FD encashment cannot be taxed as fresh deposit: ITAT
What's the story
The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) has ruled that encashing a fixed deposit (FD) cannot be taxed again as an unexplained bank deposit. The ruling came in a case where an assessing officer had treated the maturity proceeds of an FD as another bank deposit, leading to double counting of the same money. The tribunal clarified that taxpayers must show a clear link between the original source of funds, bank deposits, and subsequent FDs.
Case specifics
How the case unfolded
In this particular case, the taxpayer had deposited ₹10 lakh in cash into their bank account in September 2020 and created an FD of the same amount a few days later.
The FD was encashed on November 2, 2020.
The assessing officer included both the creation and encashment of the FD while computing total deposits in the bank account, leading to double counting.
Tribunal decision
Clear trail needed
The ITAT observed that the ₹10 lakh FD was created from an earlier bank deposit, and its encashment didn't represent a new deposit.
The tribunal overturned the remaining addition, saying the assessment was against facts and records.
It also emphasized that taxpayers must maintain a clear trail of withdrawal and subsequent deposit, especially within a short timeframe.
Tax implications
Not every FD is explained
The ruling doesn't automatically classify every FD as explained.
Mihir Tanna, Associate Director at SK Patodia LLP, clarified that if an FD was created from an existing bank balance whose source can't be satisfactorily explained, it can be treated as unexplained credit.
He also said if the creation of the FD wasn't recorded in taxpayers' books of account and no satisfactory explanation is provided for its nature and source, it can be considered unexplained investment.
Financial transparency
What taxpayers need to do
Taxpayers must maintain a clear link between the original source of funds, bank deposits, and subsequent FDs.
A withdrawal or deposit followed by an FD creation should be backed by bank statements and other relevant documents.
For large FDs, taxpayers should show the source of funds like salary credits, business receipts, sale proceeds of assets, or gifts/inheritances.
This is especially important when the FD amount is much higher than income shown in return.