Cash Deposits under Presumptive Taxation-Attract Sec 68/69A?

Cash Deposits under Presumptive Taxation—Whether Attract Section 68 or 69A?

Cash deposits under presumptive taxation schemes (Sections 44AD, 44ADA, & 44AE) and their implications u/s68 of the Income Tax Act.

Section 44AD/ADA/AE allows eligible businesses and professionals to declare profits on a presumptive basis, thereby exempting them from maintaining books of accounts u/s44AA, provided they declare profits at the specified rate. The presumptive scheme aims to simplify tax compliance for small businesses, where cash transactions are typically higher, and enforcement of strict book-keeping is impractical.

Applicability in Presumptive Taxation Cases 

Section 68 – Not Applicable, Precondition must comply with the Maintenance of Books: As per Section 68, additions can only be made if the sum is credited in the books of the assessee. In presumptive taxation cases under Sections 44AD/ADA/AE, books of account are not required to be maintained, hence Section 68 cannot be invoked.

Presumptive Taxation (Sec. 44AD/44ADA/44AE):

Assessees opting for presumptive taxation are not required to maintain books of account u/s44AA. Their income is deemed at a certain percentage of turnover (e.g., 8% or 6% for digital receipts under Sec. 44AD). Once presumptive income is accepted, no further verification of expenses, receipts, or deposits is generally warranted

Section 68 Requirements:

For Section 68 to apply There must be a credit entry in the books of account. The assessee must have failed to explain the nature and source of the credit. The Assessing Officer must not be satisfied with the explanation. No books = No Section 68 addition.

Interaction with Section 69A (Unexplained Money):

While Section 68 requires entries in books, Section 69A allows addition of unexplained money found in possession or control of the assessee. AO may invoke Section 69A if The cash deposits are significantly higher than gross receipts declared.  There is independent evidence that such deposits are not business receipts. And Deposits are out of sync with the nature and scale of the business. However, burden lies on the AO to establish disconnect between deposits and business operations covered under presumptive tax scheme.

Section 68 vs Section 69A – Key Conditions

Key Judicial Principles Reaffirmed Pronouncements:

Section 68 requires “books of account” maintained by the assessee:

• Anand Ram Raitani v CIT: “Existence of books of account is a condition precedent for invoking Section 68.”
• CIT v. Surinder Pal Anand: Once presumptive income is accepted, AO cannot demand explanation for cash deposits if books are not maintained.
• Nand Lal Popli v DCIT: AO cannot require detailed linkage of bank deposits with business receipts under presumptive regime.

Bank Passbook ≠ Books of Account (Sec 2(12A)): Bank Passbook is maintained by the bank, not the assessee., Not admissible as “books” for Section 68 purposes. CIT v Taj Borewell [2007] 291 ITR 232 (Mad): Balance sheets and P&L are by-products, not books.

Loose Sheets ≠ Books of Account:  Common Cause v UOI [2017] 394 ITR 220 (SC): Loose papers are not sufficient for additions; inadmissible as evidence.

Question : Can bank deposits be treated as unexplained cash credit (u/s 68) when income is declared under presumptive taxation?

And: No, additions u/s68 generally cannot be made for bank deposits if the assessee has declared income under presumptive taxation (Sections 44AD, 44ADA, or 44AE) and is not required to maintain books of account, unless there is clear evidence that the deposits are from non-business sources or unexplained funds.

Practical Interpretation in Case Can Bank Deposits Be Treated as Unexplained Cash Credit (u/s 68) :

if cash deposits in the bank account can be reasonably linked to business receipts, no addition should be made u/s68. If books of accounts are not maintained, a pre-condition of Section 68 fails. However, if deposits are clearly from unexplained or unrelated sources, or significantly exceed turnover, the AO may investigate under other sections (e.g., Section 69 – unexplained investments).

Suggested Defense Strategy in Scrutiny Cases Involving Presumptive Taxation (Sections 44AD/44ADA/44AE)

Reiterate Eligibility under Section 44AD/44ADA/44AE:

Clearly establish that the assessee qualifies for presumptive taxation under the relevant section, based on the nature of business/profession and the turnover/receipts being within the prescribed threshold. Submit a brief factual summary including PAN, nature of business, and turnover figures.

Highlight Exemption from Maintaining Books of Account:

Refer to Section 44AA read with Section 44AD/ADA/AE, which relieves eligible assessees from the obligation to maintain regular books of accounts, provided income is declared at the prescribed presumptive rate. Assert that no books of account were maintained, and this is in full compliance with the law.

Bank Deposits Relate to Gross Receipts:

Cash deposits made into the bank account are part of the regular business activity and represent gross receipts, out of which presumptive income has been offered to tax. Where feasible, provide a turnover reconciliation or estimate based on deposit patterns (without implying the existence of formal books).

