Reopening based on undisclosed bank transactions upheld, but only profit element in routed deposits was taxable.

Unreported bank account transactions can justify reopening where the account and related entries were not disclosed in the return or balance sheet and the assessee later offered additional profit in response to section 148 notice. The reopening was therefore treated as valid. For taxability of the bank deposits, where credits were matched by corresponding cash withdrawals and reflected business-like turnover, only the profit element embedded in the routed transactions was treated as taxable, not the full credits. The addition was restricted accordingly, with set-off allowed for profit already offered by the assessee.

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Issues: (i) Whether the reopening of assessment was valid when the assessee had not disclosed the bank account and related transactions in the return and balance sheet. (ii) Whether the entire credits in the bank account could be taxed as unexplained income, or only the profit element embedded in the deposits and withdrawals was liable to be assessed.

Issue (i): Whether the reopening of assessment was valid when the assessee had not disclosed the bank account and related transactions in the return and balance sheet.

Analysis: The bank account with Shri Renuka Multi State Urban Co-operative Credit Society Limited was not disclosed in the balance sheet and the transactions routed through it were not accounted for in the regular books. The assessee also admitted additional profit in the return filed in response to notice under section 148, which supported the basis for reopening.

Conclusion: The reopening was held to be valid and the assessee's challenge on this issue was rejected.

Issue (ii): Whether the entire credits in the bank account could be taxed as unexplained income, or only the profit element embedded in the deposits and withdrawals was liable to be assessed.

Analysis: The credits in the bank account were found to be linked with corresponding debits and withdrawals, mostly in cash, and the account reflected business-like transactions rather than isolated unexplained receipts. In such circumstances, taxing the whole credit amount was held to be incorrect. Following the coordinate bench decisions on identical facts, only the profit element embedded in the turnover routed through the bank account was considered taxable, and the additional profit already offered by the assessee was directed to be set off.

Conclusion: The addition was restricted to 8% of the credits, with credit for the additional profit already offered, and the assessee succeeded partly on merits.

Final Conclusion: The appeal was partly allowed by upholding reopening, but limiting the addition to the profit element embedded in the bank transactions and granting set-off of the additional profit offered.

Ratio Decidendi: Where bank deposits are intertwined with corresponding withdrawals and represent undisclosed business turnover, only the profit element embedded in the transactions can be brought to tax, not the entire credits.

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