Application of Section 44AD: ITAT Rules Gross Deposits Taxable at 8% for Retail Business Assessment [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the gross deposits of a retail business are taxable at 8% under Section 44AD of the Income Tax Act, 1961, rather than treating the entire amount as undisclosed income.

The assessee, Santosh Kumar, engaged in the trading of Kota Stones under the name Garg Stone and Suppliers, had cash deposits totaling Rs. 25,56,700 in his ICICI Bank, Dholpur account during the Assessment Year (A.Y.) 2011-12.

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The Income Tax Department issued a notice under Section 148, as the assessee had not filed a return. Despite receiving the notice, the assessee failed to comply, leading to an ex-parte assessment under Section 144, where the AO treated the entire cash deposit as income from other sources.

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The assessee appealed before the CIT(A), arguing that the cash deposits were business receipts, and similar transactions had been accepted in A.Y. 2010-11. The CIT(A) dismissed the appeal stating that additional evidence submitted under Rule 46A of the Income Tax Rules, 1962, was inadmissible.

On further appeal before the ITAT, the assessee’s counsel argued that he was engaged in a retail trading business, where Section 44AD should be applied, taxing only 8% of gross receipts as business profit. The assessee also invoked the Peak Credit Theory, arguing that only Rs. 1,39,000 should be treated as taxable income.

The two-member bench, comprising Dr. S. Seethalakshmi (Judicial Member) and Gagan Goyal (Accountant Member) observed that while the assessee had failed to cooperate with the AO, the real income should be taxed instead of the entire deposit.

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Considering that the Revenue had accepted the same nature of transactions in the previous year, the tribunal ruled that Section 44AD was applicable and restricted the taxable income to Rs. 2,05,000, calculated at 8% of the total deposits.

The tribunal ruled that the AO’s assessment of Rs. 25,56,700 as undisclosed income was unjustified and deleted the addition. The tribunal partially allowed the appeal and deleted the addition made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

To Read the full text of the Order CLICK HERE

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