Entire amount of undisclosed money cannot be treated income but only profit embedded

Entire amount of undisclosed money cannot be treated as income and only estimated profit embedded in these transactions may only be taxed. 

In a recent judgment, Rajkot ITAT held that entire amount of undisclosed money cannot be treated as income and only estimated profit embedded in these transactions may only be taxed. 

ABCAUS Case Law Citation:
4868 (2025) (11) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the addition made under section 69A treating cash deposited in bank account as unexplained income.

The appellant assessee was an Individual. As per the SFT report, the assessee had made large amount of cash deposit in his Bank account during Demonetization period between 09/11/2016 to 30/12/2016 in old Rs.500 & Rs.1000 currency notes. Further as per ITS data, the assessee had not filed his return of income for assessment year.

On the basis of this notice was issued under section 142(1) of the Act to furnish details. However, this notice was not complied with by the assessee. Later, another show cause notice was issued but once again the assessee failed to reply. Therefore, the assessing officer made addition under section 69A of the Act in the hands of the assessee of the entire amount of cash deposits made.

Before the Tribunal the assessee submitted that the reason for not filing return of income was that he did not have any source of income.  However, he had deposited cash of 3.50 lakhs out of his past savings.  The assessee submitted that before the CIT(A), the assessee had submitted additional evidences to prove his claim that the cash was deposited out of the definite past sources of the assessee. However, the CIT(A) has rejected these additional evidences.  By way of additional evidence, the assessee submitted that the assessee has earned out of agricultural activity and for that assessee submitted the sales bills and the land holding etc. and also submitted the proof that the part amount was from the past savings of the assessee.  However, the CIT(A) did not accept these evidences and confirmed the addition made by the AO which was not justifiable. 

The assessee further submitted that since he had not filed the return of income, therefore, the basic exemption limit, of Rs. 2,50,000/- was available to the assessee.  Therefore, the assessee need not to pay the tax up to the amount of Rs. 2,50,000/-, which is the maximum amount, which is not chargeable to tax, hence, to the extent of Rs. 2,50,000/-, no addition should be made in the hands of the assessee. 

Alternatively, it was further submitted that the entire cash deposited in the bank account should not be the profit in the hands of the assessee.  Therefore, profit element should be added in the hands of the assessee, by making estimated ad hoc addition in the hands of the assessee, considering the smallness of the amount.

The Tribunal observed that the amount of addition made by the AO was in excess of Rs. 2,50,000/-, therefore, the profit element on such cash deposit in the bank account should be treated as income of the assessee. 

The Tribunal observed that in a decision the Hon’ble Jurisdictional High Court of Gujarat wherein had held that the entire amount of undisclosed money cannot be treated as income and only estimated profit embedded in these transactions may be taxed.  The Hon’ble High Court also held that 30% estimated addition in the case of ‘on money’ is sufficient to protect the interest of the revenue. 

Therefore, following the judgment of the Hon’ble Jurisdictional High Court the ITAT directed the assessing officer to disallow 30% of cash deposited in bank in the hands of the assessee.

The Tribunal further clarified that since the assessee had deposited amount during demonetization period out of his definite sources, therefore, it should be assessed by applying the normal rate of income tax and not u/s 115BBE of the Act. 

The Tribunal also clarified that the adjudication in the assessee’s appeal, had been done considering the smallness of the amount, therefore, this should not be treated as a precedent.

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