Declaring Income Section 44AD: NLarge Cash Deposits, Low Expenses, and High Investments

 Introduction

Section 44AD provides a simplified presumptive taxation framework for small businesses, deeming income at a fixed percentage of turnover. However, tax authorities often challenge large cash deposits declared as turnover when such businesses show minimal cash withdrawals for expenses yet make significant investments, invoking Sections 68, 69, or 69A of the Income-tax Act. This article critically examines these issues, referencing landmark judgments and statutory provisions to provide a 360-degree analysis.

1. Legal Framework

1.1 Section 44AD – Presumptive Taxation Scheme

• Applicable to resident individuals, HUFs, and partnerships (except LLPs) with turnover/gross receipts ≤ ₹3 crore.

• Income deemed at 8% of turnover (6% for digital receipts).

• No mandatory books under Section 44AA or audit under Section 44AB unless profits declared are less than deemed and total income exceeds basic exemption (Section 44AD(5)).

1.2 Section 68 – Unexplained Cash Credits

• Applies when any sum is credited in books of account and the assessee fails to satisfactorily explain the nature/source.

• Essential that books of account are maintained, as held in CIT v. Bhaichand H. Gandhi, 141 ITR 67 (Bom, 1983).

1.3 Sections 69 & 69A – Unexplained Investments and Money

• Invoked when money or assets are found outside books and inadequately explained.

• Vital tool where books are not maintained, particularly under presumptive taxation schemes.

2. Core Issues

• Large cash deposits shown as turnover under Section 44AD.

• Minimal withdrawals for business expenses.

• Large investments made without clear profit explanation.

• Can the Revenue invoke Sections 68/69/69A despite presumptive income declaration?

3. Judicial and Legal Analysis

3.1 Section 68 Requires Maintenance of Books

The Supreme Court and High Courts have clarified that bank passbooks alone do not qualify as “books of account” under Section 68.

• CIT v. Bhaichand H. Gandhi, 141 ITR 67 (Bom, 1983): “Bank passbook is not 'books of account' for Section 68.”

• Thomas Eapen v. ITO, ITA No. 1902/Chd/2019 (Punjab & Haryana HC): Section 68 not invokable without books; AO must rely on Sections 69/69A.

3.2 Sections 69 & 69A Are Invokable Even Without Books

• Ankit Tanwani v. ACIT, ITA No. 2881/Mum/2022 (ITAT Nagpur): Section 44AD declaration does not bar additions under Section 69A for unexplained investments.

• Kailash Jewellery House v. CIT, (2016) 385 ITR 85 (SC): Large unexplained investments with no nexus to business justified additions under Section 69A.

3.3 Presumptive Income Does Not Preclude Further Scrutiny

• Mehjabeen Masood Khan v. ITO, ITA No. 191/Del/2023 (ITAT Delhi): Tribunal deleted Section 68 additions where deposits aligned with turnover and business activity.

• Babulal Jain v. ACIT, ITA No. 123/JP/2018 (ITAT Jaipur): Additions upheld when deposits were unconnected with declared business.

3.4 Proportionality Between Deposits, Expenses, and Investments

Courts expect reasonable alignment between cash deposits, business expenses, and investments.

• Raj Bahadur v. ITO, 131 ITD 44 (Delhi ITAT, 2021): Presumptive scheme should not be defeated by unexplained cash credits.

• Tarun Bansal v. ITO, ITA No. 157/DEL/2022 (ITAT Delhi): Excessive unexplained investments can invoke Section 69A despite presumptive taxation.

4. Arguments for the Assessee

• Section 44AD’s legislative intent is to reduce compliance burden.

• No books, no Section 68 (supported by Bhaichand H. Gandhi).

• Presumptive income at fixed rates is final unless proved otherwise.

• Some businesses inherently incur low cash expenses.

• Reasonable explanations and basic records satisfy Revenue’s concerns.

5. Arguments for Revenue

• Large cash deposits without proportional expenses cast doubt on genuineness.

• Disproportionate investments suggest unexplained income.

• Burden is on assessee to explain source and nature of cash and investments.

• Sections 69 and 69A empower Revenue to look beyond presumptive income.

• Protecting the revenue base requires detailed scrutiny when suspicious facts arise.

