The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has held that CA can’t be taxed on client funds used for statutory payments.
The bench of Aby T. Varkey (Judicial Member) and Padmavathy.S (Accountant Member) has observed that both the Assessing Officer and the CIT(A) had focused only on the credits appearing in the accounts while completely ignoring the corresponding debit entries that reflected payments to various government authorities. The narration in the bank statements supported the assessee’s claim that the funds had been used for statutory remittances on behalf of clients.
The assessee, a practising Chartered Accountant from Pudukottai, Tamil Nadu, had filed his return of income for Assessment Year 2016-17 declaring an income of ₹2.95 lakh. During scrutiny, the Income Tax Department received information regarding substantial cash deposits in his bank account, which appeared disproportionate to the income disclosed in his return. Consequently, the assessment was reopened under Section 148 of the Income Tax Act on the belief that income had escaped assessment.
During the reassessment proceedings, the assessee explained that the bank account had been opened exclusively for facilitating tax payments on behalf of clients. According to him, many of his clients were located in rural areas and lacked access to online banking facilities. Therefore, they entrusted him with funds for payment of statutory dues such as Income Tax, TDS, VAT, and Service Tax.
The Assessing Officer rejected the explanation and treated the deposits appearing in the bank account as unexplained money under Section 69A of the Income Tax Act. An addition of approximately ₹23 crore was made on this basis.
When the matter reached the Commissioner of Income Tax (Appeals), the assessee produced documents and evidence showing that the funds had been utilised for payment of taxes on behalf of clients. However, instead of granting relief, the CIT(A) enhanced the addition by another ₹6.87 crore by treating credits in an HDFC Bank account as unexplained. This increased the disputed amount to nearly ₹29.87 crore.
Before the Tribunal, the Chartered Accountant argued that he was operating in a small town where several clients were unfamiliar with electronic tax payment systems. He submitted that the funds deposited in his accounts were immediately used for payment of statutory dues and never constituted his income.
The assessee produced extensive documentary evidence, including tax challans, bank statements, and an affidavit explaining the nature of the transactions. He further demonstrated that funds transferred from the Axis Bank account to the HDFC Bank account were also used for making tax payments and therefore could not be treated as unexplained income.
In the affidavit filed before the Tribunal, the assessee stated that he had received client funds solely for remitting statutory dues and had not earned any commission, profit, or personal benefit from those transactions. The affidavit also detailed tax payments aggregating approximately ₹29.83 crore made through the bank accounts.
After examining the paper books and supporting records, the Tribunal found that the assessee had produced evidence showing tax payments aggregating about ₹29.83 crore. The Bench noted that sample tax challans matched the corresponding debit entries in the bank accounts.
According to the Tribunal, the overall evidence established that the assessee was merely acting as a conduit or intermediary for payment of taxes. Since the money belonged to clients and was held in a fiduciary capacity, the deposits could not be regarded as unexplained income of the assessee.
Holding that the deposits did not represent the assessee’s own money and were fully supported by documentary evidence of tax remittances, the Chennai Bench directed the Assessing Officer to delete the entire addition made under Section 69A. The appeal of the assessee was accordingly allowed in full.
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