I. Introduction:

1.1 The issue of cash deposits in bank accounts is under the scrutiny of the Income Tax Authorities for quite some time with the availability of the information through Annual Information Returns (now Specified Financial Transaction statements ), information available from banks and also with the inclusion of cash deposits in certain accounts exceeding Rs. 10.00 lakhs in CASS parameters. The issue became of upmost importance after the demonetization of high denomination notes (hereinafter referred to as HDNs) and the levy of punitive tax (on standalone basis effective from the assessment year 2017-18) u/s.115BBE of the Income Tax Act, 1961, (hereafter unless otherwise stated the sections referred to are of the I.T. Act only) in respect of , inter-alia, additions representing such deposits.
1.2 Broadly speaking , the treatment to be meted out to the deposits in the bank accounts under the I.T. Act, depends on the activities of the assessee i.e. whether such activities relate to business or profession and also the nature of deposits i.e. whether they can be related or attributed to such activities or not .
1.3 If the assessee is a business person and the facts and circumstances show that such deposits are made out of business receipts, then the profit component embedded in such amounts only can be subjected to tax either at the presumptive rate of profit as per Ss.44AD / 44AE or at some other reasonable or suitable rate of profit if the case is not covered under these sections .
1.4 But where the deposits could not, reasonably, be attributed to the business activities of the assessee in the facts and the surrounding circumstances , then in the absence of reasonable proof or evidence for the source of the same, the deposits have to be considered as unexplained monies of the assessee u/s.69A to be taxed u/s.115BBE. In the latter case the question of quantum of such addition will have to be separately considered, though the Revenue, more often than not, treats the entire deposits as income.

2. Parameters for judging whether cash deposits have emanated from business activities:

2.1 Where the assessee is carrying on business regularly , the natural inference is that all the receipts relate to business and the cash deposits in the banks have emanated from the business activities . Strong pointers for such an inference are as under

• The cash deposits and withdrawals are made on a regular basis [Sri Manne Baswa Reddy Vs ITO - I.T.A. No. 1873/Hyd/2017 Dt. 08/06/2018 ; ITO vs Vishan Lal – ITA No.634/Lucknow/2014]
• The assessee has no other sources of income [ITO vs Vishan La (supra); Subash Chand Sharma vs ITO –ITA No.327/Agra/2017, dtd.31.5.19]
• Assessee’s other sources of income generate only meagre amounts of income or tax exempt income such as agriculture [Munni Lal Vs ITO –ITA No.495/Delhi/2019 dtd.05.05.2020] ;
• Substantial part of the withdrawn amounts have been used for making business payments and / or the assessee produces some evidence ( perhaps not covering exhaustively all transactions in the relevant bank account) regarding the business activities , like V.A.T./ G.S.T. returns , purchase invoices and confirmatory evidence from some of the suppliers and /or customers [Ashok Desingh Naik vs ITO IT No.48/Bang/2019 dtd 27.02.2019-AY 2015-2016 ; Kiran Vallabhai Ahir Vs ITO - 2020-TIOL-438-ITAT-SURAT; ITO Vs Sri Shaik Zameer- I.T.A. No. 1019/Hyd/2017 dt.18.5.18 ]
• The gross receipts and the income earned there from , as admitted in the assessee’s Income Tax return under the head “business”, are accepted by the Revenue [Subash Chand Sharma vs ITO (supra)]
• Books of account are maintained for the business by the assessee as a matter of fact , though some of the bank transactions or some of the bank accounts are not reflected or recorded therein [Moongipa Investment Ltd vs ITO -2013-TIOL-1031-ITAT-Chand]

2.2 When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business [Lakhmichand Baijnath v CIT (1959) 35 ITR 416(S.C.)] though this issue should always be decided in the backdrop of the facts and surrounding circumstances of the particular case [Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC)] . This inference gets strengthened where the Assessing officer accepts most of the deposits as related to business but goes on to treat the balance deposits as unexplained moneys without proving the contrary. Again , this legal position remains the same even where some of the transactions in a particular bank account or one or more of bank accounts are not reflected in the books or where the books of account don’t reflect all the sales so long as the assessee produces some evidence of business activities suggesting commensurate or reasonable extent of magnitude of business activities or has no other sources of income or has only meagre sources of income [ITO Vs Narender Kumar Handa 2018-TIOL-2177-ITAT-DEL ; see Ashok Desingh Naik vs ITO (supra)]
2.3 But where the assessee has failed to establish the fact of carrying on of the business itself or where the deposits and withdrawals are not made in a regular manner , addition of the bank deposits u/s.69A would be justified.[Naresh Kumar vs CIT (2017)88 taxmann.com 547 (P&H)] In this case , throughout the year, on different dates the assessee had made deposits of identical amounts in the bank account but the withdrawals were made only at the fag end of the financial year and there was no reliable evidence produced in support of business activities.