ITAT Mumbai Deletes Section 69A Addition on Cash Handled by Payment Intermediary

Irfan Ahmad Shah Vs Shashi Bhushan Singh (ITAT Mumbai Bench)

Money Passing Through An Agent’s Bank Is Traffic, Not Income-Only Commission Can Be Taxed; Gross Cash Deposits Not Addable U/s 69A

Background

The assessee was the proprietor of Irfan Enterprises. He acted as an intermediary or commission agent for telecom & payment-service providers such as Idea Money Wallet, Airtel Payment Bank, Vodafone M-Pesa & Money on Mobile.

His activities included mobile recharge, domestic money transfer, payment of electricity bills, railway-ticket booking & other allied services. The assessee collected cash from retail customers, deposited it into his bank accounts & thereafter remitted corresponding amounts to the concerned principal or service-provider companies. His real income from these transactions consisted only of the commission earned for facilitating the services.

For AY 2017-18, the assessee filed his return declaring total income of ₹3,28,950. The case was selected for scrutiny, inter alia, because of high-value cash receipts & an abnormal increase in cash deposits during the demonetisation period.

Addition Made by the AO

The AO noticed aggregate cash deposits of ₹36,78,300 in the assessee’s bank accounts during demonetisation. The assessee explained that the money represented cash collected from customers in the ordinary course of his payment-service business.

The cash did not belong beneficially to him. It was deposited merely as part of the transaction mechanism & was subsequently transferred to the respective service providers. The commission earned by the assessee was reflected in Form 26AS & had already been offered to tax.

The assessment order acknowledged that the assessee furnished his computation of income, Profit & Loss Account, Balance Sheet, Form 26AS, bank statements & month-wise details of cash deposits. Nevertheless, the AO remained dissatisfied because the assessee could not furnish complete particulars or confirmations from every individual retail customer.

The AO consequently treated the entire cash deposit of ₹36,78,300 as unexplained money u/s 69A.

CIT(A)’s Partial Relief

The CIT(A) accepted the fundamental nature of the assessee’s business. It was recognised that the assessee acted only as an intermediary & that the entire amount moving through his bank accounts could not be treated as his income.

However, because complete transaction-wise documentation was allegedly unavailable, the CIT(A) estimated an income element at 5% of the gross deposits. Accordingly, for AY 2017-18, the addition was restricted to ₹1,83,915, being 5% of ₹36,78,300.

The assessee challenged even this estimated addition before the Tribunal. For AY 2018-19, where the factual pattern was identical, the Revenue sought restoration of the entire addition of ₹6,03,69,940, while the assessee challenged the amount sustained by applying the 5% estimate.

Assessee’s Contentions

The assessee argued that once the CIT(A) accepted that the deposits represented money belonging to customers or principal companies, no percentage of such gross receipts could be arbitrarily treated as additional income.

The assessee operated in the unorganised retail payment-services sector & dealt with numerous small shopkeepers and walk-in customers. Maintaining names, addresses, identity documents & confirmations for each small-value retail transaction was neither commercially normal nor practically feasible.

Nevertheless, the assessee had furnished substantial documentary evidence, including bank statements, cash-deposit summaries, Idea Money account statements, Form 26AS & details demonstrating the flow of funds from customers through his bank accounts to the service-provider companies.

The only income accruing to him was commission, which had already been disclosed.

ITAT’s Findings

The Tribunal observed that the assessee’s business model was not disputed. Cash was received from retail customers, deposited into bank accounts & remitted onwards to telecom or payment-service companies. The assessee merely facilitated the underlying transactions & earned commission.

Once this factual position was accepted, the gross cash movement could not acquire the character of income in the assessee’s hands. A custodian or intermediary cannot be taxed on money which merely passes through his accounts.

The assessee’s explanation was not a bald assertion. The repetitive pattern of cash inflows followed by corresponding outward remittances was visible from the bank records & Idea Money statements. Form 26AS supported the commission-income model adopted by the assessee.

The Tribunal also recognised the practical realities of the business. An intermediary servicing numerous retail customers & small shopkeepers cannot reasonably be expected to obtain confirmations and exhaustive identity particulars from every person making a small cash payment.

The absence of customer-wise confirmations, by itself, could not convert third-party business funds into unexplained money, particularly when the overall banking pattern & onward remittances supported the assessee’s explanation.

Crucially, the Revenue did not identify any particular bank deposit that was retained by the assessee or represented his own undisclosed income. Nor was any material produced to show that the assessee earned commission exceeding the amount already accounted for & offered to tax.

The 5% estimate was therefore based merely on a possibility that some additional income “may” be embedded in the deposits. An addition cannot rest on conjecture or hypothetical probability after the underlying receipts have been accepted as funds handled for third-party principals.

Decision

For AY 2017-18, the Tribunal deleted the balance addition of ₹1,83,915. Applying the same reasoning to AY 2018-19, it deleted the corresponding 5% addition sustained by the CIT(A).

The assessee’s appeals for both years were allowed, while the Revenue’s appeal seeking restoration of the full addition of ₹6.03 crore for AY 2018-19 was dismissed.

Key Takeaway

The gross cash deposited by a payment-service intermediary is not his income where the banking trail demonstrates onward remittance to principal companies. Only the commission beneficially earned by him can be taxed.

A bank account may handle crores without its holder earning crores—the tax net catches income, not every rupee merely passing through it.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI

The above appeals are directed against separate orders of the learned CIT(A)-National Faceless Assessment Centre, Delhi [in short “Ld.CIT(A)”]. Since common issues are involved in all these appeals therefore, for the sake of convenience, these appeals are clubbed together for the purpose of hearing and adjudication.

2. We first take up the assessee’s appeal for A.Y. 2017-18 in ITA No.5504/Mum/2026.

2.1. The assessee has raised various grounds challenging the addition sustained by the Ld.CIT(A) out of the cash deposits made in the bank accounts during the year under consideration. The substantial grievance of the assessee is that the cash deposited in the bank accounts represented amounts collected from customers in the course of acting as an intermediary/commission agent for various telecom and payment service providers and did not constitute income belonging to the assessee.

3. Brief facts of the case are as under:-

Assessee is the proprietor of Irfan Enterprises. For A.Y. 2017-18, and filed his return of income declaring total income of Rs.3,28,950/-. The case was selected for scrutiny, inter alia, to verify high-value cash receipts and abnormal increase in cash deposits during the demonetisation period.

3.1. The Ld.AO noticed cash deposits aggregating to Rs.36,78,300/- in various bank accounts during the demonetisation period. The assessee explained that he was working as a commission agent/distributor for service providers such as Idea Money Wallet, Airtel Payment Bank, Vodafone M-Pesa and Money on Mobile, besides providing allied services such as mobile recharge, domestic money transfer, payment of electricity bills and railway ticket booking.

3.2. It was the case of the assessee that cash was collected from retail customers and deposited into the assessee’s bank accounts only as part of the transactional mechanism. Corresponding amounts were thereafter transferred to the respective principal/service provider companies, and the assessee earned only commission from such activities. It was submitted that the commission so earned was reflected in Form No.26AS and was offered to tax in the return of income.

3.3. The assessment order itself records that the assessee furnished computation of income, Profit & Loss Account, Balance Sheet, Form No.26AS, bank statements and month-wise cash deposit details. However, the Ld.AO was not satisfied with the explanation primarily on the ground that the assessee could not furnish complete particulars of individual retail customers or confirmations. The Ld.AO treated entire cash deposits of Rs.36,78,300/- as unexplained money u/s.69A of the Act.

Aggrieved, by the assessment order, the assessee preferred an appeal before the Ld.CIT(A).

3.4. Before the Ld.CIT(A), the assessee reiterated that the monies deposited in the bank accounts did not belong to him and represented amounts collected from retail customers in the course of rendering services on behalf of the principal companies. The assessee also explained the business cycle and furnished documentary material in support thereof.

3.5. The material to support assessee’s contention that were placed before the lower authorities included:

• Copy of the acknowledgement of the return of income filed for A.Y. 2017-18 vide Acknowledgement No.363944980130118;
• Form No.26AS for A.Y. 2017-18;
• summary of cash deposits in bank account during the period of demonetisation;
• summary of deposits made in the account held with Idea Money during the period of demonetisation;
• bank statements from 01/11/2016 to 31/12/2016; and
• statement of account held with Idea Money.

The assessee also furnished transactional flow demonstrating how cash received from retail customers was deposited in the bank account and thereafter remitted to the principal/service provider companies.

3.6. The Ld.CIT(A), after examining the nature of the assessee’s business, accepted that the assessee was only acting as an intermediary and that the entire amount deposited in the bank accounts could not be treated as income. However, observing that complete transaction-wise details had not been furnished, the Ld.CIT(A) estimated the income element at 5% of the total cash deposits and accordingly restricted the addition to Rs.1,83,915/-, being 5% of Rs.36,78,300/-.

Aggrieved by the order passed by the Ld.CIT(A), the assessee is in appeal before this Tribunal.

4. The Ld. AR submitted that once the Ld.CIT(A) accepted the fundamental nature of the assessee’s business, that the assessee was merely an intermediary handling monies belonging to the principal/service provider companies, there was no basis for estimating a further income element at 5% of the deposits. It was submitted that the assessee earned only commission, which was duly reflected in Form No.26AS and offered to tax.

