ITAT Bangalore Orders Fresh Assessment of Demonetisation-Linked Cash Deposits in Thaladammanahalli Muninarayanappa Ravikumar Vs ITO
Background of the Dispute
In the case of Thaladammanahalli Muninarayanappa Ravikumar Vs ITO, the Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) examined an assessment framed ex parte for A.Y. 2017-18 that was based entirely on cash and non-cash deposits appearing in the assessee’s bank account during the demonetisation period.
The assessee, an individual, operated a proprietorship concern under the name M/s. Ravi Enterprises, engaged in wholesale trading of edible oils. For the relevant assessment year, the assessee did not file a return of income, claiming that the total income was below the basic exemption limit.
On the basis of information relating to significant cash deposits made during the demonetisation window, the Assessing Officer (AO) initiated proceedings and ultimately treated the entire bank deposits as business turnover, estimating income at 8% under Section 44AD of the Income Tax Act 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] later upheld this action ex parte.
The ITAT was called upon to decide whether such an estimation, without deeper verification of actual business turnover and profitability, could be sustained in law.
Facts Considered by the AO
Non-filing of Return and Trigger for Scrutiny
- The assessee, an individual proprietor of M/s. Ravi Enterprises, was engaged in wholesale trading of edible oils.
- No return of income was filed for
A.Y. 2017-18on the premise that the income did not exceed the taxable threshold. - The AO received information that substantial cash had been deposited in the assessee’s bank account during the demonetisation period.
Based on this information, the AO issued a notice under Section 142(1) to initiate proceedings and called for details.
Bank Statement and Deposit Details
The AO obtained the assessee’s bank statement from State Bank of India (SBI). On examination, the AO noticed total deposits of Rs. 3,38,82,108/- (including both cash and non-cash deposits).
Treating these deposits as the assessee’s total turnover for the year, the AO invoked the presumptive taxation provisions of Section 44AD and estimated income at 8% of the so-called turnover. Accordingly, the AO computed the assessee’s income at Rs. 27,10,570/-.
Ex Parte Nature of Assessment
The assessment was ultimately completed under Section 144 (best judgment assessment). Though there was at least one instance where the assessee responded, the AO was not satisfied with the explanation and proceeded to estimate income by applying 8% on the aggregate deposits.
Crucially, this estimation was made:
- Solely on the basis of total deposits in the bank account, and
- Without correlating deposits to business purchases, sales, or any supporting books of account or other material.
Proceedings Before the CIT(A)
The assessee filed an appeal before the CIT(A), challenging the assessment.
Non-compliance Before CIT(A)
- The CIT(A) issued five separate notices to the assessee.
- The assessee did not respond to any of these notices or appear in the appellate proceedings.
As a result, the CIT(A):
- Decided the appeal ex parte, based only on the assessment records, and
- Confirmed the AO’s estimation and addition.
The assessee then carried the matter in further appeal before the ITAT, Bengaluru.
Contentions Raised by the Assessee Before ITAT
At the Tribunal, the learned Authorised Representative (AR) for the assessee raised several key points:
1. Challenge to Section 144 Assessment
The assessee argued that the best judgment assessment under Section 144 was not properly framed, primarily because: