimate income by applying an appropriate net profit/presumptive rate rather than treating gross receipts as unexplained income.

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