Section 68 Additions Unsustainable Without Books Of Account: ITAT Treats Bank Deposits Of Fruit Trader As Business Receipts
Pranav B Prem
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT), comprising Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member), has held that additions under Section 68 of the Income Tax Act, 1961 cannot be sustained in the absence of books of account maintained by the assessee. The Tribunal further held that where bank deposits are explainable as business receipts, the same must be treated as such and income computed on a presumptive basis. Accordingly, the Bench directed the Assessing Officer (AO) to treat the entire bank deposits as gross receipts from the assessee’s fruit trading business and to compute income at 8% thereof .
The appeal was filed by a Bangalore-based assessee engaged in the business of buying seasonal fruits from farmers and selling them to wholesalers. The appeal related to the Assessment Year (AY) 2015–16 and was directed against the order passed by the National Faceless Appeal Centre (NFAC), which had upheld additions made by the AO treating the bank deposits as unexplained cash credits.
The assessee had not filed a return of income for AY 2015–16. The case was reopened under Section 147 of the Act after the department noticed substantial deposits aggregating to ₹1.59 crore in his bank accounts. Pursuant to the reopening, notice under Section 148 was issued, followed by notices under Sections 142(1) and 143(2) of the Act .
During the assessment proceedings, the assessee explained that he was a fruit dealer by occupation and that trading in fruits was exempt from VAT and GST. Consequently, he did not maintain any formal books of account. He further stated that he operated his business from his residence and that the deposits in the bank accounts represented sale proceeds from fruit trading. In support of his claim, the assessee filed an affidavit and also furnished confirmation letters from persons identifying him as a fruit dealer.
The AO, however, rejected the explanation on the ground that no documentary or corroborative evidence was produced to establish the nature of the business. The AO treated deposits of ₹1.29 crore, which included cheque deposits of approximately ₹26 lakh, as unexplained cash credits under Section 68 of the Act. In addition, savings bank interest of ₹76,297 was added under the head “income from other sources,” and deduction under Section 80TTA was denied.
On appeal, the NFAC upheld the assessment order. It reasoned that acceptance of large cash transactions was contrary to RBI guidelines and that the assessee had failed to discharge the onus of explaining the source of deposits made in three bank accounts. The appellate authority also observed that the assessee had merely claimed to be a fruit trader without satisfactorily establishing the source of the deposits.
The ITAT found several infirmities in the approach adopted by the lower authorities. At the outset, the Tribunal observed that Section 68 presupposes the existence of books of account maintained by the assessee. In the present case, it was an undisputed fact that the assessee did not maintain any books of account. Therefore, the very foundation for making additions under Section 68 was absent.
The Tribunal also took exception to the reliance placed by the NFAC on RBI guidelines relating to cash transactions. It noted that the assessment year involved was 2015–16 and had no connection whatsoever with the demonetisation period. Such observations were held to be wholly misplaced and irrelevant.
Significantly, the Tribunal noted that for AY 2016–17, the AO himself had accepted the assessee’s claim of carrying on a genuine fruit trading business in reassessment proceedings. This, according to the Tribunal, lent credibility to the assessee’s explanation regarding the nature of his business for the year under consideration as well.
The Tribunal further observed that the assessee had filed a return of income in response to the notice under Section 148, declaring gross receipts of ₹92.80 lakh and net profit of ₹8.18 lakh, which worked out to approximately 8% of the turnover. The affidavits and confirmation letters identifying the assessee as a fruit dealer were rejected by the AO without bringing any contrary material on record.
Another inconsistency highlighted by the Tribunal was that while the AO treated the entire amount of ₹1.29 crore as cash deposits, he himself acknowledged that a portion of the deposits comprised cheque credits. This, the Tribunal held, undermined the conclusion that the entire amount represented unexplained cash credits.
In light of these findings, the ITAT held that once the assessee’s business activity was accepted as genuine, the bank deposits had to be treated as business receipts in the absence of any contrary evidence. The Tribunal directed the AO to treat the entire deposits of ₹1.29 crore, including both cash and cheque deposits, as gross receipts from the fruit trading business and to compute net profit at 8%, as declared by the assessee. The Tribunal further directed that the savings bank interest be assessed under the head “income from other sources” and that deduction under Section 80TTA to the extent of ₹10,000 be allowed. The appeal was accordingly partly allowed.
Cause Title: Mr. Abdul Jaleel Versus ITO
Case No.: ITA No.585/Bang/2025
Coram: Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member)