Favorable to Assessee Leading Judicial Precedents:

Support your position with the following rulings:

• CIT v. Surinder Pal Anand: Once presumptive income is accepted, individual entries in bank deposits need not be explained. Addition u/s 68 not sustainable in absence of books when income declared u/s44AD.
• Nand Lal Popli v. DCIT: AO cannot demand books or link every deposit to specific sales when return is under Section 44AD. Presumptive tax regime does not require explanation of cash deposits unless they are clearly from non-business sources
• Anand Ram Raitani v. CIT: Books of account are a prerequisite for invoking Section 68.
• Thomas Eapen v. ITO: Presumptive income presumes receipts; AO cannot require granular proof absent maintained books. Section 68 inapplicable where books are not maintained and turnover is not disputed.
• CIT v. Pradeep Shantilal Patel : Assessee cannot be required to explain each bank deposit once turnover and presumptive income are accepted.

Challenge Any Additions u/s 68:

Highlight that Section 68 is inapplicable, as it applies only where credits are found in books of accounts maintained by the assessee. As no such books exist, any cash deposits reflected in the bank passbook, which is not defined as “books” under Section 2(12A), cannot trigger Section 68.

If the AO invokes Section 69A, demand material evidence.

Section 69A – Can Be Invoked, But With Caveats Used When AO claims that deposits are not from business, but from undisclosed sources (e.g., gifts, loans, or personal transactions). No explanation or nexus to declared turnover is provided. But AO must bring material evidence to prove that deposits do not form part of gross receipts. Merely questioning cash deposits is not sufficient—burden of proof shifts to the AO after assessee declares presumptive income.

Clarify that Section 69A requires independent evidence that the amounts deposited are not business receipts. Unless the Assessing Officer demonstrates that the cash deposits are wholly unrelated to business activity, no addition can be made under Section 69A. Burden of disproving business nexus lies with the AO, not the assessee.

Scenario	Section Attracted?	Explanation

Presumptive Taxation Does Not Exempt Disclosure of Key Financials

ITAT Pune’s ruling in Kamalesh Kantilal Patel v. ITO : ITAT held that opting for the presumptive scheme does not absolve the assessee from maintaining or disclosing details of Cash & bank balances, Sundry debtors, Stock-in-trade, Receivables (as claimed for cash inflow). This ruling softens the blanket protection usually accorded under Section 44AD against scrutiny of individual transactions, especially when unusual cash deposits are involved. Suggested Compliance for Presumptive Filers

Area	Traditional View	ITAT Pune’s View
Disclosure under 44AD	Not required to maintain books or detailed disclosures	Still expected to disclose basic financials when cash scrutiny arises
Section 68/69A Applicability	Generally not invoked due to lack of books	Can still apply if cash inflow not reconciled with known business sources
Evidence of Deposits	Often presumed as business receipts	Must be corroborated by documentation if amount is large/unusual

Conclusion:

When income is declared under presumptive taxation, and the turnover is not disputed, Section 68 cannot be invoked solely based on bank deposits, unless there’s clear evidence of undisclosed income or non-business receipts. The presumptive scheme simplifies compliance, and income is taxed without needing to track each transaction, provided general consistency with declared turnover is maintained. following Practical Conclusion

Aspect	Summary
Section 68 Applicability	Not applicable without books of account.
Section 69A Applicability	Only applicable if deposits are proven unrelated to business receipts.
Burden of Proof	Lies on AO to demonstrate nexus break between deposits and business.
Bank Passbook	Not “books” u/s2(12A), hence not a basis for Sec. 68.
Loose Sheets	Not valid books – inadmissible for Sec. 68.
Presumptive Turnover Accepted	No further addition for cash deposits unless non-business nature is established.

Taxpayer must keep backup documents—receipts, debtor ledgers, stock summaries—even if books are not “maintained” formally. Taxpayer must ensure PAN and ID details of cash advance refund parties are fkept. Taxpayer must ile Schedule AL (Asset and Liability Statement) in ITR where applicable. In case of large or irregular cash deposits, proactively maintain:

1. • Summary of receivables/payables.
   • Capital account movements.
   • Bank reconciliation statements.

Income Tax Department Is Watching These 10 Transactions Closely!

taxpyer must ensure Transparency, Documentation & Reporting

Legal Backing and Reporting Systems

• These transactions are reported under Rule 114E via Form 61A by banks, mutual funds, registrars, etc. Violations can lead to Scrutiny notices, Disallowance of deductions & Penalties under sections 269SS, 269ST, and 271DA
• we must always use banking channels (NEFT/RTGS/UPI/Cheque) for large payments. and Document gifts with a gift deed, especially if above ₹50,000. we must Report foreign remittances and property purchases accurately in ITR. and Reconcile your transactions with Form 26AS and AIS/TIS.

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