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Facts
The assessee filed his return of income declaring ₹8,53,290. During scrutiny, the AO observed cash deposits of ₹28.69 lakh. The assessee initially claimed these were transportation of goods for M/s Hannah Trading Company and later changed the explanation to loans from friends and relatives due to his father's medical expenses.
Held
The Tribunal noted that the assessee had revised his computation treating cash deposits as turnover under Section 44AD. The AO rejected this and treated the entire deposit as unexplained income. The Tribunal found that the AO's findings were not clear regarding the revised computation and the disallowance of expenditure was made on an ad-hoc basis without specific defects being pointed out.
Key Issues
Whether the cash deposits of ₹28.69 lakh were unexplained income, and whether the disallowance of ₹1,85,710 for business expenditure was justified.
Sections Cited
44AD, 250, 131
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The present appeal has been filed by the assessee against the order passed by the learned Commissioner of Income Tax (Appeals) under section 250 of the Act dated 13.08.2025.
The assessee has raised nine grounds of appeal in the memorandum of appeal. For the sake of brevity and convenience, the same are not reproduced here.
ITA No.2238/Bang/2025 Page 2 of 8
The grounds of appeal are interconnected and relate to the addition made on account of cash deposits amounting to ₹28.69 lakh and the disallowance of ₹1,85,710 claimed as expenditure incurred for business purposes.
The brief facts of the case are that the assessee, an individual, filed his return of income for the relevant assessment year declaring a total income of ₹8,53,290.00 only. The assessee is engaged in the profession of business consultancy and renders services to various organisations on a contractual basis.
The Assessing Officer observed from the bank statement that there were cash deposits amounting to ₹28.69 lakh during the year. The assessee submitted that the cash deposits represented amounts received towards transportation of goods belonging to M/s Hannah Trading Company. It was stated that no regular books of account were maintained in respect of this activity.
5.1 However, during the course of scrutiny proceedings, the assessee filed a revised computation of income treating the cash deposits as his turnover and offered income at the rate of 8% under the presumptive provisions of section 44AD of the Act. The income so computed worked out to ₹2,30,752.00 only. On the other hand, the Assessing Officer rejected the contention of the assessee. Thereafter, the Assessing Officer recorded the statement of the assessee under section 131 of the Act. In the course of the statement, the assessee changed his earlier explanation and stated that the cash deposits in his bank account represented amounts received from close friends and relatives. He
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submitted that his father was suffering from cancer and was undergoing frequent medical treatment, and to meet urgent medical expenses, he had sought financial assistance from friends and family members.
5.2 On the contrary, the Assessing Officer observed that the explanation offered by the assessee regarding the source of cash deposits appeared to be an afterthought and a fabricated story. Accordingly, a final show cause notice was issued to the assessee. However, no response was filed to the said notice. Consequently, the Assessing Officer treated the sum of ₹28.69 lakh as unexplained income and added the same to the total income of the assessee.
5.3 Further, with regard to indirect expenses of ₹3,71,421 claimed by the assessee, the Assessing Officer noted that no supporting documents were furnished during the course of scrutiny proceedings. Therefore, 50% of the said expenditure, amounting to ₹1,85,710, was disallowed on the ground that it was not proved to be wholly and exclusively incurred for the purpose of business consultancy and the same was added back to the returned income.
Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the learned Commissioner of Income Tax (Appeals).
Before the learned Commissioner of Income Tax (Appeals), the assessee submitted that the Assessing Officer was not justified in making the addition of ₹28.69 lakh, as the same was based purely on suspicion and surmises without bringing any cogent material on record.
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The assessee further submitted that during the course of scrutiny proceedings, he had voluntarily filed a revised computation of income by treating the alleged unexplained cash deposits as turnover and had offered income at the rate of 8% under section 44AD of the Act. It was contended that once income was offered on a presumptive basis, the entire cash deposits could not be treated as unexplained income.
8.1 With regard to the disallowance of 50% of business expenditure, the assessee submitted that the Assessing Officer had made the disallowance without assigning proper reasons or justification. It was contended that such an ad hoc disallowance, without pointing out specific defects, was arbitrary and contrary to the principles of natural justice.
