Chartered Accountant Acting as Conduit for Client Tax Payments

Chartered Accountant Acting as Conduit for Client Tax Payments Cannot Be Taxed for Unexplained Bank Deposits

Issue

Whether substantial cash/credit deposits found in the bank account of a Chartered Accountant can be added to his income as “unexplained money” under section 69A of the Income-tax Act, when the corresponding debit entries and tax challans establish that the account was used merely as a conduit to collect and remit statutory taxes on behalf of his clients.

Facts

Assessee Profile & Filing: The assessee is a practicing Chartered Accountant who filed his return of income for the Assessment Year 2016-17, declaring a total income of Rs. 2.95 lakhs.
Purpose of Bank Account: The assessee maintained a specific bank account with the stated purpose of collecting advance funds from various clients to remit statutory taxes to government authorities on their behalf.
Reopening of Assessment: The Assessing Officer (AO) received information regarding massive deposits in this bank account. Finding the deposits non-commensurate with the declared income of Rs. 2.95 lakhs, the AO reopened the assessment.
Addition by AO: The AO rejected the assessee’s explanation that the deposits belonged to clients and made an addition of approximately Rs. 23 crores under section 69A, treating the credits as unexplained money.
Evidence of Remittance: Records indicated that the assessee had actually made tax payments totaling Rs. 29,83,87,572 through the said bank account.
Overlooked Debits: Sample tax challans directly matched the debit entries in the bank account. The bank narrations explicitly named various government authorities, confirming that the funds were systematically deployed for client tax duties. However, the lower tax authorities completely ignored these debit entries when making the addition.

Decision

Role as a Conduit Established: It was held that the evidence clearly demonstrated the assessee was merely acting as a routing conduit or intermediary for his clients’ tax liabilities.
Ownership of Funds: The deposits reflecting in the impugned bank account did not beneficially belong to the assessee, as they were offset by corresponding debits to the government treasury.
Addition Deleted: Because the lower authorities failed to consider the narrative debits that validated the source and utilization of the funds, the addition of Rs. 23 crores made under section 69A could not be legally sustained.
Final Outcome: The ruling was decided completely in favour of the assessee.

Key Takeaways

Deeming Provisions Require Holistic Review: Section 69A is a deeming fiction. While evaluating unexplained bank credits, tax authorities cannot selectively look at deposit entries while completely ignoring corresponding debit entries that explain the nature of the account.
Importance of Banking Narrations & Challans: Verifiable audit trails—such as bank statement narrations naming government departments matched with official tax challans—serve as conclusive evidence to prove the fiduciary nature of transactions.
Fiduciary Accounts Are Non-Taxable: Funds received by a professional in a fiduciary capacity (holding client money for specific statutory disbursements) do not constitute the personal income or “unexplained wealth” of the professional.

IN THE ITAT CHENNAI BENCH ‘A’

Bose Saravanan

Deputy Commissioner of Income-tax

ABY T. VARKEY, Judicial Member
and MS. PADMAVATHY. S, Accountant Member

IT Appeal No.2217 (CHNY) of 2025
[Assessment year 2016-17]

MAY 11, 2026

R. Subramanian, C.A. for the Appellant. C. Sivakumar, Addl. CIT for the Respondent.

ORDER

Padmavathy S., Accountant Member.- This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, (in short “CIT(A)”) passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”) dated 18.07.2025 for Assessment Year (AY) 2016-17.

2. The assessee is an individual and is a Chartered Accountant. The assessee filed a return of income for AY 2016-17 on 14.10.2016 declaring total income of Rs.2,95,197/-. The A.O received information that the assessee has deposited substantial amount of cash into his bank account. Since the income declared by the assessee in the return of income is not commensurate with the cash deposit, the A.O had a reason to believe that the income of the assessee has escaped assessment and accordingly reopened the assessment by issue of notice u/s. 148 of the Act. The assessee submitted before the A.O that the impugned bank account was opened for the purpose of paying taxes on behalf of the clients and that the entire amount deposited is with respect to the amount received from the clients towards payment of various taxes such as income tax, VAT, TDS, Service tax, etc. The A.O however did not accept the submissions of the assessee and proceeded to make addition of Rs. 23 Crores u/s. 69A of the Act. Aggrieved, the assessee filed further appeal before the CIT(A). Before the CIT(A) the assessee submitted documents substantiating the payment of taxes on behalf of the clients. The CIT(A) enhanced the addition made by the A.O by Rs.6,87,60,832/- by considering the credits in another bank account of the assessee with HDFC bank account as unexplained. Aggrieved, the assessee filed further appeal before the CIT(A).

3. The Ld. Authorized Representative (AR) of the assessee submitted that the assessee is practising in a small town near Pudukottai and since the clients of the assessee did not have proper access to pay taxes online, the assessee undertook the responsibility of remitting various taxes on behalf of the clients. The Ld. AR took the Bench through the various debits in the bank account of the assessee to submit that all the debits pertain to various taxes paid by the assessee on behalf of his clients. The Ld. AR argued that the lower authorities are not correct in completely ignoring the debits in the impugned bank account and treating the entire credits as unexplained. The Ld. AR also took the bench through the sample bank challans towards taxes paid on behalf of the clients and the corresponding debits in the bank account of the assessee to substantiate that these are the debits in the bank account is supported by the documentary evidence. With regard to the amount enhanced by the CIT(A), the ld. AR submitted that the assessee has transferred the impugned amount from Axis Bank to HDFC Bank which again is used to make payment towards taxes. The Ld. AR in this regard drew out attention to the HDFC bank statement containing the impugned entries (Page 359 of paper book). Accordingly, the Ld. AR submitted that the assessee has received the money in his fiduciary capacity to make payment towards taxes on behalf of clients and the money deposited in the bank account does not belong to the assessee.

4. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.

5. We have heard the parties, and perused the material available on record. The A.O noticed substantial tax deposit in the bank account of the assessee and accordingly reopened the assessment. The A.O did not accept the submissions of the assessee that the amount deposited belong to clients on whose behalf the assessee has made various tax payments. On further appeal, the CIT(A) enhanced the addition made by the A.O considering the deposit in one more bank account of the assessee. The assessee before us submitted an affidavit in support of the claim that the deposit in the bank account are amounts collected from the clients towards payment of various taxes and does not belong to the assessee. The relevant extract of the affidavit is reproduced below:

6. From the perusal of the various documents submitted by the assessee (pages 1 to 433 of paper book – I and paper book II containing 119 pages), we notice that the assessee has made tax payments through his bank account to the tune of Rs. 29,83,87,572/-. We further notice that on sample basis the tax challans match with the debits reflected in the bank account of the assessee. We also notice that the lower authorities while making the addition has completely ignored the debits in the impugned bank account of the assessee which in the narration clearly mentions the various government authorities that supports the contention of the assessee that the amounts collected are used towards various tax payments on behalf of the clients of the assessee. Considering the overall facts and circumstances, we see merit in the submission that the assessee has acted as a conduit for payment of taxes on behalf of the clients and that the deposits reflecting in the bank account of the assessee does not belong to the assessee. Further, the debits in the bank accounts reflecting the payment of taxes also substantiate the submissions of the assessee. Accordingly, we are of the considered view that the addition made treating the credits in the bank account of the assessee as unexplained cannot be sustained considering various evidences submitted by the assessee. Therefore, we direct the A.O to delete the addition made in this regard.

7. In the result, the appeal of the assessee is allowed.