The Income Tax Appellate Tribunal (ITAT), Hyderabad bench, has ruled that the encashment of a fixed deposit cannot be treated as a fresh bank deposit for the purpose of making an addition as unexplained money, if the same amount had already been deposited and used to create the FD.
The case involved an addition made by the assessing officer after treating the maturity proceeds of an FD as another deposit in the bank account. The tribunal found that this resulted in the same money being counted twice.
What was the case?
The taxpayer had made a cash deposit of Rs 10 lakh in the bank account in September 2020 and subsequently created an FD of the same amount on September 3, 2020. The FD was encashed on November 2, 2020.
According to the tribunal’s order, the assessing officer considered both the creation and subsequent encashment of the FD while calculating the total deposits in the bank account. This resulted in the total deposits being taken at Rs 32.50 lakh instead of Rs 20.85 lakh.
The taxpayer had also explained other deposits through the sale of agricultural land and agricultural income. The assessing officer had accepted the explanation for Rs 20.85 lakh, but an addition of Rs 11.65 lakh was sustained by the first appellate authority.
The ITAT noted that the Rs 10 lakh FD had been created from an earlier bank deposit. Therefore, its subsequent encashment did not represent a fresh deposit. The tribunal deleted the remaining addition, holding that the assessment was contrary to the facts and records.
“The learned CIT(A) has accepted the sale consideration of agricultural land as well as Rs 2,32,000 as agricultural income total amounting to Rs 20,85,000 out of the total addition of Rs 32,50,000 and the balance amount of Rs 11,65,000 was sustained as addition. Once the Assessing Officer has wrongly considered the total amount of deposit in the bank account on encashment of the fixed deposit then, this addition made by the Assessing Officer is also contrary to the facts and record. Accordingly, the same is deleted,” ITAT said in the order.
When can an FD still become a tax issue?
The ruling does not mean that every FD is automatically treated as explained. The source of the money used to create the FD remains important.
“If the FD was created from an existing bank balance, and the source of that underlying bank balance itself cannot be satisfactorily explained, the department can consider the source of that money as unexplained credit and make an addition,” an tax expert said.
“If the creation of the FD was not recorded in the taxpayer’s books of account, and no satisfactory explanation is provided for its nature and source, it can be considered unexplained investment and addition can be made,” tax expert added.
Maintain a clear money trail
Taxpayers should be able to establish a clear link between the original source of funds, the bank deposit and the subsequent FD. A withdrawal or deposit followed by an FD creation should be supported by bank statements and other relevant documents.
“A clear trail of withdrawal and subsequent deposit should exist, especially within a short timeframe. If the department presents concrete evidence of alternative utilisation or an unexplained original source, the addition can sustain,” he said.
For substantial FDs, taxpayers should maintains showing the source of funds, such as salary credits, business receipts, sale proceeds of assets, gifts or inheritances. This becomes particularly important where the FD amount is significantly higher than the income reported in the return.
