Funds Temporarily Held in One Account Before Transfer to Another Doesn’t Qualify as Unexplained Money: Allahabad High Court
The Allahabad High Court has clarified that funds temporarily placed in one bank account before being transferred to another, as per a pre-existing agreement between parties, cannot be categorized as “unexplained money” under Section 69A of the Income Tax Act, 1961. This ruling came in a case involving an agreement for the collection and deposit of loan installments, where the Income Tax Department had challenged the handling of funds.
Key Judgment Highlights
A bench comprising Chief Justice Arun Bhansali and Justice Vikas Budhwar upheld the findings of the Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The Court observed that merely diverting funds through an intermediary account, without any evidence of wrongdoing, does not render the deposits unexplained, especially when there is no dispute between the contracting parties regarding the arrangement.
Case Background
- Business Operations: The assessee, engaged in the business of security, housekeeping, and manpower services, had entered into an agreement with First Rand Bank (FRB) during the financial year 2016–17. The agreement required the assessee to collect loan installments from micro-borrowers and deposit the funds in an account designated by the bank.
- Cash Deposits Questioned: The assessee collected payments from borrowers and deposited the funds in his own bank account before transferring them to FRB’s account. During an assessment, the Assessing Officer (AO) flagged these large cash deposits as unexplained money under Section 69A of the Income Tax Act.
- Initial Appeal: The assessee appealed to the Principal Commissioner of Income Tax (PCIT), providing documentation to explain the transactions. The PCIT excluded these deposits from the taxable income but partially upheld the additions for the demonetization period.
Tribunal’s Analysis
The Income Tax Appellate Tribunal reviewed the agreement and found that:
- The funds collected by the assessee were duly deposited with FRB, albeit through an intermediary account.
- There was no dispute between the assessee and FRB regarding this arrangement.
- The mode of deposit—whether direct or indirect—was irrelevant as the funds were accounted for and matched the agreement terms.
The Tribunal also dismissed the PCIT’s partial inclusion of deposits during demonetization, stating that similar transactions had previously been accepted without issue.
Department’s Appeal and High Court Verdict
The Income Tax Department challenged the Tribunal’s findings, arguing that:
- The funds should have been deposited directly into the FRB account.
- Diverting funds through another account violated the agreement and warranted treatment as unexplained money under Section 69A.
The High Court dismissed the department’s appeal, holding that:
- The deposits made by the assessee were fully traceable and matched the amounts collected from micro-borrowers for FRB.
- Neither the PCIT nor the AO presented evidence to suggest that these funds were unexplained or misappropriated.
- A mere procedural deviation in how the funds were deposited did not constitute a violation of Section 69A.
The Court further noted that during demonetization, the assessee’s collection of Specified Bank Notes (SBNs) was consistent with prior transactions and was unjustly questioned by the PCIT.
Final Judgment
The Court affirmed that:
- The deposits made by the assessee were legitimate and could not be classified as unexplained.
- The findings of the CIT(A) and ITAT were backed by substantial evidence and did not give rise to any substantial question of law.
The appeal filed by the Income Tax Department was accordingly dismissed.
Key Takeaway for Taxpayers
This ruling underscores the importance of maintaining clear agreements and documentation to support financial transactions. The Court’s decision reiterates that procedural irregularities, without evidence of wrongdoing or unaccounted money, cannot justify the invocation of Section 69A. Taxpayers must ensure transparency and proper record-keeping to avoid unnecessary scrutiny.
Case Reference: Pr. Commissioner of Income Tax and Anr. v. Sushil Kumar Sharma [Income Tax Appeal No. 86 of 2024].
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