A recent ruling by the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has raised an important question for taxpayers dealing in cash-heavy businesses — can the tax department treat both deposits and withdrawals in a bank account as income?
In the case of Syed Ghouse Peer vs ITO (ITA No. 2325/Bang/2025), the tribunal has said such an approach may not be correct, especially when it leads to inflating income without proper verification.
The case involved a small vegetable trader from Kolar who operated from the APMC yard. He had not filed his income tax return for the relevant year, claiming he had suffered losses.
However, the tax department picked up his case after noticing significant cash activity in his bank account. There were deposits of about Rs 44.64 lakh and withdrawals of nearly Rs 2.96 crore.
Since the taxpayer did not respond to multiple notices, the Assessing Officer completed the assessment ex-parte and treated the entire Rs 3.53 crore as unexplained income under Section 69A of the Income Tax Act.
The first appellate authority also upheld this addition, citing continued non-compliance.
Why the taxpayer never responded
What makes this case different is the background of the taxpayer.
As noted in the tribunal order, he was an agriculturist and a small trader from a remote area, with education only up to Class 9. He was not familiar with email-based tax notices and e-proceedings, which meant the communications never effectively reached him.
This lack of response ultimately led to a best judgment assessment — a situation not uncommon in the faceless tax regime today.
ITAT steps in: ‘You cannot tax both sides of the same money’
When the matter reached the ITAT, the Bench took a closer look at how the addition was made.
It found that the Assessing Officer had simply treated both deposits and withdrawals as unexplained income without examining the nature of the transactions. The tribunal noted that such an approach could result in taxing the same money twice.
The Bench did not ignore the taxpayer’s repeated failure to respond, but it made it clear that even in such cases, additions must be based on sound reasoning and not on a mechanical calculation.
An tax expert, explains:
“The ITAT Bangalore Decision in Syed Ghouse Peer Vs. ITO (ITA No. 2325/Bang/2025), has delivered a noteworthy ruling on the limits of ex-parte assessments and the treatment of bank transactions under Section 69A. The decision reiterates that even in cases of persistent non-compliance, tax additions must adhere to settled legal principles and cannot result in artificial inflation of income.”
Case sent back, but with a clear message
The tribunal eventually set aside the orders of the lower authorities and sent the matter back to the Assessing Officer for fresh examination. It also directed the taxpayer to cooperate and explain the source of cash deposits.
In effect, the appeal was allowed for statistical purposes, giving the taxpayer another chance to present his case.
But the ruling carries a larger message. He further points out:
“The Tribunal’s observations implicitly recognise that bank deposits and withdrawals, particularly in cash-intensive businesses, often represent circulating capital rather than independent income streams.”
A reality check for both taxpayers and the tax department
The decision also reflects the growing tension between digital tax administration and on-ground realities. Many small taxpayers, especially in semi-urban or rural areas, still struggle with online compliance.
The tribunal acknowledged this aspect, noting that while compliance is important, genuine cases should not suffer purely due to procedural gaps.
At the same time, the ruling does not give a free pass to taxpayers. It reinforces that ignoring notices can lead to serious consequences, including large additions and prolonged litigation.
He sums up the balance well: “Additions under Section 69A must be based on cogent reasoning and cannot extend to taxing both sides of a cash cycle without justification.”
Summing up…
This ruling makes one thing clear — even in ex-parte assessments, the tax department cannot take shortcuts.
Only real income can be taxed, and there must be a clear link between the evidence and the addition made.
For small businesses dealing in cash, this judgment offers relief. But it also serves as a reminder: staying compliant and responding to notices in time can prevent a lot of trouble later.
