Business commission received in cash and capital introduced from business cash flows cannot be taxed as unexplained cash credits under Section 68

By | October 13, 2026
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Business commission received in cash and capital introduced from business cash flows cannot be taxed as unexplained cash credits under Section 68

Issue

  • Whether business commission income received in cash, once accepted and identified as business receipts, can be simultaneously characterized and taxed as an unexplained cash credit under Section 68 read with Section 115BBE.
  • Whether cash introduced by a proprietor into their capital/current account can be added as an unexplained cash credit under Section 68 when sufficient cash was generated and available from disclosed business operations during the same financial year.

Facts

  • General Details: The assessee, an individual running a proprietary concern engaged in the business of buying and selling spices and condiments and earning commission, filed a return declaring income of approximately ₹4.47 lakhs for Assessment Year 2020-21.
  • Reassessment Proceedings: The Assessing Officer (AO) initiated reassessment proceedings, and the assessee filed a return declaring the same income.
  • Addition for Cash Commission:
    • The AO noted commission income aggregating to ₹10,25,550 received in cash from the business.
    • Holding that satisfactory documentary evidence regarding the source of cash receipts was lacking, the AO treated the sum as unexplained cash credit under Section 68 read with Section 115BBE.
    • The AO made no finding that this amount represented an independent receipt over and above the business commission.
  • Addition for Proprietor’s Capital Contribution:
    • The AO observed ₹5,97,000 in cash introduced into the capital/current account of the proprietary concern.
    • Holding that the assessee failed to furnish a convincing explanation, the AO treated this sum as unexplained cash credit under Section 68 read with Section 115BBE.
    • The AO rejected the explanation without evaluating the overall cash flow or cash generated from disclosed business operations during the year.

Decision

  • On Cash Commission Receipts:
    • The court held that once the nature of a receipt is identified and accepted as business commission, it cannot simultaneously be characterized as an unexplained cash credit under Section 68 merely because it was received in cash.
    • In the absence of any finding that the sum was received over and above the regular business commission, the addition under Section 68 and the application of Section 115BBE were deleted. [Paras 9, 12, and 14]
  • On Proprietor’s Capital Introduction:
    • The court held that cash introduced into the capital account must be evaluated in conjunction with cash generated and available from disclosed business activities.
    • Since the AO accepted cash generation from business operations during the year and provided no independent material showing an undisclosed source, the explanation could not be rejected in isolation.
    • Consequently, the addition of ₹5,97,000 under Section 68 read with Section 115BBE was deleted. [Paras 16, 18, and 21]

