Gross movement of third-party funds in Angadia business cannot be added as unexplained cash; only realistic commission is taxable.

ORDER

Sanjay Garg, Judicial Member. – The captioned appeals by the Revenue and corresponding cross appeal/cross objections by the assessee are against the separate orders passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as “NFAC”), Delhi (hereinafter referred to as “CIT(A)”), under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relate to same Assessment Years (A.Y.) 2019-20 & 2020-21. Since identical facts and common issues are involved in the captioned appeals and corresponding cross objections/cross appeal, hence, the same were heard together and are being disposed of by this common order. The Revenue’s Appeal IT(SS)A No.95/Ahd/2026 is taken as lead case for narration of facts.

2. The brief facts of the case are that the assessee is operating under the name of his proprietorship concern RC Enterprise. A survey action under section 133A of the Act was initiated at the business premises of the assessee on 09.04.2019 and during the course thereof, physical cash of Rs 1,08,60,200/- was found. In view of the substantial cash found, the survey was converted into a search under section 132, and consequently proceedings Under section 153A were initiated. Though the assessee had earlier filed the return of income under section 139(1) on 31.08.2019 declaring total income of Rs.15,38.030/-, however, since, there was noncompliance by the assessee of filing a fresh return of income u/s 153A of the Act, The Assessing Officer (in short ‘the AO’) proceeded to pass the assessment order as best judgment assessment order u/s 144 of the Act.

3. The AO noted that the assessee was engaged in Angadia business (Commission agent involved in transferring the cash/money from one person to other person on commission basis) involving large-scale collection, possession and movement of unaccounted cash. He further noted that during search action, loose papers and a notebook were found which were marked as Annexures A/1 and A/2, while backup data of mobile phones was seized and marked as Annexure A/3. The AO noted that Annexure A/1 comprised red printed slips for pages 1 to 47 and 70 to 77 showing total unaccounted income of Rs. 1,80,44,950/-, with beneficiaries found of Rs 9,66,550/- spread over 6 persons, and handwritten slips for pages 48 to 69 and 78 to 81 showing total unaccounted income Rs.1,64,48,940 with beneficiaries of Rs. 1,22,83,370/- spread over 17 persons. So far as Annexure A/2 was concerned, the Assessing Officer observed that it was a 37-page notebook written in pencil in the handwriting of Shri Sagar J. Rajani, in which names were written against amounts. According to the Assessing Officer, the notebook reflected that R.C. Enterprise used to receive cash from Rajkot and outstations on behalf of beneficiaries at Rajkot and used to transfer the same through one or more intermediaries, while earning commission, such transactions being operated through other angadias. The Assessing Officer also noted that the names appearing therein were incomplete, such as Pandeyji, Manmohan, Kishore, Gautam and Gatu, and that, in most cases, even mobile numbers were absent. The statements of Shri Sagar J. Rajani recorded under section 131 of the Act and of the assessee under section 132(4) of the Act were referred to by the Assessing Officer, wherein, both of them broadly stated that the notings represented angadia cash transactions and outstanding balances, however, the Assessing Officer noted that neither of them could furnish complete names, mobile numbers or addresses of the concerned beneficiaries/parties. The assessee could furnish only a chart of opening, receipt, payment and closing balances, without any corroborative evidence. On that basis, the Assessing Officer concluded that the notings in Annexure A/2 pertained to the year under consideration, and that the aggregate thereof came to Rs.2,25,33,580/-. He observed that the assessee had failed to explain the nature and source of the cash receipts or the identity of the persons concerned. The Assessing Officer, therefore, treated the said amount as undisclosed cash receipts and added Rs.2,25,33,580/- into the income of the assessee under section 69A of the Act.

