Scrutiny case
This query is : Resolved
04 December 2013
The assessee was an employee and working as collection officer. The duties involved collection of funds from customers and transfering such amount to its employer. During a financial year the assessee collected rs. 35 lacs in cash and deposited in her bank account and repaid to employer. Now the case has been fixed for scrutiny assessment due to the same reason. The AO is of the view that this explanation is not sufficient. I want to know any case laws related to my case or any further explanation that can be given to the AO. Please help.
04 December 2013
While making collection whether they have issued company's official receipt? if yes show those receipt and show corresponding entries in the books of the company and prepare reconciliation statement for actual collection and action payment to company and confirmation letters from the company also will support your claim.
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07 December 2013
Mr. Kumar, thanks for the advise. I would like to know if that customer is no longer associated with us or doesn't provide the confirmation, the onus to confirm the balance lies with the Department?
23 July 2025
In the situation you're describing, the **Assessing Officer (AO)** has raised concerns regarding the **cash deposits** made into the assessee's bank account. Since the assessee is working as a collection officer, the AO might view the large cash transactions as unusual or inconsistent with the ordinary course of business, especially if the necessary supporting documents (e.g., receipts or confirmations) are not available.
Here's how the situation can be addressed and the further explanation that could be provided to the AO:
### 1. **Provide Clear Documentation of the Collection Process:**
* If **official receipts** were issued to customers at the time of collection, these receipts should be presented to the AO.
* Ensure that the receipts correspond to the amounts deposited in the bank account. If the company maintains **books of accounts**, provide a **reconciliation statement** showing the collection amounts, the deposits made, and the amounts paid to the employer.
**Key Points:**
* Ensure all receipts, invoices, and payment vouchers are available.
* Show the **chain of transactions** that links the collections to the final deposit in the bank account.
### 2. **Prepare a Reconciliation Statement:**
* A **reconciliation statement** could be helpful to prove that the deposits made into the personal account were only temporary and the funds were repaid to the employer promptly. The statement should clearly outline:
* Amounts received from customers.
* Amounts deposited into the personal bank account.
* Payments made to the employer.
* Any other supporting documents, such as bank statements or transfer receipts, confirming these payments.
### 3. **Confirmation Letters from Employer:**
* If the employer's records support the claims (i.e., the collected amounts were indeed transferred to them), **confirmation letters** from the employer can be presented. These letters should confirm:
* The amount of money transferred by the employee (the assessee).
* The fact that the employee was merely a conduit for the funds and did not retain any of the funds for personal use.
Even if the customer is no longer available to provide confirmation, having **company records** (such as internal ledgers) showing the payments received from the employee can provide support.
### 4. **Clarify the Nature of the Transactions:**
* **Explain the nature of the cash transactions**: Clearly explain that the assessee was **only a conduit** for collecting funds on behalf of the employer. This should be supported by the **employer’s written acknowledgment**.
* If the assessee did not retain any part of the funds and the amounts were transferred in full to the employer, then this should be explained clearly to the AO.
### 5. **Case Laws and Precedents:**
You can refer to the following case law or principles, which may help in similar situations:
* **CIT v. S. K. Datta (1981)**: If the assessee can explain the circumstances surrounding the cash deposits and establish that the funds were merely collected on behalf of the employer, it could be held that the deposits do not represent the assessee’s income.
* **CIT v. Orissa Corporation (P) Ltd. (1986)**: Cash deposits into a bank account are not necessarily taxable if the assessee can prove that the amount deposited was not their income. Evidence should be provided to show that the money collected was repaid to the employer.
* **CIT v. M/s. R. K. Brothers (2010)**: In a case where the assessee collected money for the employer, the court ruled that the assessee was not liable to pay tax on the amounts deposited in the personal account, as the money was not their own.
### 6. **Addressing the Onus of Proof:**
* **Onus of proof**: The onus of proving that the deposits are not part of the assessee’s income lies with the **assessee**. If the customer cannot provide a confirmation, it does not necessarily mean that the Department can ignore the explanation. The assessee can still rely on other documentation (like employer confirmation, receipts, and bank statements) to prove the legitimacy of the transactions.
* If the **customer is not available for confirmation**, then you must rely on the **employer’s confirmation** or **company records** to substantiate the transaction. The onus still lies with the **assessee** to provide reasonable proof.
### 7. **Declare the Correct Income:**
* If the assessee inadvertently deposited funds into their personal account, which belong to the employer, ensure that the **proper declaration of income** is made in the return.
* The assessee may need to **revise the return** to clarify the nature of the funds deposited and exclude it from their income.