6. Summary Table of Key Cases

Case	Citation	Principle	Outcome
CIT v. Bhaichand H. Gandhi	141 ITR 67 (Bom, 1983)	Bank passbook ≠ books for Sec 68	Assessee favored
Thomas Eapen v. ITO	ITA No. 1902/Chd/2019 (HC)	No Sec 68 without books; AO to invoke Sec 69/69A	Assessee favored
Ankit Tanwani v. ACIT	ITA No. 2881/Mum/2022 (ITAT Nagpur)	44AD does not bar Sec 69A additions	Revenue favored
Kailash Jewellery House v. CIT	(2016) 385 ITR 85 (SC)	Large unexplained investments justify additions	Revenue favored
Mehjabeen Masood Khan v. ITO	ITA No. 191/Del/2023 (ITAT Delhi)	Deposits matching business turnover; no additions	Assessee favored
Babulal Jain v. ACIT	ITA No. 123/JP/2018 (ITAT Jaipur)	No business nexus — Sec 68 additions upheld	Revenue favored

7. Practical Compliance Tips

• Maintain minimal evidence: invoices, receipts, payment proofs.

• Ensure expenses and withdrawals reasonably reflect turnover.

• Avoid disproportionate investments without profit support.

• Use digital transactions for transparency and lower presumptive rates.

• Be prepared with cogent explanations if questioned.

Conclusion

Section 44AD simplifies taxation but does not provide a carte blanche to ignore scrutiny. While Section 68 requires books and thus may not apply in presumptive cases, Sections 69 and 69A allow Revenue to challenge unexplained cash and investments rigorously. Courts have balanced presumptive benefits with the need to check misuse, relying heavily on factual proportionality and credible explanations.

Taxpayers should maintain basic documentation and coherence between cash flows, expenses, and investments to uphold presumptive declarations successfully.

FAQ: Section 44AD, Cash Deposits & Unexplained Investments — Key Points

1. Can the tax officer invoke Section 68 for cash deposits under Section 44AD?

No, Section 68 applies only if the assessee maintains books of account. Bank passbooks alone do not qualify. For presumptive taxpayers without books, Sections 69 and 69A are relevant.
Ref: CIT v. Bhaichand H. Gandhi (1983), Thomas Eapen v. ITO (2019)

2. What if large cash deposits are made but there are minimal withdrawals for expenses?

Disproportion between deposits and expenses raises suspicion. AO may invoke Sections 69/69A to treat unexplained investments or money as income unless adequately explained.
Ref: Kailash Jewellery House v. CIT (2016), Tarun Bansal v. ITO (2022)

3. Does declaring income under Section 44AD protect against further scrutiny?

Not entirely. While 44AD offers presumptive taxation, it doesn’t bar the Revenue from making additions under Sections 69/69A if unexplained cash credits or investments are found.
Ref: Ankit Tanwani v. ACIT (2022), Mehjabeen Masood Khan v. ITO (2023)

4. What kind of evidence should an assessee maintain?

• Sale invoices and receipts

• Bank statements matching turnover

• Explanation of source of deposits

• Proof of investments and withdrawals with business nexus

5. How important is proportionality between deposits, expenses, and investments?

Crucial. Courts expect commercial logic — turnover, expenses, and investments should reasonably align. Disproportionate figures attract scrutiny.
Ref: Raj Bahadur v. ITO (2021)

6. If large investments are made from business accounts, can Revenue treat it as unexplained income?

Yes, especially if profits are not commensurate and the assessee fails to explain the source or business nexus. Additions can be made under Section 69A.
Ref: Kailash Jewellery House v. CIT (2016)

7. What if the assessee’s turnover is close to the presumptive limit but cash deposits seem unusually high?

The AO will seek supporting documents and justification. Mere deposit does not prove turnover. Failure to explain invites additions.
Ref: Babulal Jain v. ACIT (2018)

8. Can digital transactions reduce scrutiny under Section 44AD?

Yes. Digital receipts have a lower deemed profit rate (6%), encouraging transparent transactions and reducing suspicion. Maintaining digital evidence strengthens the assessee’s case.

Remember: Presumptive taxation is a boon only when supported by logical, commercial evidence. Keeping records and maintaining coherence between deposits, expenses, and investments is the key to passing scrutiny.