3.1 In respect of Annexure A3, the Assessing Officer recorded that the same consisted of mirror images of mobile phones of Shri Sagar J. Rajani and Yashbhai, containing digital data in the nature of images, messages and WhatsApp chats. The Assessing Officer observed that the data contained details such as amounts and the mobile numbers of senders and receivers, but generally lacked complete address and PAN particulars and in some cases even the names were incomplete. The Assessing Officer further noted that phone books, call data records and the seized digital material were analysed together so as to identity beneficiaries and correlate the transactions. According to the Assessing Officer, when the data found in Annexure A/3 was compared with the call data records and other seized material, it corroborated transactions of transfer of cash by the concern, yet the assessee failed to explain the identity of the parties, the source of the transactions, or their nature. The Assessing Officer observed that the onus to explain the cash transactions found in the seized annexures was upon the assessee and that such onus had remained undischarged. The Assessing Officer then concluded that, out of the digital data in Annexure A/3, beneficiaries of amount of Rs. 29,79,57,305/- stood identified by the Department and he, therefore, added the said amount into the income of the assessee on protective basis. He, however, added the commission income of Rs.2,97,957/- in respect of the transaction of the aforesaid amount into the income of the assessee. He, however, added the balance undisclosed cash receipts of Rs.25,07,69,584/- into the income of the assessee under section 69A. Thus, the total addition (including the protective addition) relatable to Annexure A/3 was worked out by the Assessing Officer at Rs.54,90,24,846/-. Accordingly, the assessment was completed under section 153A read with section 144 of the Act by taking the returned income of Rs. 15,39,030/- and making additions of Rs 2,25,33,580/- as unexplained investment/unexplained money under section 69A r.w.s. 115BBE, as discussed in paragraph 5 of the assessment order and Rs.54,90,24,846/- (including the addition made on protective basis) as unexplained investment/unexplained money under section 69A read with section 115BBE, as discussed in paragraph 6 of the assessment order, resulting in assessed income of Rs. 57,30,97,456/.

4. During the appellate proceedings before the 1d. CIT(A), it was submitted before the Ld. CIT(A) that the digital material extracted from mobile devices was neither properly authenticated nor fully disclosed in its computational and entry-wise form. It has been submitted that despite specific request, the working or summary prepared from Annexure A-3 was not furnished, thereby depriving the assessee of an effective opportunity to verify duplication, sequencing, repetition and circulation of funds. It was contended that unverified digital chats, Images and extracted data, in the absence of proper authentication and corroboration, cannot be treated as conclusive evidence of taxable income in the hands of the assessee. With regard to Annexure A-2, the assessee submitted that the notebook entries were rough, incomplete and abbreviated in nature and, at the highest, may justify further inquiry into the nature of the business, but cannot, by themselves, establish ownership, actual receipt, accrual of income or taxable character of the entire aggregate. It was contended that such entries were in the nature of incomplete notings or “dumb documents” and cannot sustain a straight addition of the gross amount in the absence of independent corroboration.

4.1 It was explained before the 1d. CIT(A) that the assessee was engaged in Angadia business of informal cash transfer, i.e. receipt of cash from senders at one place and its onward delivery to recipients/beneficiaries at another place, on commission basis. It was submitted that assessee earns commission at a rate of approximately Rs. 35/- to Rs. 100/- per one lakh of cash transferred. The business was carried on through a network of approximately 212 branches and involved coordination between multiple other Angadia firms as intermediaries. It was contended that even this business model was confirmed, and not contradicted, by the AO, himself. It was further contended that in an Angadia business, the operator handles and routes the cash as a bailee/agent and eams only a commission for the service rendered. The cash principal thus handled belongs beneficially to the senders or receivers and not to the Angadia operator. It was contended that the entries in Annexures A/2 and A/3 reflected the gross principal movement of funds and not the income of the assessee. It was further pointed out that, subsequent to the assessment, the Department itself initiated proceedings in the case of beneficiaries/counterparties, which, materially supported the case of the assessee that he was merely acting as a conduit or facilitator. The assessee further contended that no corresponding accretion in the form of assets, investments, bullion, jewellery or retained wealth of the magnitude alleged was found in the possession of the assessee. It was accordingly submitted that even assuming, without admitting, that the impugned entries represent real transactions, only the commission income pertaining to such entries could be added in the hand of the assessee. The assessee, inter alia, submitted before the Ld. CIT(A) that the additions of Rs.54,90,24,846/- made on the basis of Annexure A-3 and Rs.2,25,33,580/- made on the basis of Annexure A-2 were unsustainable both in law and on facts. It was contended that the AO proceeded on an erroneous assumption that the entries found in the notebook and in the extracted digital material represent the assessee’s own unexplained money, whereas the assessee had duly explained that the said entries pertain to Angadia transactions ( Commission agent business) involving receipt of cash from outstations/Rajkot and onward transfer of the same to Intended beneficiaries through intermediaries, for which only commission or facilitation income, if any, could be attributed to the assessee. The assessee contended that the impugned entries relied upon by the AO reflected not only the cash receipts but also further movement of such cash to various beneficiaries and hence only the receipt side cannot be treated as the assessee’s own income, but only the commission income earned by the assessee on such transactions can be added. It was further contended that, in an Angadia or cash-facilitation business, mere handling, custody or routing of funds does not establish ownership thereof, and therefore the basic condition for invoking section 69A is not satisfied. The assessee submitted that the AO, himself has recorded the business model of receipt and onward disbursement of third-party funds and also proceeded on the footing that commission was earned on such transactions, hence, the AO could not, in the same breath, treat the entire principal flow as the assessee’s own unexplained money.

