ITAT: Books Must Be Rejected Under Section 145(3) Before Adding Unexplained Cash, Deletes ₹64 Lakh Addition
Tribunal says Assessing Officer cannot bypass procedure, protects taxpayers from arbitrary cash additions
Judgment clarifies link between Section 145(3) and Section 68, ensures fairness in income tax assessments
By Our Legal Reporter
New Delhi: December 26, 2025:
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) has held that unexplained cash additions under Section 68 of the Income Tax Act, 1961 cannot be made unless the books of account are first rejected under Section 145(3). The tribunal deleted an addition of ₹64 lakh, reinforcing the principle that tax authorities must follow due process before penalizing taxpayers.
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This judgment is expected to have wide implications for businesses and individuals facing scrutiny over cash deposits, especially in cases where books of account are properly maintained.
Background of the Case
The case involved a taxpayer whose books of account were duly audited and maintained. During assessment, the Assessing Officer (AO) made an addition of ₹64 lakh as “unexplained cash credits” under Section 68.
- The AO did not reject the books of account under Section 145(3).
- No defects were pointed out in the accounting records.
- The addition was made solely based on suspicion regarding cash deposits.
The taxpayer challenged the addition before the ITAT, arguing that unless books are rejected, unexplained cash cannot be added under Section 68.
Court’s Observations
The ITAT agreed with the taxpayer and made several important observations:
- Section 145(3 is mandatory: Before making additions, the AO must reject the books of account if they are unreliable.
- No defects in books: Since the AO did not find any defects, the books remained valid.
- Addition unsustainable: Without rejection of books, unexplained cash additions under Section 68 are legally unsustainable.
- Deletion of ₹64 lakh: The tribunal deleted the entire addition, ruling in favour of the taxpayer.
The ITAT emphasized that tax law requires procedural fairness, and arbitrary additions cannot be made without following statutory provisions.
Legal Context
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The ruling clarifies the relationship between Section 145(3) and Section 68:
- Section 145(3: Allows the AO to reject books of account if they are incomplete, incorrect, or unreliable.
- Section 68: Permits addition of unexplained cash credits if the taxpayer fails to explain the source.
- Link between the two: Section 68 additions can only be made after books are rejected under Section 145(3).
This ensures that taxpayers are not penalized arbitrarily and that additions are based on genuine defects in accounting records.
Wider Implications
The ITAT’s ruling has several implications:
- For Taxpayers
- Provides protection against arbitrary cash additions.
- Reinforces the importance of maintaining proper books of account.
- For Assessing Officers
- Clarifies that they must first reject books before making additions.
- Prevents misuse of Section 68 as a shortcut for revenue collection.
- For Businesses
- Encourages compliance with accounting standards.
- Reduces litigation by ensuring fair assessments.
- For Tax Administration
- Strengthens credibility of income tax proceedings.
- Promotes transparency and accountability.
Lessons for Taxpayers
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The case offers important lessons:
- Maintain proper books: Ensure accounts are audited and free from defects.
- Challenge arbitrary additions: Taxpayers can contest additions if books are not rejected.
- Know your rights: Section 145(3 provides protection against unfair assessments.
- Seek professional advice: Legal and accounting experts can help navigate disputes.
Conclusion
The ITAT’s ruling that books of account must be rejected under Section 145(3 before unexplained cash additions under Section 68 is a landmark in tax jurisprudence. By deleting the ₹64 lakh addition, the tribunal has reinforced the principle of procedural fairness and protected taxpayers from arbitrary assessments.
This judgment provides clarity for both taxpayers and tax authorities, ensuring that income tax proceedings remain transparent, accountable, and just.
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