On the contrary, the learned Commissioner of Income Tax (Appeals) observed that the conduct of the assessee during the assessment proceedings was not diligent. The learned CIT(A) referred to the well-known legal maxim VIGILANTIBUS NON DORMIENTIBUS JURA SUBVENIUNT, meaning that the law assists those who are vigilant and not those who sleep over their rights. Reliance was also placed on certain judicial precedents in support of this principle.
The learned CIT(A) further observed that even during the appellate proceedings, the assessee failed to come forward with proper explanations and supporting evidence in respect of the grounds raised, despite being granted several opportunities. Accordingly, the learned CIT(A) upheld the additions made by the Assessing Officer and dismissed the appeal of the assessee.
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Aggrieved by the order of the learned CIT(A), the assessee has preferred the present appeal before us.
The learned AR submitted before us that both the Assessing Officer and the learned CIT(A) failed to appreciate that the cash deposits of ₹28.69 lakh had already been considered by the assessee as business receipts in the revised computation of income filed during the assessment proceedings. It was contended that once the deposits were treated as turnover and income was offered at the prescribed rate under section 44AD of the Act, the Assessing Officer was not justified in again treating the entire amount as unexplained income, as the nature and source of the deposits stood explained.
12.1 The learned AR further submitted that the disallowance of ₹1,85,710 claimed as business expenditure was unjustified and purely on ad-hoc basis. It was argued that the authorities below had not pointed out any specific defects in the expenditure claimed. The assessee also contended that the learned CIT(A) ought to have granted one more effective opportunity of hearing in the interest of natural justice and equity before passing the impugned order.
On the contrary, the learned Departmental Representative (DR) supported the orders of the lower authorities. It was submitted that the assessee had taken inconsistent stands during the assessment proceedings and failed to substantiate the source of cash deposits with credible evidence. Therefore, the Assessing Officer was justified in treating the deposits as unexplained income. With regard to the disallowance of expenditure, the learned DR submitted that in the
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absence of supporting documents, the Assessing Officer was justified in making reasonable disallowance.
We have heard the rival submissions of both the parties and perused the materials available on record. Insofar as the addition of ₹28.69 lakh is concerned, we note that the assessee had, during the course of assessment proceedings, filed a revised computation treating the impugned cash deposits as turnover and offered income at 8% under section 44AD of the Act. The Assessing Officer, however, rejected the explanation and treated the entire amount as unexplained income, primarily on the ground that the assessee had changed his stand during the proceedings and failed to substantiate the source with supporting evidence.
14.1 At the same time, we also notice that there is no clear finding by the Assessing Officer as to whether the revised computation filed by the assessee was examined in proper perspective. If the cash deposits are to be treated as business receipts, only the profit element can be brought to tax. On the other hand, if the explanation regarding business activity is found to be incorrect, then appropriate findings supported by material evidence are required before invoking provisions relating to unexplained income. The issue, therefore, requires proper verification of facts, including the nature of activity, eligibility under section 44AD, and supporting evidence for the deposits.
14.2 Similarly, with regard to the disallowance of ₹1,85,710 out of business expenditure, the disallowance has been made on an ad hoc basis at 50% without clearly identifying specific defects in the claim. The
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assessee, on the other hand, contends that the expenditure was incurred wholly and exclusively for business purposes. This aspect also requires verification of supporting documents and a reasoned finding.
14.3 Considering the totality of the facts and in the interest of justice, we deem it appropriate to set aside the order of the learned CIT(A) on both issues and restore the matter to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall examine the revised computation, the applicability of section 44AD, the source of cash deposits, and the claim of business expenditure afresh after affording adequate opportunity of being heard to the assessee. The assessee is also directed to cooperate fully and furnish all necessary evidence in support of his claims. Accordingly, the ground of appeal of the assessee is hereby allowed for statistical purposes.
In the result, the appeal of the assessee id hereby allowed for statistical purposes
Order pronounced in court on 5th day of March, 2026
Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 5th March, 2026 / vms /
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Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore
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