4.2 The Ld. CIT(A), after duly considering the submissions of the assessee, observed that the notebook Annexure A/2 was found in the business premises of the assessee’s firm, and the writing was confirmed to be that of the assessee’s employee, and hence, it could not be considered a dumb document.

4.3 However, the Ld. CIT(A) held that in an angadia business, the gross principal movement of funds handled by the operator cannot be assessed as the income or unexplained money of the operator, and section 69A of the Act cannot be invoked on the gross principal amounts, as the assessee did not own such money in any legal or beneficial sense. The Ld. CIT(A) further noted that the Assessing Officer, himself, in dealing with the identified beneficiary amounts from Annexure A/3, made the addition on a protective basis only and independently added commission income thereon at his own estimate, recognizing commission as the real income element of the angadia business in respect of that portion. The Ld. CIT(A) held that the nature and legal character of the assessee’s relationship with the funds does not change depending on whether the beneficiary can be identified, and the Assessing Officer could not maintain two fundamentally inconsistent positions by computing commission for the identified portion and gross principal for the unidentified portion. Relying upon the proposition that gross receipts or turnover cannot be equated with income and taking note of the decisions of the Co-ordinate Ahmedabad Bench of the Tribunal in the case of ‘ACIT v. M/s Patel Madhavlal Maganlal & Co.”,  (Ahmedabad – Trib.) and of the Mumbai ITAT in the case of ‘Dikesh Mehta v. ITO”,   (Mumbai – Trib.), the Ld. CIT(A) held that only the commission income embedded in such transactions can be lawfully brought to tax. So far as the quantification of such income, in the absence of regular books of account, was concerned, the Ld. CIT(A) estimated the commission income at the rate of 2% on the total unaccounted turnover of Rs.57,12,60,469/-, which worked out to Rs.1,14,25,209/-, and after reducing the commission of Rs.2,97,957/- already added by the Assessing Officer, restricted the final sustained addition to Rs. 1,11,27,252/-, thereby deleting the balance addition of Rs. 56,04,31,174/-.

5. Before us, the Revenue has, thus, come in appeal agitating against the action of the Ld. CIT(A) in deleting the addition made by the AO of the entire receipts / principal amount, whereas, the assessee through his cross objections has agitated against the estimation of higher commission income @ 2% by the CIT(A) as against the claim of the assessee that the commission income in angadia business ranges between Rs. 35/- to Rs. 100/- per Lakh.

5.1 We have heard the rival contentions and gone through the record. In the present case, the operational model of the assessee as an angadia operator engaged in moving physical cash across multiple outstations through a network of 212 branches is an undisputed fact recognized by the AO himself in the assessment order. The entries in the notebook Annexure A/2 and the mobile digital data in Annexure A/3 reflected the gross movement of funds belonging to various clients, rather than undisclosed income of the assessee. Further, the AO, recognizing the angadia business of the assessee, for the identified beneficiary portion of the recoded amounts, has made the addition on a protective basis only and separately added the commission income element on such amount, thereby accepting the fact that the assessee was merely a conduit facilitator earning a service fee. The Revenue cannot be allowed to approbate and reprobate in the same breath by treating the same data stream as a commission-earning mechanism for one portion and as personal undisclosed wealth for the unidentified portion. The legal status of the angadia operator vis-à-vis the principal transit funds remains identical, and the failure of the assessee to produce the PANs and addresses of his clients does not automatically leads to the presumption that the same is income of the assessee from undisclosed sources. As laid down by the Hon’ble Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 721 (SC), income-tax is a tax on real income, which must be ascertained on commercial principles, meaning that what is to be taxed is the profit element only. Furthermore, the Hon’ble jurisdictional High Court of Gujarat in the case of CIT v. President Industries  258 ITR 654 (Gujarat) has held that the entire amount of undisclosed transit turnover or receipts cannot be treated as undisclosed income, and only the net profit margin or embedded element of income can be brought to tax. The act of merely routing, carrying, or transmitting third- party funds does not give rise to an accrual of such principal amount transacted in the hand of the assessee. There is no evidence on the file showing that the assessee was possessed of physical assets or investments equivalent to the amount recorded in the seized documents/entries, hence, the gross principal amount cannot be added in the hands of the assessee. Therefore, following the coordinate bench decisions in ‘ACIT v. M/s Patel Madhavlal Maganlal & Co” (supra) and “Dikesh Mehta v. ITO” (supra), we do not find any infirmity in the order of the Ld. CIT(A) in holding that the gross principal transactions cannot be assessed as the income of the assessee. The appeal of the Revenue is, therefore, dismissed.

