Surat fruit trader declares Rs 14.57 lakh income; tax dept finds Rs 2.43 crore deposits, raises assessment to Rs 5.09 crore — ITAT finds major error

When the matter reached the Income Tax Appellate Tribunal (ITAT), the judges found that the officer’s own cash deposit numbers were wrong. The figures used to justify such a huge addition simply did not match what the bank records showed.

This is not a one-off story. Similar cases keep coming up before the Tribunal, and they all raise the same question. If a person has opted for the presumptive scheme under Section 44AD, how far can the tax department go in questioning his bank account?

Here’s what happened in the case, why the taxpayer’s income was assessed at Rs 5.09 crore, and how the ITAT’s intervention changed the outcome.

The case

In Zakir Yakubbhai Patel v. ITO, Ward-2(2)(5), Surat [ITA No. 1113/Srt/2024, AY 2017-18], the taxpayer had declared business income under the presumptive taxation scheme of section 44AD and had not maintained regular books of account. 

His case was selected for scrutiny mainly due to cash deposits during the demonetisation period. The AO made substantial additions, including Rs. 2.43 crore towards bank deposits and credits, Rs. 71.87 lakh towards unsecured loans and Rs. 1.79 crore towards loans and advances, resulting in assessed income of about Rs. 5.09 crore as against returned income of Rs. 14.57 lakh.

Before the ITAT, the taxpayer argued that the figures adopted by the AO were incorrect and that his actual cash deposits were only about Rs. 89.16 lakh. He also contended that certain unsecured loans related to earlier years and were not received during the relevant year. 

The Tribunal noted significant discrepancies in the figures and observed that, merely because a taxpayer has opted for section 44AD, the entire amount credited in bank accounts cannot automatically be treated as taxable income without examining its nature and source.

The ITAT therefore did not delete the additions outright but restored the matter to the AO for fresh verification. The case rationale is that presumptive taxation simplifies the computation of business income, but it neither prevents the Department from examining suspicious deposits nor permits the AO to mechanically treat all bank credits as income. Additions must be based on verified facts and the actual nature of the transactions.

Can the tax department still add cash deposits as income under Section 44AD?

Yes, it can, and this is where a lot of taxpayers get confused. Section 44AD is meant for small businesses with turnover up to Rs 2 crore. Under this scheme, a person can simply declare 8 percent of turnover as profit (6 percent if the money came through banking channels), pay tax on that, and skip the hassle of maintaining full books of account or getting a tax audit done.

But this scheme only covers the profit calculation. It does not mean that whatever amount shows up in the bank account is automatically safe from questioning. If the cash deposits are more or less in line with the turnover already declared, there is usually no problem. But if the deposits are far higher than the declared turnover, the tax officer can ask where that extra money came from, and if there is no proper explanation, he can add it as unexplained income under separate provisions such as Section 68 or Section 69A.

“There have been cases where this played out badly for the taxpayer. In one such matter, a person had declared presumptive income of around Rs 7 lakh on a turnover of about Rs 92 lakh, but the bank showed total credits of more than Rs 8 crore during the year. The Tribunal upheld the addition in that case, making it clear that opting for Section 44AD does not give a free pass when deposits are far beyond what has been declared,” said Rajat Sharma, Advocate, Jotwani Associates. 

So the real position is straightforward. Section 44AD protects the presumptive profit rate on turnover that is genuine and explained. It does not protect money that cannot be explained, even if it happens to sit in the same bank account as the business income.

Why does matching bank entries properly matter so much once a case goes into scrutiny?

Because most of these cases are actually lost or won on simple arithmetic, not on complicated legal arguments. When a tax officer looks at a bank statement, he often adds up every credit entry and treats the whole amount as suspicious income. In reality, that total usually includes things that have nothing to do with fresh income, like money transferred between one’s own accounts, a cheque that bounced and was deposited again, loan amounts received, refunds, or money collected on someone else’s behalf and passed on. If nobody sits down and separates all of this out, the inflated total ends up becoming the basis for a massive tax demand.

This appears to be exactly what happened in the Rs 5.09 crore case. The gap between what the officer claimed was deposited and what the bank statement actually showed suggests the reconciliation was never done properly in the first place. This kind of mistake shows up again and again in Tribunal orders. 

“In many cases, once the taxpayer produces a clear reconciliation and shows that a large part of the “unexplained” money was actually double counted, or was a transfer, or was already part of the declared turnover, the addition is either reduced sharply or thrown out altogether,” Sharma said.  

“On the other hand, where a taxpayer cannot show any paperwork or explanation for the deposits, the Tribunal has been equally willing to confirm the addition, even when the person had declared a small income under the presumptive scheme,” Sharma further added. 

