S. 68 Applies to Cash Credits in Books Even under Presumptive Tax: ITAT Deletes Ad Hoc Profit Addition [Read Order]

The assessee, a trader in vegetables and agro products, declared income of ₹3,92,730 under Section 44AD on a turnover of ₹52.8 lakh for Assessment Year 2014–15. The case was selected for limited scrutiny after the Assessing Officer (AO) noticed substantial cash deposits of ₹1.58 crore in the assessee’s bank account.

The assessee explained that ₹52.8 lakh represented sales proceeds and that ₹78 lakh paid to M/s TAHA Traders was an advance for business purchases made through banking channels. He contended that the remaining deposits arose from business liquidity, cash savings, and funds belonging to his late father, who also dealt in vegetables and allegedly used the same bank account.

Tax Rules Simplified, Practice Amplified! Click here

The AO rejected these explanations and made an addition of ₹78 lakh under Section 68 as unexplained cash credit, along with a further addition of ₹2.25 lakh, calculated at 8% on a residual sum of ₹28.14 lakh, treating it as profit from suppressed turnover. The CIT(A) confirmed both additions, prompting the assessee’s appeal before the Tribunal.

Before the Tribunal, the assessee argued that Section 68 was not applicable since he was assessed on a presumptive basis under Section 44AD and was not required to maintain books of account.

It was contended that the AO had wrongly relied on a balance sheet and profit and loss account that the assessee had prepared only for personal reference, not for tax purposes. The cash deposits, according to the assessee, were sourced from accumulated capital, advances from customers, and cash generated over several years, including from his father’s business.

Alternatively, he submitted that the entire deposits should be treated as business turnover, with profits computed at 8% as per Section 44AD.

Your Definitive Guide to India’s Income Tax Laws! Click here

The Tribunal rejected the assessee’s core argument on the non-applicability of Section 68. It was observed that the assessee had, in fact, produced a cash book, balance sheet, and profit and loss account before the AO to explain the source of cash deposits.

Since “books of account” as defined under Section 2(12A) include ledgers and cash books, the Tribunal held that any unexplained cash credits recorded therein would attract Section 68, notwithstanding the assessee’s claim of presumptive taxation.

The Tribunal noted that while Section 44AD provides a simplified scheme for determining business income, it does not prohibit the maintenance of books, nor does it immunise assessees from scrutiny of cash transactions when such books are voluntarily maintained. Having recorded cash credits in a cash book, the assessee could not argue that Section 68 was inapplicable.

On merits, the Tribunal found that the assessee’s explanation for the source of ₹78 lakh, purportedly from family savings, business accruals, and his father’s funds, was unsubstantiated.

No evidence was provided to support the claim of advances from customers or to link the deposits with identifiable business transactions. Accordingly, the Tribunal upheld the ₹78 lakh addition as unexplained cash credit.

Regarding the ad hoc addition of ₹2.25 lakh (8% of ₹28.14 lakh), the Tribunal adopted a lenient approach. Considering the overall cash flow pattern and the likelihood that the assessee’s father, a fellow trader, may have used the same bank account, the Bench accepted that part of the deposits could reasonably be explained as belonging to him. In view of this, the Tribunal deleted the ₹2.25 lakh addition as unjustified.

Concluding that the assessee had failed to offer a satisfactory explanation for the ₹78 lakh deposit, the two-member bench of Anubhav Sharma (Judicial Member) and Naveen Chandra(Accountant Member) sustained the major addition under Section 68 but deleted the minor ad hoc profit addition.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates