ITAT Ahmedabad Rules Cash Deposits From Tractor Sales Cannot Be Taxed As Unexplained Income

Background of the Dispute

The matter in ITO Vs Manibhadra Tractors came before the Income Tax Appellate Tribunal, Ahmedabad Bench, in the context of reassessment proceedings initiated under Section 147 for A.Y. 2017–18. The core controversy was whether cash deposited in the assessee’s bank accounts could be treated as unexplained money under Section 69A and taxed under Section 115BBE of the Income Tax Act 1961.

The Assessing Officer (AO) had originally proceeded ex-parte and treated a substantial sum of bank deposits as unexplained cash credits. However, in appellate proceedings, the assessee claimed that the deposits represented cash collections from regular business activities – specifically, the sale of tractors and related products to farmers – duly recorded in the books of account.

The ITAT ultimately upheld the order of the Commissioner of Income Tax (Appeals) [CIT(A)] and confirmed that the cash deposits could not be taxed as unexplained income where they were demonstrably linked to recorded business sales.

Facts Leading to Reassessment

Non-filing of Return and Information of High-Value Transactions

  • The assessee, a partnership firm operating under the name “Manibhadra Tractors”, was engaged in sales and service of tractors and allied spare parts of Mahindra & Mahindra (M&M) at Kalol.
  • For A.Y. 2017–18, the assessee did not file its return of income within the prescribed time.
  • The AO received information that the assessee had entered into financial transactions aggregating to Rs. 5,41,34,906/- during the relevant year.
  • Based on this information, the AO issued a notice under Section 148 on 28.03.2021, thereby reopening the assessment under Section 147.

Ex-Parte Assessment Under Section 147 r.w.s. 144B

  • During the reassessment proceedings, there was no compliance recorded by the AO at the initial stage – no return or supporting details were noted as filed in response to the notice.
  • Consequently, the AO framed the assessment ex-parte under Section 147 read with Section 144B on 29.03.2022.
  • The AO computed the total income at Rs. 4,14,05,906/- and made multiple additions, including treating cash deposits/credits of Rs. 4,08,15,150/- as unexplained money under Section 69A read with Section 115BBE.

Appeal Before CIT(A) and Additional Evidence

Assessee’s Stand in First Appeal

Aggrieved by the reassessment order, the assessee filed an appeal before the National Faceless Appeal Centre (NFAC), functioning as CIT(A). During this appellate stage, the assessee came forward with extensive documentation explaining the nature of the bank deposits.

The assessee submitted that:

  • It was a duly constituted partnership firm.
  • Its regular business was selling tractors, providing service, and dealing in spare parts of M&M tractors.
  • The cash deposits were nothing but sale proceeds of tractors and related items, largely collected in cash from farmers and other customers and routed through bank accounts.

To substantiate this explanation, the assessee produced, inter alia:

  • Tax audit report
  • Audited financial statements
  • Cash book and cash flow statement
  • Bank book and bank statements
  • Detailed sales and purchase registers
  • VAT returns
  • RTO registration details of tractors sold to customers (mainly farmers)
  • Ledger account and purchase records relating to Mahindra & Mahindra

Remand Proceedings and AO’s Report

Since these materials had not been examined during the original assessment, the CIT(A) called for a remand report from the AO. In remand, the AO was given an opportunity to:

  1. Verify the additional documentary evidence filed by the assessee; and
  2. Reconcile the bank deposits with the recorded business transactions.

During this remand exercise: