CA Acting as Conduit for Tax Payments on Behalf of Clients Cannot Be Taxed on Deposits Routed Through His Bank Account: ITAT [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that a Chartered Accountant who receives money from clients only for payment of statutory taxes cannot be taxed on deposits routed through his bank account when the funds are used for remitting those taxes.

The assessee, Bose Saravanan, a Chartered Accountant practising near Pudukottai, filed his return for Assessment Year 2016-17 declaring an income of Rs. 2.95 lakh. The Assessing Officer (AO) reopened the assessment after noticing large cash deposits in his bank account that were not in line with the income disclosed in the return.

The assessee’s counsel argued that the deposits represented amounts received from clients for payment of Income Tax, TDS, VAT and Service Tax on their behalf. They explained that many of his clients were from rural areas and depended on him to make online tax payments. According to counsel, the funds did not belong to assessee and were received only for statutory compliance purposes.

The AO rejected the explanation and treated the deposits as unexplained money under Section 69A of the Income Tax Act, making an addition of about Rs. 23 crore. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] further enhanced the addition by Rs. 6.87 crore by treating credits in another bank account as unexplained.

Before the Tribunal, the assessee’s counsel produced bank statements, tax challans and other documents to show that the money received from clients was used for payment of taxes. They also argued that the authorities had considered only the credit entries and ignored the corresponding debit entries showing payments to Government authorities.

The bench comprising Ms. Padmavathy S. (Accountant Member) and Shri Aby T. Varkey (Judicial Member) observed that the records showed tax payments of about Rs. 29.83 crore through the assessee's bank accounts. The Tribunal also observed that the tax challans matched the debit entries in the bank statements.

The tribunal observed, "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."

Holding that the documentary evidence supported the assessee's explanation, the Tribunal directed the AO to delete the additions and allowed the appeal.

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