Once Sales Intially Accepted, Related Cash Desposits Cannot be Treated Entirely Unexplained: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) recently gave partial relief to a taxpayer named Jasbir Singh in a case involving huge cash deposits in bank accounts during Assessment Year 2011-12.

The assessee, Jasbir Singh, had initially declared an income amounting to Rs 1.59 lakh for the Assessment Year 2011-12. Later, the tax authorities came to know that the assessee had made deposits of approximately Rs 9.11 crore in his bank account maintained with Axis Bank and Rs 2.41 crore in his bank account with Indusind Bank, during the year in consideration.

Considering the huge difference in the income declared by the assessee and that deposited by him in the bank account, the case was reopened. The entire cash deposits in question were made as an addition to the assessee’s income as unexplained income under Section 68 of the Income Tax Act.

The aggrieved assessee filed an appeal in the ITAT Delhi, claiming that he had started a business of importing mobile phones from China and selling them in the local market. During the assessment proceedings, the assessee had submitted all relevant documents such as import invoices, bills of entry, shipping documents, sales invoices, audited financial statements, and an Import Export Code (IEC) certificate to support the claim. As per him, the cash deposited in the bank accounts represented sales proceeds from the business.

When the tribunal analysed the case, it noted that the tax authorities had not rejected the books of accounts under Section 145(3) and had also accepted the turnover shown by the assessee, which exceeded Rs 15 crore. The Tribunal further noted that once sales were accepted, the related cash deposits could not be treated entirely as unexplained income. It also accepted that the assessee had closed the business after suffering losses.

However, considering the low profit shown by the assessee, the Tribunal held that a higher profit rate should be applied to cover possible revenue leakage. Instead of sustaining the addition of Rs 11.52 crore, the ITAT directed that a Gross Profit rate of 1% be applied to the turnover of Rs 15.76 crore. Accordingly, most of the addition was deleted and the appeal was partly allowed.