Key Takeaways

  • Dual Taxing Bar: Recharacterizing disclosed business receipts as unexplained cash credits under Section 68 merely due to cash mode of payment is legally impermissible.
  • Cash Flow Examination: When assessing capital contributions by a proprietor, tax authorities must consider the total cash generated from disclosed business operations as a whole rather than rejecting availability in isolation.
  • Burden on Revenue for Section 68: To sustain an addition under Section 68, the Revenue must provide evidence or findings of an independent, undisclosed source rather than relying on mere suspicion.
IN THE ITAT CHENNAI BENCH ‘C’
Sivakumar
v.
Income-tax Officer
S.S. Viswanethra ravi, Judicial Member
and S. R. RAGHUNATHA, Accountant Member
IT Appeal No.1891 (Chny) of 2026
[Assessment year 2020-21]
SEPTEMBER  17, 2026
Senthil Kumar, Adv. for the Appellant. Pelli Prem Kumar, Sr.AR for the Respondent.
ORDER
S.R. Raghunatha, Accountant Member.- The present appeal of the assessee is directed against the order dated 18.03.2026 of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi (hereinafter referred to as the “Ld.CIT(A)”), arising out of the assessment order dated 23.12.2024 passed u/s.147 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) by the Assessment Unit, National Faceless Assessment Centre, Delhi (hereinafter referred to as “the AO”) for the Assessment Year 2020-21.
2. The brief facts of the case are that the assessee is an individual engaged in the business of purchase and sale of spices and condiments and earning commission therefrom under the name and style of M/s.SML Fibrex, a proprietary concern. The assessee filed his original return of income on 15.10.2020 declaring total income of Rs.4,46,700/-.
3. Subsequently, proceedings for reassessment were initiated. Notice u/s.148A(b) of the Act was issued on 21.03.2024 requiring the assessee to furnish his response on or before 28.03.2024. Thereafter, an order u/s.148A(d) of the Act and notice u/s.148 of the Act were issued on 30.03.2024. In response thereto, the assessee filed his return on 09.04.2024 declaring the same income as originally returned.
4. In the course of reassessment proceedings, the AO noticed, inter alia, that the assessee had earned commission income of Rs.10,25,550/-, which was received in cash; that cash of Rs.5,96,524/- had been introduced in the capital/current account; and that, as against the assessee’s statement before the Investigation Wing that his annual personal expenditure would be around Rs.2,25,000/-, the capital account reflected withdrawals of only Rs.72,283/-towards personal expenses.
5. The AO, therefore, made an addition of Rs.10,25,550/- being commission receipts as unexplained cash credit u/s.68 r.w.s 115BBE of the Act; Rs.5,96,524/- being cash introduced in the capital account as unexplained cash credit u/s.68 r.w.s 115BBE of the Act; and Rs.1,52,717/- being the difference between the estimated annual personal expenditure of Rs.2,25,000/- and withdrawals of Rs.72,283/-, as unexplained expenditure u/s.69C r.w.s 115BBE of the Act. Thus, the total addition made by the AO amounted to Rs.17,74,791/-by passing an order dated 23.12.2024.
6. Aggrieved, the assessee carried the matter in appeal before the Ld.CIT(A). The assessee, inter alia, challenged the validity of the reassessment proceedings and also contested the aforesaid additions on merits. The ld.CIT(A) was pleased to confirm the additions made by the AO by dismissing the appeal of the assessee. Being aggrieved by the decision of the ld.CIT(A), the assessee is in further appeal before us.
7. We have heard the rival submissions perused the material available on record and gone through the orders of the authorities. The first issue for our consideration relates to the addition of Rs.10,25,550/- made by the AO u/s.68 of the Act.
8. It is not in dispute that the sum of Rs.10,25,550/- represents commission receipts arising in the course of the assessee’s business. The AO himself has proceeded on the factual premise that the assessee had earned commission income of Rs.10,25,550/- during the relevant financial year. The objection of the AO is essentially that the commission was received in cash and, according to him, the assessee had not furnished satisfactory documentary evidence regarding the source thereof.
9. In our considered view, once the nature of the receipt is identified and accepted as commission arising from the assessee’s business activity, the very same receipt cannot, merely because it was received in cash, be simultaneously characterised as an unexplained cash credit u/s.68 of the Act. The mode of receipt, by itself, cannot alter the character of a receipt whose nature and source have otherwise been identified as a business receipt.
10. Section 68 is attracted where any sum is found credited in the books of an assessee and the assessee either offers no explanation about the nature and source thereof or the explanation offered is not found satisfactory. In the present case, however, the AO has not treated the impugned sum as an unidentified credit from an unknown source. On the contrary, the assessment order itself proceeds on the footing that the amount represents commission earned by the assessee. There is, therefore, an inherent inconsistency in first recognising the amount as commission earned in the course of business and thereafter treating the gross receipt itself as an unexplained cash credit.
11. Further, the assessee has already disclosed income from the business carried on under the name of M/s.SML Fibrex. Once the receipt is found to have emanated from the business activity, what can ordinarily be brought to tax is the income or profit embedded in such business receipts in accordance with the provisions of the Act. The gross business receipt cannot automatically be regarded as unexplained income merely because the assessee may not have maintained the books and supporting records in the manner expected by the AO.
12. It is also pertinent that there is no finding in the assessment order that the impugned sum of Rs.10,25,550/- represents any receipt independent of, or over and above, the commission receipts forming part of the assessee’s business. Nor has any material been brought on record to establish that the said amount represents money introduced from an undisclosed source unrelated to the business of the assessee.
13. The AO cannot approbate and reprobate in respect of the same receipt. If the sum represents commission receipts, its taxability has to be considered in that character. The same amount cannot be stripped of its identified business character and assessed once again as unexplained cash credit merely on the ground that the receipt was in cash.
