Stories
FD Encashment Not Taxable as Unexplained Deposit if Source Already Accounted For: ITAT
- •The Income Tax Appellate Tribunal (ITAT), Hyderabad, ruled that encashing a fixed deposit (FD) cannot be taxed again as an unexplained bank deposit if the original amount was already deposited and used to create the FD.
- •The case involved an assessing officer treating both the creation and encashment of an FD as separate deposits, leading to the same money being counted twice.
- •The taxpayer had deposited Rs 10 lakh, created an FD, and later encashed it; the ITAT found the encashment was not a fresh deposit.
- •The ITAT deleted an addition of Rs 11.65 lakh, stating the assessment was contrary to facts as the FD was created from an earlier explained bank deposit.
- •Taxpayers must maintain a clear money trail for FDs, as the source of funds remains crucial; unexplained original sources can still lead to tax issues.
Key Questions Answered
The ITAT Hyderabad bench ruled that the encashment of a fixed deposit cannot be treated as a fresh bank deposit for an addition as unexplained money if the same amount had already been deposited and used to create the FD. Counting both the creation and encashment results in double counting the same money.
An FD can still become a tax issue if it was created from an existing bank balance whose underlying source cannot be satisfactorily explained. Additionally, if the creation of the FD was not recorded in the taxpayer's books and lacks a valid explanation, it may be treated as an unexplained investment.
Taxpayers should maintain documents showing the clear source of funds, such as salary credits, business receipts, asset sale proceeds, gifts, or inheritances. They must establish a direct link between the original funds, the bank deposit, and the subsequent FD using bank statements and records.