5.2 Now, coming to the cross objection raised by the assessee regarding the estimation of commission income at the flat rate of 2% on the aggregate turnover, we find that there is considerable merit in the contentions of the Ld. AR that this rate is highly excessive and lacks commercial justification. In his statement recorded under Section 132(4) of the Act during the search proceedings, the assessee consistently explained that the operational margin earned in this line of business ranges between Rs. 35 to Rs. 100 per lakh of cash transferred, which works out to a fractional percentage of approximately 0.035% to 0.10%. In a highly competitive transit sector, an estimated commission rate of 2% [which amounts to Rs. 2,000 per lakh] is completely unrealistic and would wipe out the entire volume movement of an angadia network. Taking into consideration the massive scale of the aggregate turnover of the assessee’s business, which stands at Rs. 57,12,60,469/- across a vast branch network, the actual profit element has to be estimated in a realistic manner. The Mumbai ITAT in the case of “Dikesh Mehta” (supra) has upheld the commission structure of 0.30% in Angadia business. The Hon’ble jurisdictional High Court of Gujarat in the case of CIT v. Samir Synthetics Mill [2010] 326 ITR 410 (Gujarat), has held that any profit or commission estimation must be based on a reasonable nexus with the industry-specific operating environment and the assessee’s own historical data profile, rather than high pitch visual approximations. To project a 2% profit profile onto a low- margin delivery system is unsustainable. Recently, the identical matter came for consideration before the Co-ordinate Mumbai Bench of the Tribunal in the case of Ravi Omprakash Agrawal v. Dy. CIT [IT Appeal No. 3559 & 3560 (Mum.) of 2025, dated 4-8-2026]. In the said case, there was a search action in the A’s premises. From the employee cabin several loose papers were found alongwith what’s app chats on the employee’s phone depicting cash being received and paid by the A. AO made addition of total of cash received and paid as stated by the employee from his phone as income of the A. In appeal the Co-ordinate Mumbai Bench held that the since the nature of business of cash being received and paid was explained by the employee in his statement on oath and further What’s app chats denote that money was coming from one person and being paid to another, and this act clearly demonstrated movement and transportation of cash from one location to another and thus the assessee was found to be in angadia business. It was held that the A only facilitated movement and transportation of cash and was not owner of such cash. The cash, in fact, belonged to the people who paid or received it and any addition should be made in their hands. The Co-Ordinate Mumbai Bench, thus, held that the AO was, thus, wrong in making the entire addition in the hands of A. The Mumbai Bench of the Tribunal, having regard to the explanation of the assessee that commission was earned at Rs.175 per Rs.1 lakh, the nature of entries recorded in the seized material and the judicial guidance available in similar Angadia-type cases, directed the Assessing Officer to restrict the addition only to commission income at the rate of 0.175% on the higher of the cash receipts or cash payments.

5.3. Therefore, to meet the ends of justice and keeping in view that the assessee’s huge turnover and further relying upon the decisions of the Co-ordinate Benches of the Tribunal in relation to estimation of commission income in Angadia business, as discussed above, we modify the order of the Ld. CIT(A) and direct the AO to estimate and restrict the embedded commission income to a reasonable and realistic rate of .30% on the total unaccounted turnover of Rs.57,12,60,469/- to be taxed at normal rates and not under Section 115BBE of the Act. The AO is further directed to recompute the final addition after giving full adjustment and credit for the commission income already brought to tax in the assessment order. The cross objections filed by the assessee are accordingly allowed.

6. Since the facts, and issue involved in the present appeal of the Revenue and cross appeal of the assessee for the assessment year 2020-21 are completely identical to those discussed and adjudicated by us in the preceding paragraphs for the assessment year 2019-20, our findings and conclusions shall apply mutatis mutandis to these cross appeals for year 2020-21 as well.

7. In the final result, the captioned two appeals filed by the Revenue are dismissed, and whereas, the corresponding cross objection No.48/Ahd2026 and ITA No.2022/Ahd/2026 filed by the assessee stand allowed.