### 8. **Prepare for Further Scrutiny:**
* Given that the case is under **scrutiny**, the AO may ask for additional documents to verify the claims. Be prepared to provide:
* **Payment details** from the employer.
* **Bank statements** showing the actual repayment.
* **A clear explanation** of the transaction flow.
---
### Conclusion:
To resolve this case and respond to the scrutiny effectively:
1. Provide official receipts, reconciliation statements, and employer confirmation letters.
2. Clarify that the funds collected were for the employer and not personal income.
3. If the customer is unavailable for confirmation, the onus is still on the assessee to provide valid documentation.
4. Use **case laws** to support the claim that the funds were not income.
Here's how the situation can be addressed and the further explanation that could be provided to the AO:
### 1. **Provide Clear Documentation of the Collection Process:**
* If **official receipts** were issued to customers at the time of collection, these receipts should be presented to the AO.
* Ensure that the receipts correspond to the amounts deposited in the bank account. If the company maintains **books of accounts**, provide a **reconciliation statement** showing the collection amounts, the deposits made, and the amounts paid to the employer.
**Key Points:**
* Ensure all receipts, invoices, and payment vouchers are available.
* Show the **chain of transactions** that links the collections to the final deposit in the bank account.
### 2. **Prepare a Reconciliation Statement:**
* A **reconciliation statement** could be helpful to prove that the deposits made into the personal account were only temporary and the funds were repaid to the employer promptly. The statement should clearly outline:
* Amounts received from customers.
* Amounts deposited into the personal bank account.
* Payments made to the employer.
* Any other supporting documents, such as bank statements or transfer receipts, confirming these payments.
### 3. **Confirmation Letters from Employer:**
* If the employer's records support the claims (i.e., the collected amounts were indeed transferred to them), **confirmation letters** from the employer can be presented. These letters should confirm:
* The amount of money transferred by the employee (the assessee).
* The fact that the employee was merely a conduit for the funds and did not retain any of the funds for personal use.
Even if the customer is no longer available to provide confirmation, having **company records** (such as internal ledgers) showing the payments received from the employee can provide support.
### 4. **Clarify the Nature of the Transactions:**
* **Explain the nature of the cash transactions**: Clearly explain that the assessee was **only a conduit** for collecting funds on behalf of the employer. This should be supported by the **employer’s written acknowledgment**.
* If the assessee did not retain any part of the funds and the amounts were transferred in full to the employer, then this should be explained clearly to the AO.
### 5. **Case Laws and Precedents:**
You can refer to the following case law or principles, which may help in similar situations:
* **CIT v. S. K. Datta (1981)**: If the assessee can explain the circumstances surrounding the cash deposits and establish that the funds were merely collected on behalf of the employer, it could be held that the deposits do not represent the assessee’s income.
* **CIT v. Orissa Corporation (P) Ltd. (1986)**: Cash deposits into a bank account are not necessarily taxable if the assessee can prove that the amount deposited was not their income. Evidence should be provided to show that the money collected was repaid to the employer.
* **CIT v. M/s. R. K. Brothers (2010)**: In a case where the assessee collected money for the employer, the court ruled that the assessee was not liable to pay tax on the amounts deposited in the personal account, as the money was not their own.
### 6. **Addressing the Onus of Proof:**
* **Onus of proof**: The onus of proving that the deposits are not part of the assessee’s income lies with the **assessee**. If the customer cannot provide a confirmation, it does not necessarily mean that the Department can ignore the explanation. The assessee can still rely on other documentation (like employer confirmation, receipts, and bank statements) to prove the legitimacy of the transactions.
* If the **customer is not available for confirmation**, then you must rely on the **employer’s confirmation** or **company records** to substantiate the transaction. The onus still lies with the **assessee** to provide reasonable proof.
### 7. **Declare the Correct Income:**
* If the assessee inadvertently deposited funds into their personal account, which belong to the employer, ensure that the **proper declaration of income** is made in the return.
* The assessee may need to **revise the return** to clarify the nature of the funds deposited and exclude it from their income.
### 8. **Prepare for Further Scrutiny:**
* Given that the case is under **scrutiny**, the AO may ask for additional documents to verify the claims. Be prepared to provide:
* **Payment details** from the employer.
* **Bank statements** showing the actual repayment.
* **A clear explanation** of the transaction flow.
---
### Conclusion:
To resolve this case and respond to the scrutiny effectively:
1. Provide official receipts, reconciliation statements, and employer confirmation letters.
2. Clarify that the funds collected were for the employer and not personal income.
3. If the customer is unavailable for confirmation, the onus is still on the assessee to provide valid documentation.
4. Use **case laws** to support the claim that the funds were not income.
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