The point is that these disputes rarely hinge on whether Section 44AD applies or not. They usually come down to whether someone has actually gone through the bank statement, entry by entry, and matched it to a source.

What should someone using Section 44AD do if bank transactions are much higher than the income declared?

If the total credits in the bank account are clearly higher than the turnover declared in the return, this is exactly the kind of mismatch that gets picked up for scrutiny under the current system, where the department already has access to AIS, Form 26AS, and bank reporting data. It is far easier to sort this out at the time of filing than after a notice lands.

Keep some basic records even though formal books are not compulsory. Section 44AD removes the requirement to maintain detailed books of account, but that does not stop the department from asking questions once the deposits look unusually high compared to the declared turnover. A simple daybook of receipts, maintained through the year, carries far more weight than a document prepared after the notice has already been received.

Keep business money and personal money clearly separate. Loans taken, gifts received, money from selling a personal asset, amounts collected on behalf of someone else and passed on, and transfers between one’s own accounts should all be identifiable and backed by some paper trail, such as loan confirmations, sale agreements, or bank advice slips. None of this should get mixed up with business turnover in a way that makes it impossible to tell apart later.

Hold on to bank statements for the full year and match them against sales bills, invoices, or at least a basic receipts record, not just for the months where deposits look large.

If the actual turnover for the year is genuinely higher than what was declared, it may be worth correcting the return rather than sticking to a lower figure that cannot be justified later. A mismatch like that is often what triggers scrutiny in the first place.

Whenever a notice does come, the first and most useful thing to send back is a clear statement reconciling the bank deposits with the declared turnover. In most of these cases, that one document is what decides whether the matter gets sorted out quickly or drags all the way to the Tribunal.

The larger lesson from cases like this one is fairly simple. Section 44AD makes life easier on the compliance side, not on the explanation side. The moment bank deposits and declared income drift apart, the burden falls back on the taxpayer to explain where the money came from, and how well that explanation is put together usually matters more than any legal argument about the scheme itself.

What is Section 44AD?

Section 44AD of the Income-tax Act (ITA), 1961 (corresponding section 58 of ITA 2025), is a presumptive taxation provision designed to simplify tax compliance for eligible small businesses. The scheme enables qualifying taxpayers to compute their taxable business income at a prescribed percentage of turnover or gross receipts, without the need to maintain detailed books of account or determine profits based on actual income and expenditure.

An eligible taxpayer may declare business income on a presumptive basis at 8% of the total turnover or gross receipts of the eligible business. However, the presumptive rate is reduced to 6% in respect of turnover or receipts received through specified banking or online modes. A taxpayer may also voluntarily declare income at a rate higher than the prescribed presumptive rate.

The scheme is available to a resident individual, resident Hindu Undivided Family (HUF) or resident partnership firm, other than an LLP, carrying on an eligible business. 

“Ordinarily, the turnover or gross receipts of the business should not exceed Rs. 2 crore during the year. However, this threshold is increased to Rs. 3 crore where cash receipts do not exceed 5% of the total turnover or gross receipts for the year. The scheme does not apply to the business of plying, hiring or leasing goods carriages covered by section 44AE, specified professions referred to in section 44AA(1), agency businesses, or persons earning income in the nature of commission or brokerage,” said CA (Dr.) Suresh Surana. 

Further, once income is offered on this presumptive basis, deductions for business expenses covered under Sections 30 to 38 of ITA 1961 (corresponding to sections 28 to 33 of ITA 2025) are deemed to have already been allowed.

Thus, section 44AD essentially allows eligible small businesses to offer a prescribed percentage of turnover as taxable business profit instead of computing actual profit after separately claiming individual business expenses, subject to the prescribed eligibility conditions and turnover limits.

Taxpayers should exercise caution before opting in or out of the presumptive taxation scheme under section 44AD. 

“Under section 44AD(4), where an eligible taxpayer declares income under section 44AD and subsequently fails to declare income in accordance with the presumptive scheme in any of the next five years, the taxpayer may become ineligible to claim the benefit of section 44AD for the five years following the year of such exit,” stated Surana.  

Accordingly, the decision to discontinue the scheme should not be taken merely on a year-to-year basis without considering the potential five-year lock-out and the consequential requirements relating to maintenance of books and tax audit, where applicable. The precise consequences should be evaluated based on the taxpayer’s facts, turnover, income level and the reason for moving out of the scheme.

Disclaimer: This article discusses the facts and observations in a specific Income Tax Appellate Tribunal (ITAT) case and is intended for informational purposes only. The outcome of a tax dispute depends on its individual facts, documents and applicable law. It should not be treated as a precedent or as professional tax advice. The information provided in this article is for general informational purposes only and should not be considered tax, legal or financial advice. 

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