14. We are, therefore, unable to sustain the addition of Rs.10,25,550/- made u/s.68 of the Act. The AO is directed to delete the same. Consequently, the application of section 115BBE to the aforesaid amount also does not survive. The relevant ground of the assessee is allowed.
15. The next issue relates to the addition of Rs.5,96,524/- representing cash introduced by the assessee in his capital/current account, which has been assessed as unexplained cash credit u/s.68 of the Act.
16. We have considered the facts of the case. The AO proceeded to make the addition principally on the ground that the assessee had failed to furnish a convincing explanation regarding the source of the cash introduced into the proprietary concern. In this regard, it is relevant to notice that the assessee is carrying on a business in which cash receipts admittedly formed part of the business transactions. In fact, the AO himself has recorded that commission receipts aggregating to Rs.10,25,550/- were received in cash during the relevant financial year. This factual finding assumes significance while examining the availability of cash for introduction into the proprietary concern. Once the existence of cash generated from the assessee’s business during the very same financial year is accepted by the AO, the explanation regarding availability of cash cannot be rejected in isolation without examining the cash flow as a whole. The cash introduced in the capital account has to be considered in conjunction with the cash generated and available with the assessee from the disclosed business activity.
17. More importantly, a proprietary concern has no legal identity independent of its proprietor. A transfer of the proprietor’s own cash into his proprietary business does not, by itself, establish generation of an independent income. For sustaining an addition, the Revenue has to demonstrate that the amount so introduced represents money from an unexplained source and is not out of the cash otherwise available with the assessee.
18. In the facts before us, there is no finding based upon any independent material that the cash of Rs.5,96,524/- introduced by the assessee represented a receipt from an undisclosed source. The addition has essentially been made because, according to the Assessing Officer, the explanation furnished by the assessee was not convincing. However, the AO has simultaneously accepted the existence of substantial cash receipts from the assessee’s business.
19. The assessment of Rs.10,25,550/- representing the cash commission receipts as unexplained cash credit has already been held by us to be unsustainable. The availability of such cash cannot thereafter be completely ignored while examining the subsequent introduction of cash into the proprietary concern. Otherwise, the same cash flow would effectively suffer taxation at more than one stage without any material establishing the existence of two separate and independent sources of income.
20. The Revenue has not brought on record any evidence demonstrating that the cash introduced was over and above the cash available with the assessee or that it emanated from a source distinct from the assessee’s business receipts. In the absence of such material, the addition cannot be sustained merely on suspicion arising from inadequacy of the assessee’s books or records.
21. We accordingly hold that, on the facts and circumstances of the present case, the addition of Rs.5,96,524/- u/s.68 is not sustainable. The AO is directed to delete the same. Consequently, section 115BBE also has no application to this amount. The relevant ground of the assessee is allowed.
22. The last issue relates to the addition of Rs.1,52,717/- u/s.69C of the Act. The AO noticed that, in the statement furnished before the Deputy Director of Income-tax (Investigation), Erode, the assessee had stated that his annual personal expenditure would be approximately Rs.2,25,000/-, excluding educational expenditure. However, the capital account furnished during the assessment proceedings reflected withdrawals towards personal expenses of only Rs.72,283/-. The AO accordingly treated the difference of Rs.1,52,717/-[Rs.2,25,000/- minus Rs.72,283/-] as unexplained expenditure u/s.69C of the Act.
23. Before us also, no satisfactory material has been brought on record to reconcile the aforesaid difference. The assessee’s own statement regarding the approximate level of personal expenditure constitutes a relevant piece of evidence. It was incumbent upon the assessee to demonstrate either that the statement did not correctly represent the actual expenditure incurred during the relevant previous year or that the balance expenditure was met from an explained source. We are conscious that an addition cannot ordinarily be sustained merely on conjecture or on an arbitrary estimate of household expenditure. However, the present addition does not emanate solely from an estimate independently made by the AO. The figure of Rs.2,25,000/- has its foundation in the assessee’s own statement regarding his annual personal expenditure. Against such statement, the books/capital account disclose withdrawals of only Rs.72,283/-.
24. Once such discrepancy was specifically confronted, the primary facts regarding the source from which the balance personal expenditure was met were within the special knowledge of the assessee. No cogent explanation or supporting evidence has been placed before us to establish the source for meeting the differential expenditure. In these circumstances, we find no sufficient reason to interfere with the conclusion of the Assessing Officer in respect of the difference of Rs.1,52,717/-. We, therefore, confirm the addition of Rs.1,52,717/- made towards unexplained expenditure u/s.69C of the Act. The relevant ground of the assessee is dismissed.
25. In the result, the addition of Rs.10,25,550/- made u/s.68 of the Act in respect of commission receipts is deleted. The addition of Rs.5,96,524/- made u/s.68 of the Act in respect of cash introduced in the capital/current account is also deleted. The addition of Rs.1,52,717/- made u/s.69C of the Act towards unexplained personal expenditure is confirmed.
26. In view of the relief granted by us on merits in respect of the substantive additions under section 68, the other contentions of the assessee concerning those additions, to the extent they have become academic, do not require separate adjudication.
27. In the result, the appeal filed by the assessee is partly allowed.