4.1. The Ld.AR further submitted that the assessee operates in an unorganised sector, dealing with a large number of retail customers and small shopkeepers. In such a line of business, detailed customer-wise records, confirmations and identification particulars in respect of each individual cash transaction are ordinarily not maintained. However, the aggregate bank movement, bank statements, Idea Money statements, Form No.26AS, cash-deposit summaries and corresponding remittances to the principal companies were available before the authorities below.

4.2. The Ld.DR relied upon the orders passed by the authorities below.

We have perused the submissions advanced by both sides in light of the record placed before us.

5. At the outset, the nature of the assessee’s business is not in dispute. The assessee was engaged as an agent/intermediary for telecom and payment service providers and rendered services including mobile recharge, domestic money transfer, electricity bill payments and allied services. In such business, cash is received from retail customers, deposited into the bank account and thereafter transferred/remitted to the corresponding service provider/principal. The assessee earns only commission for facilitating such transactions.

5.1. Significantly, the Ld.CIT(A) accepted this fundamental factual position. The Ld.CIT(A) recorded that the assessee was engaged in providing such services and that treating the entire cash deposits as unexplained income would be excessive. The only reason for sustaining 5% of the deposits was the perceived absence of complete transaction-wise documentary evidence.

5.2. In our considered opinion, once it is accepted that the assessee is merely an intermediary and that the monies routed through the bank accounts essentially belong to the principal/service provider companies, the gross cash movement cannot acquire the character of income in the hands of the assessee. What accrues to the assessee is only the commission or service income earned for facilitating the underlying transactions.

5.3. It is also relevant that the assessee had not merely offered a bald explanation. The return acknowledgement, Form No.26AS, summaries of cash deposits, bank statements, Idea Money account statements and the transaction-flow details were available before the lower authorities. The bank records demonstrated repetitive inflow and onward movement of funds consistent with the business model explained by the assessee.

5.4. The business carried on by the assessee is essentially part of the unorganised retail/payment-service sector. The assessee dealt with numerous retail customers and small shopkeepers. In such circumstances, the absence of customer-wise confirmations or exhaustive identification particulars in respect of every single small-value retail transaction, by itself, cannot lead to an inference that a portion of the gross cash deposits constituted unexplained income, particularly when the overall banking pattern, Form No.26AS and corresponding remittances are consistent with the explanation furnished.

5.5. We also note that no specific discrepancy has been pointed out by the Revenue in the bank statements or in the movement of funds to establish that any particular deposit represented income belonging to the assessee over and above the commission already disclosed. Nor has any material been brought on record to demonstrate that the assessee earned any commission or income outside what had already been accounted for and offered to tax.

5.6. The estimate of 5% made by the Ld.CIT(A) is therefore founded merely on a possibility that some income element “may” be embedded in the cash deposits. An addition cannot be sustained merely on suspicion, conjecture or a hypothetical possibility, particularly when the underlying character of the receipts has been accepted as business funds handled on behalf of third-party principals.

5.7. In view of the above, we find no justification for sustaining the addition of Rs.1,83,915/- being 5% of the cash deposits. The same is directed to be deleted.

Accordingly, the grounds raised by the assessee for A.Y. 2017-18 are allowed.

A.Y.2018-19 Assessee’s appeal – ITA No.5493/Mum/2026 Revenue’s appeal – ITA No.6538/Mum/2026.

6. The factual matrix for A.Y. 2018-19 is identical to A.Y. 2017-18. The nature of business, mode of operation, banking pattern and the character of the cash deposited remain the same. The Ld.CIT(A) has accepted that the assessee was acting as an intermediary for telecom/payment service providers and that the entire cash handled through the bank accounts could not be treated as income.

6.1. For the reasons recorded by us while adjudicating the assessee’s appeal for A.Y. 2017-18, which shall apply mutatis mutandis to A.Y. 2018-19, we hold that there is no basis for sustaining even 5% of the gross cash deposits as unexplained income in the hands of the assessee.

Accordingly, the addition of sustained by the Ld.CIT(A) for assessment year 2018-19 is directed to be deleted.

7. Consequently, as we have held that the gross cash deposits cannot be treated as unexplained income of the assessee and have deleted the addition sustained by the Ld. CIT(A), the grounds raised by the Revenue seeking restoration of the entire addition of Rs.6,03,69,940/- do not survive.

Accordingly, the assessee’s appeal stands allowed and Revenue’s appeal for AY 2018-19 is dismissed.

In the result appeal filed by the assessee for AY 2017-18 and AY 2018-19 stands allowed and appeal filed by the revenue stands dismissed.

Order pronounced in the open court on 11/09/2026.